Obligation of Contracts

SECTION 10. Clause 1. 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, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

Annotations

“Law” Defined.—The Contract Clause provides that no state may pass a “Law impairing the Obligation of Contracts,” and a “law” in this context may be a statute, constitutional provision,²⁰⁷⁴ municipal ordinance,²⁰⁷⁵ or administrative regulation having the force and operation of a statute.²⁰⁷⁶ But are judicial decisions within the clause? The abstract principle of the separation of powers, at least until recently, forbade the idea that the courts “make” law and the word “pass” in the above clause seemed to confine it to the formal and acknowledged methods of exercise of the law-making function. Accordingly, the Court has frequently said that the clause does not cover judicial decisions, however erroneous, or whatever their effect on existing contract rights.²⁰⁷⁷ Nevertheless, there are important exceptions to this rule that are set forth below.

Status of Judicial Decisions.—Although the highest state court usually has final authority in determining the construction as well as the validity of contracts entered into under the laws of the state, and federal courts will be bound by decisions of the highest state court on such matters, this rule does not hold when the contract is one whose obligation is alleged to have been impaired by state law.²⁰⁷⁸ Otherwise, the challenged state authority could be vindicated through the simple device of a modification or outright nullification by the state court of the contract rights in issue. Similarly, the highest state court usually has final authority in construing state statutes and determining their validity in relation to the state constitution. But this rule too has had to bend to some extent to the Supreme Court’s interpretation of the Contract Clause.²⁰⁷⁹

Suppose the following situation: (1) a municipality, acting under authority conferred by a state statute, has issued bonds in aid of a railway company; (2) the validity of this statute has been sustained by the highest state court; (3) later the state legislature repeals certain taxes to be used to pay off the bonds when they become due; (4) the repeal is sustained by a decision of the highest state court holding that the statute authorizing the bonds was unconstitutional ab initio. In such a case the Supreme Court would take an appeal from the state court and would reverse the latter’s decision of unconstitutionality because of its effect in rendering operative the repeal of the tax.²⁰⁸⁰

Suppose, however, that the state court has held the statute authorizing the bonds unconstitutional ab initio in a suit by a creditor for payment without the state legislature’s having repealed the taxes. In this situation, the Supreme Court would still afford relief if the case were one between citizens of different states, which reached it via a lower federal court.²⁰⁸¹ This is because in cases of this nature the Court formerly felt free to determine questions of fundamental justice for itself. Indeed, in such a case, the Court in the past has apparently regarded itself as free to pass upon the constitutionality of the state law authorizing the bonds even though there had been no prior decision by the highest state court sustaining them, the idea being that contracts entered into simply on the faith of the presumed constitutionality of a state statute are entitled to this protection.²⁰⁸²

In other words, in cases in which it has jurisdiction because of diversity of citizenship, the Court has held that the obligation of contracts is capable of impairment by subsequent judicial decisions no less than by subsequent statutes, and that it is able to prevent such impairment. In cases, on the other hand, of which it obtains jurisdiction only on the constitutional ground and by appeal from a state court, it has always adhered in terms to the doctrine that the word “laws” as used in Article I, § 10, does not include judicial decisions. Yet, even in these cases, it will intervene to protect contracts entered into on the faith of existing decisions from an impairment that is the direct result of a reversal of such decisions, but there must be in the offing, as it were, a statute of some kind—one possibly many years older than the contract rights involved—on which to pin its decision.²⁰⁸³

In 1922, Congress, through an amendment to the Judicial Code, endeavored to extend the reviewing power of the Supreme Court to “any suit involving the validity of a contract wherein it is claimed that a change in the rule of law or construction of statutes by the highest court of a State applicable to such contract would be repugnant to the Constitution of the United States . . . .”²⁰⁸⁴ This appeared to be an invitation to the Court to say frankly that the obligation of a contract can be impaired by a subsequent court decision. The Court, however, declined the invitation in an opinion by Chief Justice Taft that reviewed many of the cases covered in the preceding paragraphs.

Dealing with Gelpcke and subsequent decisions, Chief Justice Taft said: “These cases were not writs of error to the Supreme Court of a State. They were appeals or writs of error to federal courts where recovery was sought upon municipal or county bonds or some other form of contracts, the validity of which had been sustained by decisions of the Supreme Court of a State prior to their execution, and had been denied by the same court after their issue or making. In such cases the federal courts exercising jurisdiction between citizens of different States held themselves free to decide what the state law was, and to enforce it as laid down by the State Supreme Court before the contracts were made rather than in later decisions. They did not base this conclusion on Article I, § 10, of the Federal Constitution, but on the state law as they determined it, which, in diverse citizenship cases, under the third Article of the Federal Constitution they were empowered to do. Burgess v. Seligman, 107 U. S. 20 [1883].”²⁰⁸⁵ Although doubtless this was an available explanation in 1924, the decision in 1938, in Erie Railroad Co. v. Tompkins,²⁰⁸⁶ so cut down the power of the federal courts to decide diversity of citizenship cases according to their own notions of “general principles of common law” as to raise the question whether the Court will not be required eventually to put Gelpcke and its companions and descendants squarely on the Contract Clause or else abandon them.

“Obligation” Defined.—A contract is analyzable into two elements: the agreement, which comes from the parties, and the obligation, which comes from the law and makes the agreement binding on the parties. The concept of obligation is an importation from the civil law and its appearance in the Contract Clause is supposed to have been due to James Wilson, a graduate of Scottish universities and a civilian. Actually, the term as used in the Contract Clause has been rendered more or less superfluous by the doctrine that “[t]he laws which exist at the time and place of the making of a contract, and where it is to be performed, enter into and form a part of it.”²⁰⁸⁷ Hence, the Court sometimes recognizes the term in its decisions applying the clause, and sometimes ignores it. In Sturges v. Crowninshield,²⁰⁸⁸ Chief Justice Marshall defined “obligation of contract” as the law that binds a party “to perform his undertaking,” but a little later the same year, in Dartmouth College v. Woodward, he set forth the points presented for consideration to be: “1. Is this contract protected by the constitution of the United States? 2. Is it impaired by the acts under which the defendant holds?”²⁰⁸⁹ The word “obligation” undoubtedly implies that the Constitution was intended to protect only executory contracts—i. e., contracts still awaiting performance—but this implication was rejected early on for a certain class of contracts, with immensely important result for the clause.

