Vanderbilt Law School professor James W. Ely Jr. tells that unhappy story in The Contract Clause: A Constitutional History. Explaining the clause’s importance to the Framers, he writes:
Inserted into the Constitution without extensive debate, the Contract Clause was clearly prompted by the sour experience with state debt relief laws during the Post-Revolution Era. It was grounded in the premise that honoring contractual commitments served the public interest by encouraging commerce.
Unfortunately, like a number of other key constitutional provisions, the Contract Clause eventually fell victim to judicial interpretations that, by the latter stages of the New Deal, rendered it almost a dead letter. Ely’s book gives the reader a fascinating account of the “roller-coaster ride” of this clause.
Need for commerce / The young American nation developed a commercial economy in which the enforceability of contracts for land, goods, and services was crucial. But, as John Marshall observed, state legislatures were inclined to “break in upon the ordinary intercourse of society, and destroy all confidence between man and man.” In an attempt to stop that, the Constitution’s drafters—probably at the urging of Alexander Hamilton, Ely notes—included in Article I, Section 10 the provision, “No state shall pass any law impairing the obligation of contracts.” (In the same section, states were forbidden to issue paper money or enact ex post facto laws.)
That language did not, however, stop state governments from attempting to meddle with contracts, usually to help struggling debtors. Much of our early constitutional litigation revolved around such laws. For example, the first federal court decision to invalidate a state law, Champion and Dickason v. Casey (1792), involved a Rhode Island law that gave a particular debtor, Silas Casey (a prominent merchant) an extended period of time to pay his creditors. When two British merchants sued him to collect on their contracts, Casey defended on the grounds that the state law—which he had lobbied for—barred their suit. The circuit court, with Chief Justice John Jay presiding, dismissed Casey’s defense on the ground that the Rhode Island law violated Article I, Section 10. That decision was important both in the development of judicial review and in demonstrating the young nation’s commitment to the security of contracts.
Another early case was Fletcher v. Peck, an 1810 decision of the Supreme Court. To greatly condense a convoluted factual situation, the Georgia legislature had attempted to rescind its sale of a large tract of land. Chief Justice Marshall ruled that act invalid, declaring that the Contract Clause applied to public as well as private contracts and was intended “to shield against the effects of sudden passions.” Thus, the reach of the clause was extended and the reliability of contracts broadened.
Undoubtedly the most famous of Marshall’s Contract Clause decisions is Dartmouth College v. Woodward (1819), which held that a corporate charter (albeit for a nonprofit educational enterprise) was a contract that the state legislature could not change. While the corporate charter at issue in the case was for a charitable institution, the holding over time was extended to safeguard business corporations against subsequent legislative interference by changing their charters.
By the end of the Marshall era, the Contract Clause provided a firm defense against legislative interference for rights under public and private contracts. But that would be its high-water mark. Soon state and federal courts would begin to whittle away at it.
First slips / In the years following Marshall’s death, the Contract Clause proved inadequate to prevent various kinds of state actions that impaired the obligation of contracts. Chief among them were abridgements of corporate charters on “police power” grounds. That is, legislatures altered or revoked business charters they had granted in order to protect “public health and morals.” Such powers are nowhere conferred upon the states in the Constitution, but the courts began to regard them as inherent in state sovereignty and overrode the Contract Clause when the two clashed.
For example, beginning in the 1820s, a strong alcohol prohibition movement started to grow in many states and, as a consequence, state legislatures forced businesses that made or sold alcoholic beverages to close, despite their charters. Didn’t that impair those contracts, making the legislative actions unconstitutional? No, answered most courts, state police power took precedence. Business charters to operate lotteries met the same fate. Eventually, the police power exception would mostly swallow up the rule against legislation impairing contracts.
On the whole, however, the Contract Clause held strong during the Taney Court period (1835–1864). The Court’s decisions “harmonized with the widely shared desire to foster economic growth by honoring contractual arrangements,” writes Ely. Moreover, state court decisions in the main reinforced the importance of contractual reliability.
After the Civil War, the importance of contracts was strengthened by the passage of the Civil Rights Act of 1866, which specifically included “the right to make and enforce contracts” among those accorded to former slaves. Ely quotes University of Chicago historian Amy Dru Stanley: “In postbellum America contract was above all a metaphor of freedom.”
