The contracts clause is one of the provisions in the U.S. Constitution’s Article I that has received significant attention from legal scholars, judges, and commentators over the years. The clause, which states that “No State shall…pass any…Law impairing the Obligation of Contracts,” was designed to prevent state governments from interfering with contractual relations between individuals and organizations. However, despite its seemingly straightforward language, the contracts clause has given rise to a host of complicated legal issues, including questions about its scope, its application to private contracts, and its relationship to other constitutional provisions. In this article, we will explore the history and meaning of the contracts clause and examine some of the most significant decisions that have been made relating to its interpretation and enforcement.
History of the Contracts Clause
The origins of the contracts clause can be traced back to the early history of the United States. During the colonial period, many British merchants and investors had invested heavily in American enterprises, such as land purchases, shipping, and trading. However, after the American Revolution, many of these agreements were disrupted or nullified by newly independent state governments seeking to assert their authority over commercial affairs. This led to disputes and tensions between American and British investors, which were exacerbated by the lack of a clear federal system of commercial law.
To address these issues, the framers of the Constitution included the contracts clause as a central feature of their new government. The clause was intended to guarantee that both public and private contracts would be respected and enforced uniformly throughout the country, regardless of state borders or interests. As Alexander Hamilton wrote in Federalist No. 44, “The sacredness of contracts is a fundamental principle in free government; and that, in proportion as the observance of them is extended, will the stability of the [American] Constitution be increased.”
However, the precise meaning and scope of the contracts clause have remained a source of debate and controversy among legal scholars and judges.
Private Contracts and the Contracts Clause
One of the most contentious issues in the interpretation of the contracts clause is whether it applies only to public contracts, such as those between states or between the federal government and private entities, or whether it also covers private contracts between individuals and organizations.
This question arose in the early years of the Republic, as courts and lawmakers struggled to define the limits of state authority over commercial affairs. In the 1819 case of Dartmouth College v. Woodward, the Supreme Court ruled that the contracts clause applied to private corporations, such as Dartmouth College, which had been granted a corporate charter by the state of New Hampshire. The Court held that the state’s attempt to modify or revoke the college’s charter was a violation of the contracts clause, as it impaired the obligations of the contract between the state and the college.
This decision marked a significant expansion of the scope of the contracts clause, as it established that state governments could not interfere with the contractual relations of private corporations without violating the Constitution. However, it also raised questions about how far the clause extended, and whether it applied to all types of private contracts.
In subsequent cases, courts have attempted to define the limits of the contracts clause by drawing distinctions between public and private contracts, and by applying different levels of scrutiny to state laws that implicate contractual obligations. For example, in the 1923 case of A.L.A. Schechter Poultry Corp. v. United States, the Supreme Court held that the contracts clause did not apply to certain “public rights” that fell outside the scope of traditional commercial or contractual relations. Similarly, in the 1978 case of Energy Reserves Group, Inc. v. Kansas Power & Light Co., the Court held that the contracts clause could only be invoked if a state law substantially impaired the contractual obligations of the parties, rather than merely “modifying” or “adjusting” the terms of the contract.
These and other decisions have established a complex framework for determining when the contracts clause applies to private contracts, and have led to continued debate and disagreement among legal scholars and judges.
The Contracts Clause and State Sovereignty
Another key issue in the interpretation of the contracts clause is its relationship to the broader principle of state sovereignty. Some commentators have argued that the clause represents a significant limitation on the power of state governments, by prohibiting them from arbitrarily interfering with contractual relations. Others have suggested that the clause strikes a balance between federal and state authority, by ensuring that contractual obligations are respected while allowing states to regulate commercial activity in ways that are consistent with their own interests and policies.
These divergent views have been reflected in various legal disputes over the years, including several cases involving state efforts to regulate or modify existing contracts. For example, in the 1934 case of Home Building & Loan Association v. Blaisdell, the Supreme Court upheld a Minnesota law that authorized the state to suspend certain mortgage foreclosures during the Great Depression. The Court acknowledged that the law interfered with existing mortgage contracts, but held that the state’s interest in protecting homeowners from foreclosure outweighed any impairment of the contractual obligations.
Similarly, in the 2004 case of United States Trust Co. v. New Jersey, the Supreme Court struck down a state law that retroactively modified certain state debt obligations, on the grounds that the law violated the contracts clause by impairing the obligations of the parties. The Court held that the state’s interest in reducing its debt burden did not justify the impairment of contractual rights.
These and other cases illustrate the complex interplay between state sovereignty, contractual rights, and the federal Constitution. They also underscore the ongoing significance of the contracts clause as a safeguard against arbitrary interference with contractual obligations.
The contracts clause of the U.S. Constitution has been the subject of numerous legal disputes and scholarly debates over the years. Despite its relatively simple language, the clause has given rise to complex questions about its scope, its application to private contracts, and its relationship to state sovereignty. Through a series of landmark decisions, courts have attempted to define the limits of the clause and establish a framework for enforcing its provisions. However, the ongoing significance and relevance of the contracts clause remain open to interpretation and debate, and will likely continue to be a source of contention and discussion among legal scholars, judges, and lawmakers in the years to come.
Article 1 of the United States Constitution – within its ten sections – establishes the collective rights of all legislative bodies in the United States, such as Congress, the House of Representatives, the Senate, as well as the individual State governments. Specifically, within Section 10, it is written that a State is not allowed to pass any law that “impairs the obligation of contracts”. This is known as the Contracts Clause.
For example, although most states are permitted to establish their own taxes within their borders, they are not permitted to regulate interstate taxes. This delicate balance allows them certain individual freedoms. However, the Contracts Clause disallows any State to invalidate anything on a nationwide level, including the levying of taxes or the abolition of contracts.
As a result, contracts have been the binding framework of symbiotic agreements between citizens and entities. Legal contracts are considered to be the glue that allows the general public, as well as the Government, to engage in honest and volitional business. The only instance in which contracts can be nullified is when they are ruled in violation of public health and welfare.
In 1905 in the case of Lochner vs. New York, the inclusion of the Contracts Clause was the deciding factor of the case. Lochner, the owner of a bakeshop in Utica, New York, had been allowing himself and his employees to work for more than 60 hours per week. All of his employees had agreed to work the assigned hours under contract. However, the New York Bakeshop Act stated that bakeshops were not permitted to operate in excess of either 60 hours per week or 10 hours per day.
The State of New York ordered Lochner to cease conducting his business that was in clear violation of the Bakeshop Act. However, Lochner, referencing the Contracts Clause, stated that the State did not have the right to undermine a contract established between two parties if said contract was not in violation of health and welfare. In addition, Lochner stated that the New York Bakeshop Act was in direct violation of his Fourteenth Amendment rights, stating that the Act was infringing on ‘Life, Liberty, and Pursuit of Happiness’.
As a result, and per the Contracts Clause and the Fourteenth Amendment, the Supreme Court voted in favor of Lochner, explaining that the nature of the contract established between Lochner and his employees were legal and binding, thus disallowing the State of New York to negate them in any way.
The Contracts Clause established in the Constitution allows for contracts, like taxes, to be commercial certainties on which we are able to rely on the hopes that they provide equal parameters for every citizen to follow. Unless taxes or contracts are deemed to be in violation of health or welfare, they are to be treated as volitional, binding agreements between the Government, the State, and the citizens of the United States.