“Impair” Defined.—“The obligations of a contract,” said Chief Justice Hughes for the Court in Home Building & Loan Ass’n v. Blaisdell,²⁰⁹⁰ “are impaired by a law which renders them invalid, or releases or extinguishes them . . . , and impairment . . . has been predicated upon laws which without destroying contracts derogate from substantial contractual rights.”²⁰⁹¹ But he adds: “Not only are existing laws read into contracts in order to fix obligations as between the parties, but the reservation of essential attributes of sovereign power is also read into contracts as a postulate of the legal order. The policy of protecting contracts against impairment presupposes the maintenance of a government by virtue of which contractual relations are worthwhile,—a government which retains adequate authority to secure the peace and good order of society. This principle of harmonizing the constitutional prohibition with the necessary residuum of state power has had progressive recognition in the decisions of this Court.”²⁰⁹² In short, the law from which the obligation stems must be understood to include constitutional law and, moreover a “progressive” constitutional law.²⁰⁹³

Vested Rights Not Included.—The term “contracts” is used in the Contract Clause in its popular sense of an agreement of minds. The clause therefore does not protect vested rights that are not referable to such an agreement between the state and an individual, such as the right of recovery under a judgment. The individual in question may have a case under the Fourteenth Amendment, but not one under Article I, § 10.²⁰⁹⁴

Public Grants That Are Not “Contracts”.—Not all grants by a state constitute “contracts” within the sense of Article I, § 10. In his Dartmouth College decision, Chief Justice Marshall conceded that “if the act of incorporation be a grant of political power, if it creates a civil institution, to be employed in the administration of the government . . . the subject is one in which the legislature of the State may act according to its own judgment,” unrestrained by the Constitution²⁰⁹⁵ —thereby drawing a line between “public” and “private” corporations that remained undisturbed for more than half a century.²⁰⁹⁶

It has been subsequently held many times that municipal corporations are mere instrumentalities of the state for the more convenient administration of local governments, whose powers may be enlarged, abridged, or entirely withdrawn at the pleasure of the legislature.²⁰⁹⁷ The same principle applies, moreover, to the property rights that the municipality derives either directly or indirectly from the state. This was first held as to the grant of a franchise to a municipality to operate a ferry and has since then been recognized as the universal rule.²⁰⁹⁸ It was stated in a case decided in 1923 that the distinction between the municipality as an agent of the state for governmental purposes and as an organization to care for local needs in a private or proprietary capacity, though it limited the legal liability of municipalities for the negligent acts or omissions of its officers or agents, did not, however, furnish ground for the application of constitutional restraints against the state in favor of its own municipalities.²⁰⁹⁹ Thus, no contract rights were impaired by a statute relocating a county seat, even though the former location was by law to be “permanent” and the citizens of the community had donated land and furnished bonds for the erection of public buildings.²¹⁰⁰ Similarly, a statute changing the boundaries of a school district, giving to the new district the property within its limits that had belonged to the former district, and requiring the new district to assume the debts of the old district, did not impair the obligation of contracts.²¹⁰¹ Nor was the Contract Clause violated by state legislation authorizing state control over insolvent communities through a Municipal Finance Commission.²¹⁰²

On the same ground of public agency, neither appointment nor election to public office creates a contract in the sense of Article I, § 10, whether as to tenure, or salary, or duties, all of which remain, so far as the Constitution of the United States is concerned, subject to legislative modification or outright repeal.²¹⁰³ Indeed, there can be no such thing in this country as property in office, although the common law sustained a different view sometimes reflected in early cases.²¹⁰⁴ When, however, services have once been rendered, there arises an implied contract that they shall be compensated at the rate in force at the time they were rendered.²¹⁰⁵ Also, an express contract between the state and an individual for the performance of specific services falls within the protection of the Constitution. Thus, a contract made by the governor pursuant to a statute authorizing the appointment of a commissioner to conduct, over a period of years, a geological, mineralogical, and agricultural survey of the state, for which a definite sum had been authorized, was held to have been impaired by repeal of the statute.²¹⁰⁶ But a resolution of a local board of education reducing teachers’ salaries for the school year 1933–1934, pursuant to an act of the legislature authorizing such action, was held not to impair the contract of a teacher who, having served three years, was by earlier legislation exempt from having his salary reduced except for inefficiency or misconduct.²¹⁰⁷ Similarly, the Court held that an Illinois statute that reduced the annuity payable to retired teachers under an earlier act did not violate the Contract Clause, because it had not been the intention of the earlier act to propose a contract but only to put into effect a general policy.²¹⁰⁸ On the other hand, the right a teacher whose position had become “permanent” under the Indiana Teachers Tenure Act of 1927, to continued employment was held to be contractual and to have been impaired by the repeal in 1933 of the earlier act.²¹⁰⁹

Tax Exemptions: When Not “Contracts”.—From a different point of view, the Court has sought to distinguish between grants of privileges, whether to individuals or to corporations, which are contracts and those which are mere revocable licenses, although on account of the doctrine of presumed consideration mentioned earlier, this has not always been easy to do. In pursuance of the precedent set in New Jersey v. Wilson,²¹¹⁰ the legislature of a state “may exempt particular parcels of property or the property of particular persons or corporations from taxation, either for a specified period or perpetually, or may limit the amount or rate of taxation, to which such property shall be subjected,” and such an exemption is frequently a contract within the sense of the Constitution. Indeed this is always so when the immunity is conferred upon a corporation by the clear terms of its charter.²¹¹¹ When, on the other hand, an immunity of this sort springs from general law, its precise nature is more open to doubt, as a comparison of decisions will serve to illustrate.

In State Bank of Ohio v. Knoop,²¹¹² a closely divided Court held that a general banking law of Ohio, which provided that companies complying therewith and their stockholders should be exempt from all but certain taxes, was, as to a bank organized under it and its stockholders, a contract within the meaning of Article I, § 10. The provision was not, the Court said, “a legislative command nor a rule of taxation until changed, but a contract stipulating against any change, from the nature of the language used and the circumstances under which it was adopted.”²¹¹³ When, however, the State of Michigan pledged itself, by a general legislative act, not to tax any corporation, company, or individual undertaking to manufacture salt in the state from water there obtained by boring on property used for this purpose and, furthermore, to pay a bounty on the salt so manufactured, it was held not to have engaged itself within the constitutional sense. “General encouragements,” the Court wrote, “held out to all persons indiscriminately, to engage in a particular trade or manufacture, whether such encouragement be in the shape of bounties or drawbacks, or other advantage, are always under the legislative control, and may be discontinued at any time.”²¹¹⁴ So far as exemption from taxation is concerned the difference between these two cases is obviously slight, but the later one is unquestionable authority for the proposition that legislative bounties are repealable at will.

