The Contract Clause appears in the United States Constitution, Article I,
section 10, clause 1. It states: 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.
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. The Framers of the Constitution added
this clause in response to the 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
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 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 ensuring 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..) Origins
= Treaties, Alliances, or Confederations At the time of the Civil War, this
clause was one of the provisions upon which the Court relied in holding that
the Confederation formed by the seceding States could not be recognized as having
any legal existence. Today, its practical significance lies in the
limitations which it implies upon the power of the States to deal with matters
having a bearing upon international relations. In the early case of Holmes
v. Jennison, Chief Justice Taney invoked it as a reason for holding that a State
had no power to deliver up a fugitive from justice to a foreign State. More
recently, the kindred idea that the responsibility for the conduct of
foreign relations rests exclusively with the Federal Government prompted the
Court to hold that, since the oil under the three mile marginal belt along the
California coast might well become the subject of international dispute and
since the ocean, including this three mile belt, is of vital consequence to
the nation in its desire to engage in commerce and to live in peace with the
world, the Federal Government has paramount rights in and power over that
belt, including full dominion over the resources of the soil under the water
area. In Skiriotes v. Florida, the Court, on the other hand, ruled that
this clause did not disable Florida from regulating the manner in which its own
citizens may engage in sponge fishing outside its territorial waters. Speaking
for a unanimous Court, Chief Justice Hughes declared: “When its action does
not conflict with federal legislation, the sovereign authority of the State
over the conduct of its citizens upon the high seas is analogous to the
sovereign authority of the United States over its citizens in like
circumstances.” = Bills of Credit =
Within the sense of the Constitution, bills of credit signify a paper medium
of exchange intended to circulate between individuals, and between the
Government and individuals, for the ordinary purposes of society. It is
immaterial whether the quality of legal tender is imparted to such paper.
Interest bearing certificates in denominations up to ten dollars that
were issued by loan offices established by the State of Missouri and made
receivable in payment of taxes or other moneys due to the State, and in payment
of the fees and salaries of state officers, were held to be bills of
credit whose issuance was banned by this section. The States are not forbidden,
however, to issue coupons receivable for taxes, nor to execute instruments
binding themselves to pay money at a future day for services rendered or
money borrowed. Bills issued by state banks are not bills of credit; it is
immaterial that the State is the sole stockholder of the bank, that the
officers of the bank were elected by the state legislature, or that the capital
of the bank was raised by the sale of state bonds. The restriction of emitting
bills of credit was extended to Congress as well, because the power to "emit
bills and borrow money on credit" during the previous Articles of Confederation
was struck out and revised in the Constitution to only "borrow money on
the credit". = Legal tender =
Relying on this clause, which applies both to the States and to the Federal
Government, the Supreme Court has held that where the marshal of a state court
received state bank notes in payment and discharge of an execution, the creditor
was entitled to demand payment in gold or silver. Since, however, there is
nothing in the Constitution prohibiting a bank depositor from consenting when he
draws a check that payment may be made by draft, a state law providing that
checks drawn on local banks should, at the option of the bank, be payable in
exchange drafts was held valid. Furthermore, no state may make anything
but gold and silver coin a tender in payment of debts, which expressly
forbids any state government from "making a tender" of any type or form of
money to meet any financial obligation, unless that form of money is coins made
of gold or silver. However, the states cannot coin money themselves.
= Bills of Attainder = Statutes passed after the Civil War with
the intent and result of excluding persons who had aided the Confederacy
from following certain callings, by the device of requiring them to take an oath
that they had never given such aid, were held invalid as being bills of
attainder, as well as ex post facto laws.
Other attempts to raise bill-of-attainder claims have been
unsuccessful. A Court majority denied that a municipal ordinance that required
all employees to execute oaths that they had never been affiliated with Communist
or similar organizations, violated the clause, on the grounds that the
ordinance merely provided standards of qualifications and eligibility for
employment. A law that prohibited any person convicted of a felony and not
subsequently pardoned from holding office in a waterfront union was not a
bill of attainder because the “distinguishing feature of a bill of
attainder is the substitution of a legislative for a judicial determination
of guilt” and the prohibition “embodies no further implications of appellant’s
guilt than are contained in his 1920 judicial conviction.”
The Contract Clause since Blaisdell During the New Deal Era, the Supreme
Court began to depart from the Lochner era constitutional interpretation of the
Commerce Clause, Due Process, and the Contract Clause.
In Home Building & Loan Association v. Blaisdell 290 U.S. 398, 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 the Great Depression, a time of economic hardship in America. The kind
of contract modification performed by the law in question was arguably similar
to the kind that the Framers intended to prohibit. 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 is
more scrutiny when the government modifies a contract to alter its own
obligations..) = Modification of private contracts =
The Supreme Court laid out a three-part test for whether a law conforms with the
Contract Clause in Energy Reserves Group v. Kansas Power & Light 459 U.S. 400.
First, the state regulation must not substantially impair a contractual
relationship. Second, the State "must have a significant and legitimate
purpose behind the regulation, such as the remedying of a broad and general
social or economic problem." Id. at 411-13. Third, the law must be
reasonable and appropriate for its intended purpose. This test is similar
to rational basis review. = Modification of government contracts =
In United States Trust Co. v. New Jersey 431 U.S. 1, the Supreme Court held that
a higher level of scrutiny was needed for situations where laws modified the
government's own contractual obligations. In this case, New Jersey
had issued bonds to finance the World Trade Center and had contractually
promised the bondholders that the collateral would not be used to finance
money-losing rail operations. Later, New Jersey attempted to modify law to allow
financing of railway operations, and the bondholders successfully sued to prevent
this from happening. See also
Charles River Bridge v. Warren Bridge Contract law
Dartmouth College v. Woodward Federalist No. 10, complete text at
Wikisource. Fletcher v. Peck
Reserved Powers Doctrine of the United States
References