Contract Clause - AbsoluteAstronomy.com

This article relates to an article of the United States Constitution

United States Constitution

The Constitution of the United States is the supreme law of the United States of America. It is the framework for the organization of the United States government and for the relationship of the federal government with the states, citizens, and all people within the United States.The first three...

. For terms of a legal contract

Contract

A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...

, see Contractual term

Contractual term

A contractual term is "Any provision forming part of a contract" Each term gives rise to a contractual obligation, breach of which can give rise to litigation. Not all terms are stated expressly and some terms carry less legal gravity as they are peripheral to the objectives of the...

The Contract Clause appears in the United States Constitution

United States Constitution

, Article I, section 10, clause 1. It states:
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

Articles of Confederation

The Articles of Confederation, formally the Articles of Confederation and Perpetual Union, was an agreement among the 13 founding states that legally established the United States of America as a confederation of sovereign states and served as its first constitution...

—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

Bankruptcy

Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....

law the province of the federal government

Federal government of the United States

The federal government of the United States is the national government of the constitutional republic of fifty states that is the United States of America. The federal government comprises three distinct branches of government: a legislative, an executive and a judiciary. These branches and...

.

During and after the Revolution, many states passed laws favoring colonial debtors to the detriment of foreign creditors. Federalists, especially Alexander Hamilton

Alexander Hamilton

Alexander Hamilton was a Founding Father, soldier, economist, political philosopher, one of America's first constitutional lawyers and the first United States Secretary of the Treasury...

, 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. (See generally James W. Ely Jr., The Guardian of Every Other Right (Oxford Univ. Press 1998).)

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 not exceeding ten dollars, which 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.

Legal Tender

Relying on this clause, which applies only to the States and not 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 (but not the federal government, as noted previously) from "making a tender" (i.e., authorizing something that may be offered in payment) of any type or form of money

Money

Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...

to meet any financial obligation, unless that form of money is coins made of gold or silver (or a medium of exchange backed by and redeemable in gold or silver coins). 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

New Deal

The New Deal was a series of economic programs implemented in the United States between 1933 and 1936. They were passed by the U.S. Congress during the first term of President Franklin D. Roosevelt. The programs were Roosevelt's responses to the Great Depression, and focused on what historians call...

Era, the Supreme Court began to depart from the Lochner era

Lochner era

The Lochner era is a period in American legal history in which the Supreme Court of the United States tended to strike down laws held to be infringing on economic liberty or private contract rights, and takes its name from a 1905 case, Lochner v. New York. The beginning of the period is usually...

constitutional interpretation of the Commerce Clause

Commerce Clause

The Commerce Clause is an enumerated power listed in the United States Constitution . The clause states that the United States Congress shall have power "To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes." Courts and commentators have tended to...

, Due Process

Due process

Due process is the legal code that the state must venerate all of the legal rights that are owed to a person under the principle. Due process balances the power of the state law of the land and thus protects individual persons from it...

, and the Contract Clause.

In Home Building & Loan Association v. Blaisdell

Home Building & Loan Association v. Blaisdell

Home Building & Loan Association v. Blaisdell, 290 U.S. 398 , was a decision of the United States Supreme Court holding that Minnesota's suspension of creditor's remedies was not in violation of the United States Constitution. Blaisdell was decided during the height of the Great Depression and has...

290 U.S. 398 (1934) , the Supreme Court upheld a Minnesota

Minnesota

Minnesota is a U.S. state located in the Midwestern United States. The twelfth largest state of the U.S., it is the twenty-first most populous, with 5.3 million residents. Minnesota was carved out of the eastern half of the Minnesota Territory and admitted to the Union as the thirty-second state...

law that temporarily restricted the ability of mortgage holders to foreclose

Foreclosure

Foreclosure is the legal process by which a mortgage lender , or other lien holder, obtains a termination of a mortgage borrower 's equitable right of redemption, either by court order or by operation of law...

. The law was enacted to prevent mass foreclosures during a time of economic hardship in America

United States

The United States of America is a federal constitutional republic comprising fifty states and a federal district...

. 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

Police power

In United States constitutional law, police power is the capacity of the states to regulate behavior and enforce order within their territory for the betterment of the general welfare, morals, health, and safety of their inhabitants...

. 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. (See United States Trust Co. v. New Jersey, 431 U.S. 1 (1977).)

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 (1983). 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." 459 U.S. 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, 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

World Trade Center

The original World Trade Center was a complex with seven buildings featuring landmark twin towers in Lower Manhattan, New York City, United States. The complex opened on April 4, 1973, and was destroyed in 2001 during the September 11 attacks. The site is currently being rebuilt with five new...

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.