Furthermore, exemptions from taxation have in certain cases been treated as gratuities repealable at will, even when conferred by specific legislative enactments. This would seem always to be the case when the beneficiaries were already in existence when the exemption was created and did nothing of a more positive nature to qualify for it than to continue in existence.²¹¹⁵ Yet the cases are not always easy to explain in relation to each other, except in light of the fact that the Court’s point of view has altered from time to time.²¹¹⁶

“Contracts” Include Public Contracts and Corporate Charters.—The question, which was settled very early, was whether the clause was intended to be applied solely in protection of private contracts or in the protection also of public grants, or, more broadly, in protection of public contracts, in short, those to which a state is a party.²¹¹⁷ Support for the affirmative answer accorded this question could be derived from the following sources. For one thing, the clause departed from the comparable provision in the Northwest Ordinance (1787) in two respects: first, in the presence of the word “obligation;” secondly, in the absence of the word “private.” There is good reason for believing that James Wilson may have been responsible for both alterations, as two years earlier he had denounced a current proposal to repeal the Bank of North America’s Pennsylvania charter in the following words: “If the act for incorporating the subscribers to the Bank of North America shall be repealed in this manner, every precedent will be established for repealing, in the same manner, every other legislative charter in Pennsylvania. A pretence, as specious as any that can be alleged on this occasion, will never be wanting on any future occasion. Those acts of the state, which have hitherto been considered as the sure anchors of privilege and of property, will become the sport of every varying gust of politicks, and will float wildly backwards and forwards on the irregular and impetuous tides of party and faction.”²¹¹⁸

Furthermore, in its first important constitutional case, Chisholm v. Georgia,²¹¹⁹ the Court ruled that its original jurisdiction extended to an action in assumpsit brought by a citizen of South Carolina against the State of Georgia. This construction of the federal judicial power was, to be sure, promptly repealed by the Eleventh Amendment, but without affecting the implication that the contracts protected by the Constitution included public contracts.

One important source of this diversity of opinion is to be found in that ever welling spring of constitutional doctrine in early days, the prevalence of natural law notions and the resulting vague significance of the term “law.” In Sturges v. Crowninshield, Chief Justice Marshall defined the obligation of contract as the law that binds a party “to perform his undertaking.”²¹²⁰ Whence, however, comes this law? If it comes from the state alone, which Marshall was later to deny even as to private contracts,²¹²¹ then it is hardly possible to hold that the states’ own contracts are covered by the clause, which manifestly does not create an obligation for contracts but only protects such obligation as already exists. But, if, on the other hand, the law furnishing the obligation of contracts comprises natural law and kindred principles, as well as law that springs from state authority, then, as the state itself is presumably bound by such principles, the state’s own obligations, so far as harmonious with them, are covered by the clause.

Fletcher v. Peck²¹²² has the double claim to fame that it was the first case in which the Supreme Court held a state enactment to be in conflict with the Constitution, and also the first case to hold that the Contract Clause protected public grants. By an act passed on January 7, 1795, the Georgia Legislature directed the sale to four land companies of public lands comprising most of what are now the States of Alabama and Mississippi. As soon became known, the passage of the measure had been secured by open and wholesale bribery. So when a new legislature took over in the winter of 1795–1796, almost its first act was to revoke the sale made the previous year.

Meantime, however, the land companies had disposed of several millions of acres of their holdings to speculators and prospective settlers, and following the rescinding act some of these took counsel with Alexander Hamilton as to their rights. In an opinion which was undoubtedly known to the Court when it decided Fletcher v. Peck, Hamilton characterized the repeal as contravening “the first principles of natural justice and social policy,” especially so far as it was made “to the prejudice . . . of third persons . . . innocent of the alleged fraud or corruption; . . . moreover,” he added, “the Constitution of the United States, article first, section tenth, declares that no State shall pass a law impairing the obligations of contract. This must be equivalent to saying no State shall pass a law revoking, invalidating, or altering a contract. Every grant from one to another, whether the grantor be a State or an individual, is virtually a contract that the grantee shall hold and enjoy the thing granted against the grantor, and his representatives. It, therefore, appears to me that taking the terms of the Constitution in their large sense, and giving them effect according to the general spirit and policy of the provisions, the revocation of the grant by the act of the legislature of Georgia may justly be considered as contrary to the Constitution of the United States, and, therefore null. And that the courts of the United States, in cases within their jurisdiction, will be likely to pronounce it so.”²¹²³ Hamilton’s views were quoted frequently in the congressional debate over the “Yazoo Land Frauds,” as they were contemporaneously known.

So far as it invoked the Contract Clause, Marshall’s opinion in Fletcher v. Peck performed two creative acts. It recognized that an obligatory contract was one still to be performed—in other words, was an executory contract, also that a grant of land was an executed contract—a conveyance. But, Marshall asserted, every grant is attended by “an implied contract” on the part of the grantor not to claim again the thing granted. Thus, grants are brought within the category of contracts having continuing obligation and so within Article I, § 10. But the question still remained of the nature of this obligation. Marshall’s answer to this can only be inferred from his statement at the end of his opinion. The State of Georgia, he says, “was restrained” from the passing of the rescinding act “either by general principles which are common to our free institutions, or by particular provisions of the Constitution of the United States.”²¹²⁴

The protection thus thrown about land grants was presently extended, in the case of New Jersey v. Wilson,²¹²⁵ to a grant of immunity from taxation that the State of New Jersey had accorded certain Indian lands, and several years after that, in Dartmouth College,²¹²⁶ to the charter privileges of an eleemosynary corporation.

In City of El Paso v. Simmons,²¹²⁷ the Court held, over a vigorous dissent by Justice Black, that Texas had not violated this clause when it amended its laws governing the sale of public lands so as to restrict the previously unlimited right of a delinquent to reinstate himself upon forfeited land by a single payment of all past interest due.

