Contract Clause

Introduction

The Contract Clause (Article I, § 10, cl. 1) provides that “No State shall . . . pass any . . . Law impairing the Obligation of Contracts.” The Contract Clause was one of the few provisions in the original Constitution that limited state power, reflecting the Framers’ concern about debtor relief legislation that had been enacted after the Revolution. The scope of the Contract Clause has been significantly narrowed by judicial interpretation, particularly since the New Deal.

The Blaisdell Decision

Home Building & Loan Association v. Blaisdell (1934) is the most important Contract Clause decision. The case involved a Minnesota law that temporarily prevented mortgage foreclosures during the Great Depression. The Supreme Court upheld the law, holding that the Contract Clause does not prohibit all laws that affect existing contracts.

Chief Justice Hughes identified five factors for evaluating Contract Clause challenges: the emergency giving rise to the legislation; the law was designed to protect a basic societal interest, not to benefit a particular class; the relief was appropriately tailored to the emergency; the law was temporary; and the law did not destroy contract rights but merely modified their remedy.

The Modern Contract Clause Standard

The modern Contract Clause analysis involves two steps. First, the court asks whether the state law has substantially impaired a contractual relationship. If the impairment is substantial, the court asks whether the law serves a legitimate public purpose and is reasonable and appropriate to achieve that purpose.

Substantial impairment considers whether the impaired contract is for public or private purposes, the reasonable expectations of the parties, and the nature of the interference. The impairment analysis is more searching when the government is a party to the contract.

The Public Purpose Test

If substantial impairment is established, the state must show that the law serves a legitimate public purpose and that the means chosen are reasonable and necessary for achieving that purpose. The standard is more demanding than rational basis review but less demanding than strict scrutiny.

The Supreme Court has applied this standard to uphold laws that adjust public pension benefits, modify collective bargaining agreements, and regulate economic activities. The Court has struck down laws that retroactively impair the state’s own contractual obligations.

Contract Clause and the Public Contracts

The Contract Clause applies with special force to laws that impair the state’s own contracts. In United States Trust Co. v. New Jersey (1977), the Court struck down a New Jersey law that repealed a covenant protecting bondholders. The Court held that states must meet a more rigorous standard when they impair their own contracts because the state is a party and has an incentive to use its lawmaking power to avoid its obligations.

Conclusion

The Contract Clause limits state power to impair existing contracts. The Blaisdell decision established that the Clause does not prohibit all impairments, particularly in emergencies. The modern standard requires substantial impairment analysis followed by a balancing of public purpose and means. The Clause applies more strictly to laws that impair the state’s own contractual obligations.