Contract Clause
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:''This article relates to an article of the [[United States Constitution]]. For terms of a legal [[contract]], see [[Contractual term]].
{{expert-subject|Law}}
The '''Contract Clause''' appears in the [[United States Constitution]], '''Article I, section 10, clause 1'''. It states:
{{cquote|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, expost facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.}}
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 of the United States|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).)
==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 the 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 likely meant that the constitution 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. <ref name="Constitutional Law">{{cite book |last= [[Erwin Chemerinsky|Chemerinsky]]|first= Erwin|title= Constitutional Law|year= 2002|publisher= Aspen Publishers|location= New York, United States|language= English|id= ISBN 0-7355-2428-9|pages= 1276 pages}}</ref>.
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).) <ref name="Constitutional Law"/>
===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.
<ref name="Constitutional Law"/>
===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. <ref>431 U.S. 1. (1977)</ref>
===Application of the Contract Clause Barbri Bar Review (2004)===
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.
==Private Contracts==
The Contracts Clause prevents only '''substantial impairments''' of contract, i.e. destruction or loss of most or all of a party's rights under an existing contract. However, not all substantial impairments violate the Contracts Clause.
To determine whether state legislation is valid under the Contracts Clause, the following three part test applies:
(i) Does the state legislation substantially impair a party's rights under an '''existing''' contract? If it does not, the state legislation is valid under the Contracts Clause. If it does, such impairment will be valid '''only if''' it:
(ii) Serves an important and legitimate public interest; and
(iii) Is a reasonable and '''narrowly tailored''' means of promoting that public interest.
==See also==
*''[[Fletcher v. Peck]]''
*''[[Dartmouth College v. Woodward]]''
*''[[Charles River Bridge v. Warren Bridge]]''
*[[Federalist No. 10]], complete text at [[wikisource:The Federalist Papers/No. 10|Wikisource]].
*[[Contract law]]
==References==
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[[Category:United States Constitution]]