Corporate Charters: Different Ways of Regarding.—There are three ways in which the charter of a corporation may be regarded. In the first place, it may be thought of simply as a license terminable at will by the state, like a liquor-seller’s license or an auctioneer’s license, but affording the incorporators, so long as it remains in force, the privileges and advantages of doing business in the form of a corporation. Nowadays, indeed, when corporate charters are usually issued to all legally qualified applicants by an administrative officer who acts under a general statute, this would probably seem to be the natural way of regarding them were it not for the Dartmouth College decision. But, in 1819 charters were granted directly by the state legislatures in the form of special acts and there were very few profit-taking corporations in the country. The later extension of the benefits of the Dartmouth College decision to corporations organized under general law took place without discussion.

Secondly, a corporate charter may be regarded as a franchise constituting a vested or property interest in the hands of the holders, and therefore as forfeitable only for abuse or in accordance with its own terms. This is the way in which some of the early state courts did regard them at the outset.²¹²⁸ It is also the way in which Blackstone regarded them in relation to the royal prerogative, although not in relation to the sovereignty of Parliament, and the same point of view found expression in Story’s concurring opinion in Dartmouth College v. Woodward, as it did also in Webster’s argument in that case.²¹²⁹

The third view is the one formulated by Chief Justice Marshall in his controlling opinion in Dartmouth College v. Woodward.²¹³⁰ This is that the charter of Dartmouth College, a purely private institution, was the outcome and partial record of a contract between the donors of the college, on the one hand, and the British Crown, on the other, and the contract still continued in force between the State of New Hampshire, as the successor to the Crown and Government of Great Britain, and the trustees, as successors to the donors. The charter, in other words, was not simply a grant—rather it was the documentary record of a still existent agreement between still existent parties.²¹³¹ Taking this view, which he developed with great ingenuity and persuasiveness, Marshall was able to appeal to the Contract Clause directly, and without further use of his fiction in Fletcher v. Peck of an executory contract accompanying the grant.

A difficulty still remained, however, in the requirement that a contract, before it can have obligation, must import consideration, that is to say, must be shown not to have been entirely gratuitous on either side. Moreover, the consideration, which induced the Crown to grant a charter to Dartmouth College, was not merely a speculative one. It consisted of the donations of the donors to the important public interest of education. Fortunately or unfortunately, in dealing with this phase of the case, Marshall used more sweeping terms than were needed. “The objects for which a corporation is created,” he wrote, “are universally such as the government wishes to promote. They are deemed beneficial to the country; and this benefit constitutes the consideration, and in most cases, the sole consideration of the grant.” In other words, the simple fact of the charter having been granted imports consideration from the point of view of the state.²¹³² With this doctrine before it, the Court in Providence Bank v. Billings,²¹³³ and again in Charles River Bridge v. Warren Bridge,²¹³⁴ admitted, without discussion of the point, the applicability of the Dartmouth College decision to purely business concerns.

Reservation of Right to Alter or Repeal Corporate Charters.—There are four principles or doctrines by which the Court has broken down the force of the Dartmouth College decision in great measure in favor of state legislative power. By the logic of Dartmouth College itself, the state may reserve in a corporate charter the right to “amend, alter, and repeal” the same, and such reservation becomes a part of the contract between the state and the incorporators, the obligation of which is accordingly not impaired by the exercise of the right.²¹³⁵ Later decisions recognize that the state may reserve the right to amend, alter, and repeal by general law, with the result of incorporating the reservation in all charters of subsequent date.²¹³⁶ There is, however, a difference between a reservation by a statute and one by constitutional provision. Although the former may be repealed as to a subsequent charter by the specific terms thereof, the latter may not.²¹³⁷

Is the right reserved by a state to “amend” or “alter” a charter without restriction? When it is accompanied, as it generally is, by the right to “repeal,” one would suppose that the answer to this question was self-evident. Nonetheless, there is judicial dicta to the effect that this power is not without limit, that it must be exercised reasonably and in good faith, and that the alterations made must be consistent with the scope and object of the grant.²¹³⁸ Yet, although some state courts have applied tests of this nature to the disallowance of legislation, the U. S. Supreme Court has apparently never done so.²¹³⁹

It is quite different with respect to the distinction that some cases point out between, on the one hand, the franchises and privileges that a corporation derives from its charter, and, on the other hand, the rights of property and contract that accrue to it in the course of its existence. Even the outright repeal of the former does not wipe out the latter or cause them to escheat to the state. The primary heirs of the defunct organization are its creditors, but whatever of value remains after their valid claims are met goes to the former shareholders.²¹⁴⁰ By the earlier weight of authority, however, persons who contract with companies whose charters are subject to legislative amendment or repeal do so at their own risk; any “such contracts made between individuals and the corporation do not vary or in any manner change or modify the relation between the State and the corporation in respect to the right of the State to alter, modify, or amend such a charter . . . .”²¹⁴¹ But later holdings becloud this rule.²¹⁴²

Corporation Subject to the Law and Police Power.—But suppose that the state neglects to reserve the right to amend, alter, or repeal. Is it, then, without power to control its corporate creatures? By no means. Private corporations, like other private persons, are always presumed to be subject to the legislative power of the state, from which it follows that immunities conferred by charter are to be treated as exceptions to an otherwise controlling rule. This principle was recognized by Chief Justice Marshall in Providence Bank v. Billings,²¹⁴³ which held that, in the absence of express stipulation or reasonable implication to the contrary in its charter, the bank was subject to the state’s taxing power, notwithstanding that the power to tax is the power to destroy.

And of course the same principle is equally applicable to the exercise by the state of its police powers. Thus, in what was perhaps the leading case before the Civil War, the Supreme Court of Vermont held that the legislature of that state had the right, in furtherance of the public safety, to require chartered companies operating railways to fence in their tracks and provide cattle guards. In a matter of this nature, said the court, corporations are on a level with individuals engaged in the same business, unless, from their charter, they can prove the contrary.²¹⁴⁴ Since then the rule has been applied many times in justification of state regulation of railroads,²¹⁴⁵ and even of the application of a state prohibition law to a company that had been chartered expressly to manufacture beer.²¹⁴⁶

Strict Construction of Charters, Tax Exemptions.—Long before the cases last cited were decided, the principle that they illustrate had come to be powerfully reinforced by two others, the first of which is that all charter privileges and immunities are to be strictly construed as against the claims of the state, or as it is otherwise often phrased, “nothing passes by implication in a public grant.”

