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EspañolCONTRACT CLAUSE
:''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).)
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 kind that the Framers intended to prohibit. However, Chief Justice Marshall famously said in ''McCulloch v. Maryland'', "It is a constitution we are expounding." By this, he meant that the constitution is a living document and must adapt to the times. This statement is also interpreted to mean that the "framers' intent is not 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. [1].
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).)
The Supreme Court laid out the test for whether a law violates the Contract Clause in ''Energy Reserves Group v. Kansas Power & Light'' 459 U.S. 400 (1983). The test is a three part test. First, the state regulation must 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.
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 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. [2]
★ ''Fletcher v. Peck''
★ ''Dartmouth College v. Woodward''
★ ''Charles River Bridge v. Warren Bridge''
★ Federalist No. 10, complete text at .
★ Contract law
1. Constitutional Law, , Erwin, Chemerinsky, Aspen Publishers, 2002, ISBN 0-7355-2428-9
2. 431 U.S. 1. (1977)
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).)
| Contents |
| The Contract Clause After 1934 |
| Modification of Private Contracts After 1934 |
| Modification of Government Contracts After 1934 |
| See also |
| References |
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 kind that the Framers intended to prohibit. However, Chief Justice Marshall famously said in ''McCulloch v. Maryland'', "It is a constitution we are expounding." By this, he meant that the constitution is a living document and must adapt to the times. This statement is also interpreted to mean that the "framers' intent is not 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. [1].
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 After 1934
The Supreme Court laid out the test for whether a law violates the Contract Clause in ''Energy Reserves Group v. Kansas Power & Light'' 459 U.S. 400 (1983). The test is a three part test. First, the state regulation must 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 After 1934
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 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. [2]
See also
★ ''Fletcher v. Peck''
★ ''Dartmouth College v. Woodward''
★ ''Charles River Bridge v. Warren Bridge''
★ Federalist No. 10, complete text at .
★ Contract law
References
1. Constitutional Law, , Erwin, Chemerinsky, Aspen Publishers, 2002, ISBN 0-7355-2428-9
2. 431 U.S. 1. (1977)
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