Then, in one of the first major Supreme Court decisions following the war, Hepburn v. Griswold, Chief Justice Salmon P. Chase sought to extend the reach of the Contract Clause from state laws to federal enactments. That case involved the federal government’s mandate that paper “greenback” currency be accepted in contracts that had called for payment in gold. Chase’s opinion held that the Contract Clause applied to federal statutes and not just state laws because it would be inconsistent with “the spirit of the Constitution” to allow the federal government to do what the states could not. This was, one might say, an early “living Constitution” decision, but with the twist that it was meant to further restrict government power, not to justify its expansion.
Losing the clause / But Chase’s attempt to expand the Contract Clause was quickly crushed. The next year, after President Ulysses S. Grant had filled two vacancies on the Court, the Legal Tender Act was back before the justices and this time it was upheld in a decision (Knox v. Lee) that overruled Hepburn. Ominously, Justice William Strong’s concurring opinion stated, “No obligation of a contract can extend to the defeat of a legitimate governmental authority.”
During Reconstruction, state courts, especially in the South, became increasingly sympathetic to pro-debtor laws on the grounds that because of “policy and humanity,” such laws did not impair contracts but were “paramount to debts.” And the erosion of the Contract Clause continued during the Gilded Age as the courts upheld laws that imposed rate regulation on railroads despite charter provisions stating that the individual railroads were not subject to such controls. Also during this period, “police power” justifications for laws impairing contracts grew more frequent.
By the late 1800s, with Progressivism gaining ground, private contracts were looked upon with disdain and, as Ely puts it, the Contract Clause was “viewed in a new and diminished light.”
Evidence for that included the fact that the challenge in Lochner v. New York (1905) to New York’s law placing limits on the number of hours bakers worked did not include a Contract Clause claim. Instead, it relied upon the rather vague idea that the law was unconstitutional as a violation of due process under the 14th Amendment. Evidently, the defenders of contractual freedom thought it better to fight this “police power” expansion on a different ground than that it ran afoul of the Contract Clause.
During the New Deal, the battered and weakened Contract Clause suffered body blows. Once again, poor economic circumstances provoked legislatures to pass laws favoring debtors, such as mortgage moratorium laws. A few state courts bravely struck them down as Contract Clause violations, but in 1934 the Supreme Court shredded that defense in Home Building and Loan v. Blaisdell. In a tortured majority opinion upholding the law, Chief Justice Charles Evans Hughes wrote that economic emergencies do not create new power under the Constitution, but then proceeded to expatiate on a five-part test for circumstances when it did. In dissent, Justice George Sutherland warned that the decision would mean “ever-advancing encroachments upon the sanctity of private and public contracts.” Exactly so.
Further undermining the Contract Clause during and after the New Deal was the advancing idea that courts should defer to legislative authority in almost every case where it could be argued that a measure was intended to protect the public. In a 1945 case, Justice Felix Frankfurter wrote that the police power should be regarded as an implied term of every contract so that when the state acts, it cannot possibly impair a contract, and that courts should respect political judgments about whatever is necessary to protect the public. The Contract Clause, therefore, falls before any political whim.
Zombie clause / So, is it now dead? In a 1978 case, Allied Structural Steel v. Spannaus, Justice Potter Stewart said that it “is not a dead letter” but then proceeded to drive more nails into its coffin.
The case involved a Minnesota law that retroactively imposed substantial new financial obligations on firms by forcing them to pay pension benefits to employees who had not vested for them under their voluntary plans. The Court came up with an ambiguous balancing test of the kind many jurists love, pitting the “social interest” against the importance of contractual stability. Ely comments, “Much depends on the weight assigned by courts to the various factors to be balanced. How severe is a contractual impairment? What constitutes a broad societal interest? … The various criteria are so malleable that a court could justify almost any decision.”
Thus, state governments now have nearly unlimited power to tamper with contractual obligations and the reliability of a contract depends upon how judges might weigh several vague factors. Where the Founders wanted certainty, we now have a great deal of uncertainty.
Ely concludes by taking us into recent cases where the clause has been resurrected in efforts by public employee unions to prevent legislatures from whittling away any of their promised benefits by legislative efforts to lower budget deficits. Some have gone in favor of the legislatures, some in favor of the unions. In the latter cases, that bespeaks the Norma Desmond–like metamorphosis of the Contract Clause. Language put into the Constitution to protect the growth of commerce has been turned into a way of protecting special interest gains wrung from one legislative session against any future reduction.
This illuminating book will appeal not only to lawyers, but to anyone who has an interest in the way our laws can change over time without the altering of a single word.