The leading case was Charles River Bridge v. Warren Bridge,²¹⁴⁷ which was decided by a substantially new Court shortly after Chief Justice Marshall’s death. The question at issue was whether the charter of the complaining company, which authorized it to operate a toll bridge, stood in the way of the state’s permitting another company of later date to operate a free bridge in the immediate vicinity. Because the first company could point to no clause in its charter specifically vesting it with an exclusive right, the Court held the charter of the second company to be valid on the principle just stated. Justice Story presented a vigorous dissent in which he argued cogently, but unavailingly, that the monopoly claimed by the Charles River Bridge Company was fully as reasonable an implication from the terms of its charter and the circumstances surrounding its concession as perpetuity had been from the terms of the Dartmouth College charter and the ensuing transaction.

The Court was in fact making new law, because it was looking at things from a new point of view. This was the period when judicial recognition of the police power began to take on a doctrinal character. It was also the period when the railroad business was just beginning. Chief Justice Taney’s opinion evinces the influence of both these developments. The power of the state to provide for its own internal happiness and prosperity was not, he asserted, to be pared away by mere legal intendments, nor was its ability to avail itself of the lights of modern science to be frustrated by obsolete interests such as those of the old turnpike companies, the charter privileges of which, he apprehended, might easily become a bar to the development of transportation along new lines.²¹⁴⁸

The Court has reiterated the rule of strict construction many times. In Blair v. City of Chicago,²¹⁴⁹ decided nearly seventy years after Charles River Bridge, the Court said: “Legislative grants of this character should be in such unequivocal form of expression that the legislative mind may be distinctly impressed with their character and import, in order that the privileges may be intelligently granted or purposely withheld. It is a matter of common knowledge that grants of this character are usually prepared by those interested in them, and submitted to the legislature with a view to obtain from such bodies the most liberal grant of privileges which they are willing to give. This is one among many reasons why they are to be strictly construed. . . . The principle is this, that all rights which are asserted against the State must be clearly defined, and not raised by inference or presumption; and if the charter is silent about a power, it does not exist. If, on a fair reading of the instrument, reasonable doubts arise as to the proper interpretation to be given to it, those doubts are to be solved in favor of the State; and where it is susceptible of two meanings, the one restricting and the other extending the powers of the corporation, that construction is to be adopted which works the least harm to the State.”²¹⁵⁰

An excellent illustration of the operation of the rule in relation to tax exemptions was furnished by the derivative doctrine that an immunity of this character must be deemed as intended solely for the benefit of the corporation receiving it and hence, in the absence of express permission by the state, may not be passed on to a successor.²¹⁵¹ Thus, where two companies, each exempt from taxation, were permitted by the legislature to consolidate, the new corporation was held to be subject to taxation.²¹⁵² Again, a statute that granted a corporation all “the rights and privileges” of an earlier corporation was held not to confer the latter’s “immunity” from taxation.²¹⁵³ Yet again, a legislative authorization of the transfer by one corporation to another of the former’s “estate, property, right, privileges, and franchises” was held not to clothe the later company with the earlier one’s exemption from taxation.²¹⁵⁴

Furthermore, an exemption from taxation is to be strictly construed even in the hands of one clearly entitled to it. Thus, the exemption conferred by its charter on a railway company was held not to extend to branch roads it constructed pursuant to a later statute.²¹⁵⁵ Also, a general exemption of the property of a corporation from taxation was held to refer only to the property actually employed in its business.²¹⁵⁶ And, the charter exemption of the capital stock of a railroad from taxation “for ten years after completion of the said road” was held not to become operative until the completion of the road.²¹⁵⁷ So also the exemption of the campus and endowment fund of a college was held to leave other lands of the college, though a part of its endowment, subject to taxation.²¹⁵⁸ Provisions in a statute that bonds of the state and its political subdivisions were not to be taxed and should not be taxed were held not to exempt interest on them from taxation as income of the owners.²¹⁵⁹

Strict Construction and the Police Power.—The police power, too, has frequently benefitted from the doctrine of strict construction, although this recourse is today seldom, if ever, necessary in this connection. Some of the more striking cases may be briefly summarized. The provision in the charter of a railway company permitting it to set reasonable charges still left the legislature free to determine what charges were reasonable.²¹⁶⁰ However, when a railway agreed to accept certain rates for a specified period, it thereby foreclosed the question of the reasonableness of such rates.²¹⁶¹ The grant to a company of the right to supply a city with water for twenty-five years was held not to prevent a similar concession to another company by the same city.²¹⁶² The promise by a city in the charter of a water company not to make a similar grant to any other person or corporation was held not to prevent the city itself from engaging in the business.²¹⁶³ A municipal concession to a water company to run for thirty years, and accompanied by the provision that the “said company shall charge the following rates,” was held not to prevent the city from reducing such rates.²¹⁶⁴ But more broadly, the grant to a municipality of the power to regulate the charges of public service companies was held not to bestow the right to contract away this power.²¹⁶⁵ Indeed, any claim by a private corporation that it received the ratemaking power from a municipality must survive a two-fold challenge: first, as to the right of the municipality under its charter to make such a grant, secondly, as to whether it has actually done so, and in both respects an affirmative answer must be based on express words and not on implication.²¹⁶⁶

Doctrine of Inalienability as Applied to Eminent Domain, Taxing, and Police Powers.—The second of the doctrines mentioned above, whereby the principle of the subordination of all persons, corporate and individual alike, to the legislative power of the state has been fortified, is the doctrine that certain of the state’s powers are inalienable, and that any attempt by a state to alienate them, upon any consideration whatsoever, is ipso facto void and hence incapable to producing a “contract” within the meaning of Article I, § 10. One of the earliest cases to assert this principle was decided in New York in 1826. The corporation of the City of New York, having conveyed certain lands for the purposes of a church and cemetery together with a covenant for quiet enjoyment, later passed a by-law forbidding their use as a cemetery. In denying an action against the city for breach of covenant, the state court said the defendants “had no power as a party, [to the covenant] to make a contract which should control or embarrass their legislative powers and duties.”²¹⁶⁷

The Supreme Court first applied similar doctrine in 1848 in a case involving a grant of exclusive right to construct a bridge at a specified locality. Sustaining the right of the State of Vermont to make a new grant to a competing company, the Court held that the obligation of the earlier exclusive grant was sufficiently recognized in making just compensation for it; and that corporate franchises, like all other forms of property, are subject to the overruling power of eminent domain.²¹⁶⁸ This reasoning was reinforced by an appeal to the theory of state sovereignty, which was held to involve the corollary of the inalienability of all the principal powers of a state.

