ArtI.S10.C1.6.4.2 State Sovereign Powers and Contracts

Article I, Section 10, Clause 1:

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

During the 1800s, the Supreme Court often interpreted the Contract Clause as providing robust protection for public and private contracts. However, the Court decided some cases that were more solicitous of the states’ power to regulate contracts in the public interest. Under Chief Justice Roger B. Taney, the Court held that states could not contract away their sovereign powers, including their powers of eminent domain and police powers.1

An early example of a case in which the Supreme Court recognized the Contract Clause allows states some leeway to adopt legislation that would interfere with existing contracts in order to protect the public interest involved the Vermont legislature’s exercise of the power of eminent domain to “take” contractual rights of private parties.2 In West River Bridge Co. v. Dix, the Vermont legislature enacted a law granting an exclusive 100-year franchise to operate a toll bridge over the West River to the West River Bridge Company.3 However, several decades later, the legislature passed a statute that permitted certain public officials to “take” such franchises using the power of eminent domain to construct public highways—a power the state sought to use against the West River Bridge Company’s toll bridge franchise.4 In an attempt to avoid the taking of its franchise, the company sued, arguing the state’s eminent domain law impaired the obligation of the franchise contract between Vermont and itself by depriving the company of its franchise without its consent.5

The Supreme Court disagreed that the subsequently enacted Vermont law violated the Contract Clause.6 Acknowledging the legislature’s grant of a corporate charter to the company was a contract, the Court nevertheless determined that taking the corporation’s franchise for public use upon payment of compensation was a proper exercise of the state’s inherent and long-standing sovereign power of eminent domain over subordinate private property rights.7 The Court noted the state’s power of eminent domain constituted part of the background law and conditions under which parties entered into private contracts, and thus the state’s exercise of that power could not impair the franchise contract.8 However, the state would have to compensate the bridge company adequately for the taking.9 West River Bridge Co. represents the Court’s early recognition that the Contract Clause was not absolute, and that states retained some leeway to exercise their sovereign powers to protect the public interest, which they could not contract away, regardless of interference with contractual relationships.

During this era, the Supreme Court decided other important cases that recognized that a state could functionally abrogate the terms of a corporate charter to serve the public interest through the exercise of its police powers. In Proprietors of Charles River Bridge v. Proprietors of Warren Bridge,10 Chief Justice Taney, writing for the Court, held that a state could functionally abrogate the terms of a corporate charter to benefit its economy when the charter had not specifically preserved an exclusive toll franchise for a bridge company.11 As one scholar has noted, the Taney Court “established the principle that corporate charters should be strictly construed and that privileges such as monopoly status . . . could never be implied.” 12 Later in the nineteenth century, the Court carved out additional exceptions for state police powers. For example, the Court held that a state could use its police powers to revoke, on public moral grounds, a previously granted charter to a company to operate a lottery.13

From the late nineteenth to early twentieth centuries, the Contract Clause gradually took on a lesser role in the Court’s jurisprudence. Although the Court’s Contract Clause jurisprudence protected state tax exemptions in corporate charters and the rights of state bondholders from subsequent legislative impairment,14 the Clause diminished in importance with the ratification of the Fourteenth Amendment.15 Specifically, the Fourteenth Amendment’s Due Process Clause offered a new avenue for the protection of private property interests, including contract rights, against unreasonable state interference.16

James W. Ely, Jr., The Contract Clause: A Constitutional History 4 (2016) ( “[Chief Justice] Taney both limited and strengthened the security of contractual obligations under the contract clause.” ). “On the other hand, . . . [the Taney Court] vigorously invoked the [Contract Clause] to safeguard the rights of parties under private agreements and to uphold clearly expressed tax exemptions.” Id. back
See W. River Bridge Co. v. Dix, 47 U.S. (6 How.) 507, 530–31 (1848). back
Id. at 530. back
Id. at 530–31. back
See id. at 531, 533–34. back
Id. at 536. back
See id. at 530–36. back
See W. River Bridge Co. v. Dix, 47 U.S. 507, 532–33 (1848) ( “[I]nto all contracts, whether made between States and individuals or between individuals only, there enter conditions which arise not out of the literal terms of the contract itself, they are superinduced by the preexisting and higher authority of the laws of nature, of nations, or of the community to which the parties belong, they are always presumed, and must be presumed, to be known and recognized by all, are binding upon all, and need never, therefore, be carried into express stipulation, for this could add nothing to their force.” ). back
Cf. id. at 535. back
36 U.S. (11 Pet.) 420 (1837). back
Id. at 448–53. back
Ely, supra note 1, at 4. back
See Stone v. Mississippi, 101 U.S. 814, 821 (1879) ( “Any one, therefore, who accepts a lottery charter does so with the implied understanding that the people, in their sovereign capacity, and through their properly constituted agencies, may resume [a prohibition on lotteries] at any time when the public good shall require, whether [the charter] be paid for or not. All that one can get by such a charter is a suspension of certain governmental rights in his favor, subject to withdrawal at will.” ). back
See, e.g., Wilmington R.R. v. Reid, 80 U.S. (13 Wall.) 264, 266–68 (1871) (holding the North Carolina General Assembly violated the Contract Clause by taxing the property of a railroad corporation after agreeing not to tax the property in the company’s charter); Home of the Friendless v. Rouse, 75 U.S. (8 Wall.) 430, 438–39 (1869) ( “Without pursuing the subject further, we are of the opinion that the State of Missouri did make a contract on sufficient consideration with the Home of the Friendless, to exempt the property of the corporation from taxation, and that the attempt made on behalf of the State through its authorized agent, notwithstanding this agreement, to compel it to pay taxes, is an indirect mode of impairing the obligation of the contract, and cannot be allowed.” ). back
Ely, supra note 1, at 5 ( “Although both federal and state courts heard a steady stream of contract clause cases [during the late nineteenth century], they increasingly relied on other constitutional provisions, notably the due process clause of the Fourteenth Amendment, to protect economic rights.” ). back
Ely, supra note 1, at 5. back