Everything about Contract Clause totally explained
» This article relates to an article of the United States Constitution. For terms of a legal contract, see Contractual term.
The
Contract Clause appears in the
United States Constitution,
Article I, section 10, clause 1. It states:
The framers of the Constitution added this clause due to fear that states would continue a practice that had been widespread under the
Articles of Confederation—that of granting "private relief." Legislatures would pass bills relieving particular persons (predictably, influential persons) of their obligation to pay their debts. It was this phenomenon that also prompted the framers to make
bankruptcy law the province of the
federal government.
During and after the Revolution, many states passed laws favoring colonial debtors (ie discharging their debts) to the detriment of foreign creditors. Federalists, especially
Alexander Hamilton, believed that such a practice would jeopardize the future flow of foreign capital into the fledgling United States. Consequently, the Contract Clause, by insuring the inviolability of sales and financing contracts, encouraged an inflow of foreign capital by reducing the risk of loss to foreign merchants trading with and investing in the former colonies. (See generally
James W. Ely Jr.,
The Guardian of Every Other Right (Oxford Univ. Press 1998).)
The Contract Clause After 1934
During the
New Deal Era, the Supreme Court made several fundamental changes regarding constitutional interpretation of the
Commerce Clause,
Due Process, and the Contract Clause. The changes came during a time of great crisis for the United States, and there was large public support for government programs which the Supreme Court had been ruling as unconstitutional. Finally, the Court fundamentally changed its interpretation of the constitution to accommodate the new programs. This "change" has been called
The switch in time that saved nine.
In
Home Building & Loan Association v. Blaisdell 290 U.S. 398 (1934), the Supreme Court upheld a Minnesota law that temporarily restricted the ability of mortgage holders to foreclose. The law was enacted to prevent mass foreclosures during a time of economic hardship. The kind of contract modification performed by the law in question was exactly the kind that the Framers intended to prohibit. However,
Chief Justice Marshall famously said in
McCulloch v. Maryland, "It is a constitution we're expounding." By this, he likely meant that the constitution must adapt to the times. This statement is also interpreted to mean that the "framers' intent isn't controlling." The Supreme Court held that this law was a valid exercise of the state's
Police Power. It found that the temporary nature of the contract modification and the emergency of the situation justified the law. .
Further cases have refined this holding, differentiating between governmental interference with private contracts and interference with contracts entered into by the government. Succinctly, there's more scrutiny when the government modifies a contract to alter its own obligations. (See
United States Trust Co. v. New Jersey, 431 U.S. 1 (1977).)
Application of the Contract Clause Barbri Bar Review (2004)
The Contract Clause prohibits
states from enacting any law that
retroactively impairs contract rights. The Contract Clause applies only to state
legislation, not court decisions.
Private Contracts
The Contracts Clause prevents only
substantial impairments of contract, for example destruction or loss of most or all of a party's rights under an existing contract. However, not all substantial impairments violate the Contracts Clause.
To determine whether state legislation is valid under the Contracts Clause, the following three part test applies:
(i) Does the state legislation substantially impair a party's rights under an
existing contract? If it does not, the state legislation is valid under the Contracts Clause. If it does, such impairment will be valid
only if it:
(ii) Serves an important and legitimate public interest; and
(iii) Is a reasonable and
narrowly tailored means of promoting that public interest.
Further Information
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