The subordination of all charter rights and privileges to the power of eminent domain has been maintained by the Court ever since; not even an explicit agreement by the state to forego the exercise of the power will avail against it.²¹⁶⁹ Conversely, the state may revoke an improvident grant of public property without recourse to the power of eminent domain, such a grant being inherently beyond the power of the state to make. Thus, when the legislature of Illinois in 1869 devised to the Illinois Central Railroad Company, its successors and assigns, the state’s right and title to nearly a thousand acres of submerged land under Lake Michigan along the harbor front of Chicago, and four years later sought to repeal the grant, the Court, a four-to-three decision, sustained an action by the state to recover the lands in question. Justice Field wrote for the majority: “Such abdication is not consistent with the exercise of that trust which requires the government of the State to preserve such waters for the use of public. The trust devolving upon the State for the public, and which can only be discharged by the management and control of property in which the public has an interest, cannot be relinquished by a transfer of the property. . . . Any grant of the kind is necessarily revocable, and the exercise of the trust by which the property was held by the State can be resumed at any time.”²¹⁷⁰

On the other hand, repeated endeavors to subject tax exemptions to the doctrine of inalienability, though at times supported by powerful minorities on the Bench, have failed.²¹⁷¹ As recently as January 1952, the Court ruled that the Georgia Railway Company was entitled to seek an injunction in the federal courts against an attempt by Georgia’s Revenue Commission to compel it to pay ad valorem taxes contrary to the terms of its special charter issued in 1833. In answer to the argument that this was a suit contrary to the Eleventh Amendment, the Court declared that the immunity from federal jurisdiction created by the Amendment “does not extend to individuals who act as officers without constitutional authority.”²¹⁷²

The leading case involving the police power is Stone v. Mississippi.²¹⁷³ In 1867, the legislature of Mississippi chartered a company to which it expressly granted the power to conduct a lottery. Two years later, the state adopted a new Constitution which contained a provision forbidding lotteries, and a year later the legislature passed an act to put this provision into effect. In upholding this act and the constitutional provision on which it was based, the Court said: “The power of governing is a trust committed by the people to the government, no part of which can be granted away. The people, in their sovereign capacity, have established their agencies for the preservation of the public health and the public morals, and the protection of public and private rights,” and these agencies can neither give away nor sell their discretion. All that one can get by a charter permitting the business of conducting a lottery “is suspension of certain governmental rights in his favor, subject to withdrawal at will.”²¹⁷⁴

The Court shortly afterward applied the same reasoning in a case challenging the right of Louisiana to invade the exclusive privilege of a corporation engaged in the slaughter of cattle in New Orleans by granting another company the right to engage in the same business. Although the state did not offer to compensate the older company for the lost monopoly, its action was sustained on the ground that it had been taken in the interest of the public health.²¹⁷⁵ When, however, the City of New Orleans, in reliance on this precedent, sought to repeal an exclusive franchise which it had granted a company for fifty years to supply gas to its inhabitants, the Court interposed its veto, explaining that in this instance neither the public health, the public morals, nor the public safety was involved.²¹⁷⁶

Later decisions, nonetheless, apply the principle of inalienability broadly. To quote from one: “It is settled that neither the ‘contract’ clause nor the ‘due process’ clause has the effect of overriding the power to the State to establish all regulations that are reasonably necessary to secure the health, safety, good order, comfort, or general welfare of the community; that this power can neither be abdicated nor bargained away, and is inalienable even by express grant; and all contract and property rights are held subject to its fair exercise.”²¹⁷⁷

It would scarcely suffice today for a company to rely upon its charter privileges or upon special concessions from a state in resisting the application to it of measures alleged to have been enacted under the police power thereof; if this claim is sustained, the obligation of the contract clause will not avail, and if it is not, the due process of law clause of the Fourteenth Amendment will furnish a sufficient reliance. That is to say, the discrepancy that once existed between the Court’s theory of an overriding police power in these two adjoining fields of constitutional law is today apparently at an end. Indeed, there is usually no sound reason why rights based on public grant should be regarded as more sacrosanct than rights that involve the same subject matter but are of different provenance.

Private Contracts.—The term “private contract” is, naturally, not all-inclusive. A judgment, though granted in favor of a creditor, is not a contract in the sense of the Constitution,²¹⁷⁸ nor is marriage.²¹⁷⁹ And whether a particular agreement is a valid contract is a question for the courts, and finally for the Supreme Court, when the protection of the contract clause is invoked.²¹⁸⁰

The question of the nature and source of the obligation of a contract, which went by default in Fletcher v. Peck and the Dartmouth College case, with such vastly important consequences, had eventually to be met and answered by the Court in connection with private contracts. The first case involving such a contract to reach the Supreme Court was Sturges v. Crowninshield,²¹⁸¹ in which a debtor sought escape behind a state insolvency act of later date than his note. The act was held inoperative, but whether this was because of its retroactivity in this particular case or for the broader reason that it assumed to excuse debtors from their promises was not at the time made clear. As noted earlier, Chief Justice Marshall’s definition on this occasion of the obligation of a contract as the law that binds the parties to perform their undertakings was not free from ambiguity, owing to the uncertain connotation of the term “law.”²¹⁸²

These obscurities were finally cleared up for most cases in Ogden v. Saunders,²¹⁸³ in which the temporal relation of the statute and the contract involved was exactly reversed—the former antedating the latter. Chief Justice Marshall contended unsuccessfully that the statute was void because it purported to release the debtor from that original, intrinsic obligation that always attaches under natural law to the acts of free agents. “When,” he wrote, “we advert to the course of reading generally pursued by American statesmen in early life, we must suppose that the framers of our Constitution were intimately acquainted with the writings of those wise and learned men whose treatises on the laws of nature and nations have guided public opinion on the subjects of obligation and contracts,” and that they took their views on these subjects from those sources. He also posed the question of what would happen to the Contract Clause if states might pass acts declaring that all contracts made subsequently thereto should be subject to legislative control.²¹⁸⁴

For the first and only time, a majority of the Court abandoned the Chief Justice’s leadership. Speaking by Justice Washington, it held that the obligation of private contracts is derived from the municipal law—state statutes and judicial decisions—and that the inhibition of Article I, § 10, is confined to legislative acts made after the contracts affected by them, subject to the following exception. By a curiously complicated line of reasoning, the Court also held in the same case that, when the creditor is a nonresident, then a state by an insolvency law may not alter the former’s rights under a contract, albeit one of later date.

With the proposition established that the obligation of a private contract comes from the municipal law in existence when the contract is made, a further question presents itself, namely, what part of the municipal law is referred to? No doubt, the law which determines the validity of the contract itself is a part of such law. Also part of such law is the law which interprets the terms used in the contract, or which supplies certain terms when others are used, as for instance, constitutional provisions or statutes which determine what is “legal tender” for the payment of debts, or judicial decisions which construe the term “for value received” as used in a promissory note, and so on. In short, any law which at the time of the making of a contract goes to measure the rights and duties of the parties to it in relation to each other enters into its obligation.

Remedy a Part of the Private Obligation.—Suppose, however, that one of the parties to a contract fails to live up to his obligation as thus determined. The contract itself may now be regarded as at an end, but the injured party, nevertheless, has a new set of rights in its stead, those which are furnished him by the remedial law, including the law of procedure. In the case of a mortgage, he may foreclose; in the case of a promissory note, he may sue; and in certain cases, he may demand specific performance. Hence the further question arises, whether this remedial law is to be considered a part of the law supplying the obligation of contracts. Originally, the predominating opinion was negative, since as we have just seen, this law does not really come into operation until the contract has been broken. Yet it is obvious that the sanction which this law lends to contracts is extremely important—indeed, indispensable. In due course it became the accepted doctrine that part of the law which supplies one party to a contract with a remedy if the other party does not live up to his agreement, as authoritatively interpreted, entered into the “obligation of contracts” in the constitutional sense of this term, and so might not be altered to the material weakening of existing contracts. In the Court’s own words: “Nothing can be more material to the obligation than the means of enforcement. Without the remedy the contract may, indeed, in the sense of the law, be said not to exist, and its obligation to fall within the class of those moral and social duties which depend for their fulfillment wholly upon the will of the individual. The ideas of validity and remedy are inseparable. . . .”²¹⁸⁵

This rule was first definitely announced in 1843 in Bronson v. Kinzie.²¹⁸⁶ Here, an Illinois mortgage giving the mortgagee an unrestricted power of sale in case of the mortgagor’s default was involved, along with a later act of the legislature that required mortgaged premises to be sold for not less than two-thirds of the appraised value and allowed the mortgagor a year after the sale to redeem them. It was held that the statute, in altering the pre-existing remedies to such an extent, violated the constitutional prohibition and hence was void. The year following a like ruling was made in McCracken v. Hayward,²¹⁸⁷ as to a statutory provision that personal property should not be sold under execution for less than two-thirds of its appraised value.

But the rule illustrated by these cases does not signify that a state may make no changes in its remedial or procedural law that affect existing contracts. “Provided,” the Court has said, “a substantial or efficacious remedy remains or is given, by means of which a party can enforce his rights under the contract, the Legislature may modify or change existing remedies or prescribe new modes of procedure.”²¹⁸⁸ Thus, states are constantly remodelling their judicial systems and modes of practice unembarrassed by the Contract Clause.²¹⁸⁹ The right of a state to abolish imprisonment for debt was early asserted.²¹⁹⁰ Again, the right of a state to shorten the time for the bringing of actions has been affirmed even as to existing causes of action, but with the proviso added that a reasonable time must be left for the bringing of such actions.²¹⁹¹ On the other hand, a statute which withdrew the judicial power to enforce satisfaction of a certain class of judgments by mandamus was held invalid.²¹⁹² In the words of the Court: “Every case must be determined upon its own circumstances”;²¹⁹³ and it later added: “In all such cases the question becomes . . . one of reasonableness, and of that the legislature is primarily the judge.”²¹⁹⁴

Contracts involving municipal bonds merit special mention. While a city is from one point of view but an emanation from the government’s sovereignty and an agent thereof, when it borrows money it is held to be acting in a corporate or private capacity and so to be suable on its contracts. Furthermore, as was held in the leading case of United States ex rel. Von Hoffman v. Quincy,²¹⁹⁵ “where a State has authorized a municipal corporation to contract and to exercise the power of local taxation to the extent necessary to meet its engagements, the power thus given cannot be withdrawn until the contract is satisfied.” In this case the Court issued a mandamus compelling the city officials to levy taxes for the satisfaction of a judgment on its bonds in accordance with the law as it stood when the bonds were issued.²¹⁹⁶ Nor may a state by dividing an indebted municipality among others enable it to escape its obligations. The debt follows the territory and the duty of assessing and collecting taxes to satisfy it devolves upon the succeeding corporations and their officers.²¹⁹⁷ But where a municipal organization has ceased practically to exist through the vacation of its offices, and the government’s function is exercised once more by the state directly, the Court has thus far found itself powerless to frustrate a program of repudiation.²¹⁹⁸ However, there is no reason why the state should enact the role of particeps criminis in an attempt to relieve its municipalities of the obligation to meet their honest debts. Thus, in 1931, during the Great Depression, New Jersey created a Municipal Finance Commission with power to assume control over its insolvent municipalities. To the complaint of certain bondholders that this legislation impaired the contract obligations of their debtors, the Court, speaking by Justice Frankfurter, pointed out that the practical value of an unsecured claim against a city is “the effectiveness of the city’s taxing power,” which the legislation under review was designed to conserve.²¹⁹⁹

Private Contracts and the Police Power.—The increasing subjection of public grants to the police power of the states has been previously pointed out. That purely private contracts should be in any stronger situation in this respect obviously would be anomalous in the extreme. In point of fact, the ability of private parties to curtail governmental authority by the easy device of contracting with one another is, with an exception to be noted, even less than that of the state to tie its own hands by contracting away its own powers. So, when it was contended in an early Pennsylvania case that an act prohibiting the issuance of notes by unincorporated banking associations violated the Contract Clause because of its effect upon certain existing contracts of members of such association, the state Supreme Court answered: “But it is said, that the members had formed a contract between themselves, which would be dissolved by the stoppage of their business. And what then? Is that such a violation of contracts as is prohibited by the Constitution of the United States? Consider to what such a construction would lead. Let us suppose, that in one of the States there is no law against gaming, cock-fighting, horse-racing or public masquerades, and that companies should be formed for the purpose of carrying on these practices. . . .” Would the legislature then be powerless to prohibit them? The answer returned, of course, was no.²²⁰⁰

The prevailing doctrine was stated by the U. S. Supreme Court: “It is the settled law of this court that the interdiction of statutes impairing the obligation of contracts does not prevent the State from exercising such powers as are vested in it for the promotion of the common weal, or are necessary for the general good of the public, though contracts previously entered into between individuals may thereby be affected. . . . In other words, that parties by entering into contracts may not estop the legislature from enacting laws intended for the public good.”²²⁰¹

So, in an early case, we find a state recording act upheld as applying to deeds dated before the passage of the act.²²⁰² Later cases have brought the police power in its more customary phases into contact with private as well as with public contracts. Lottery tickets, valid when issued, were necessarily invalidated by legislation prohibiting the lottery business;²²⁰³ contracts for the sale of beer, valid when entered into, were similarly nullified by a state prohibition law;²²⁰⁴ and contracts of employment were modified by later laws regarding the liability of employers and workmen’s compensation.²²⁰⁵ Likewise, a contract between plaintiff and defendant did not prevent the state from making the latter a concession that rendered the contract worthless;²²⁰⁶ nor did a contract as to rates between two railway companies prevent the state from imposing different rates;²²⁰⁷ nor did a contract between a public utility company and a customer protect the rates agreed upon from being superseded by those fixed by the state.²²⁰⁸ Similarly, a contract for the conveyance of water beyond the limits of a state did not prevent the state from prohibiting such conveyance.²²⁰⁹

But the most striking exertions of the police power touching private contracts, as well as other private interests within recent years, have been evoked by war and economic depression. Thus, in World War I, the State of New York enacted a statute which, declaring that a public emergency existed, forbade the enforcement of covenants for the surrender of the possession of premises on the expiration of leases, and wholly deprived for a period owners of dwellings, including apartment and tenement houses, within the City of New York and contiguous counties, of possessory remedies for the eviction from their premises of tenants in possession when the law took effect, providing the latter were able and willing to pay a reasonable rent. In answer to objections leveled against this legislation on the basis of the Contract Clause, the Court said: “But contracts are made subject to this exercise of the power of the State when otherwise justified, as we have held this to be.”²²¹⁰ In a subsequent case, however, the Court added that, although the declaration by the legislature of a justifying emergency was entitled to great respect, it was not conclusive; a law “depending upon the existence of an emergency or other certain state of facts to uphold it may cease to operate if the emergency ceases or the facts change,” and whether they have changed was always open to judicial inquiry.²²¹¹

Summing up the result of the cases referred to above, Chief Justice Hughes, speaking for the Court in Home Building & Loan Ass’n v. Blaisdell,²²¹² remarked in 1934: “It is manifest from this review of our decisions that there has been a growing appreciation of public needs and of the necessity of finding ground for a rational compromise between individual rights and public welfare. The settlement and consequent contraction of the public domain, the pressure of a constantly increasing density of population, the interrelation of the activities of our people and the complexity of our economic interests, have inevitably led to an increased use of the organization of society in order to protect the very bases of individual opportunity. Where, in earlier days, it was thought that only the concerns of individuals or of classes were involved, and that those of the State itself were touched only remotely, it has later been found that the fundamental interests of the State are directly affected; and that the question is no longer merely that of one party to a contract as against another, but of the use of reasonable means to safeguard the economic structure upon which the good of all depends. . . . The principle of this development is . . . that the reservation of the reasonable exercise of the protective power of the States is read into all contracts . . . .”²²¹³

Evaluation of the Clause Today.—It should not be inferred that the Contract Clause is today totally moribund. Even prior to the most recent decisions, it still furnished the basis for some degree of judicial review as to the substantiality of the factual justification of a professed exercise by a state legislature of its police power, and in the case of legislation affecting the remedial rights of creditors, it still affords a solid and palpable barrier against legislative erosion. Nor is this surprising in view of the fact that, as we have seen, such rights were foremost in the minds of the framers of the clause. The Court’s attitude toward insolvency laws, redemption laws, exemption laws, appraisement laws and the like, has always been that they may not be given retroactive operation,²²¹⁴ and the general lesson of these earlier cases is confirmed by the Court’s decisions between 1934 and 1945 in certain cases involving state moratorium statutes. In Home Building & Loan Ass’n v. Blaisdell,²²¹⁵ the leading case, a closely divided Court sustained the Minnesota Moratorium Act of April 18, 1933, which, reciting the existence of a severe financial and economic depression for several years and the frequent occurrence of mortgage foreclosure sales for inadequate prices, and asserting that these conditions had created an economic emergency calling for the exercise of the State’s police power, authorized its courts to extend the period for redemption from foreclosure sales for such additional time as they might deem just and equitable, although in no event beyond May 1, 1935.

The act also left the mortgagor in possession during the period of extension, subject to the requirement that he pay a reasonable rental for the property as fixed by the court. Contemporaneously, however, less carefully drawn statutes from Missouri and Arkansas, acts that were not as considerate of creditor’s rights, were set aside as violating the Contract Clause.²²¹⁶ “A State is free to regulate the procedure in its courts even with reference to contracts already made,” said Justice Cardozo for the Court, “and moderate extensions of the time for pleading or for trial will ordinarily fall within the power so reserved. A different situation is presented when extensions are so piled up as to make the remedy a shadow. . . . What controls our judgment at such times is the underlying reality rather than the form or label. The changes of remedy now challenged as invalid are to be viewed in combination, with the cumulative significance that each imparts to all. So viewed they are seen to be an oppressive and unnecessary destruction of nearly all the incidents that give attractiveness and value to collateral security.”²²¹⁷ On the other hand, in the most recent of this category of cases, the Court gave its approval to an extension by the State of New York of its moratorium legislation. While recognizing that business conditions had improved, the Court found reason to believe that “the sudden termination of the legislation which has dammed up normal liquidation of these mortgages for more than eight years might well result in an emergency more acute than that which the original legislation was intended to alleviate.”²²¹⁸

In the meantime, the Court had sustained New York State legislation under which a mortgagee of real property was denied a deficiency judgment in a foreclosure suit where the state court found that the value of the property purchased by the mortgagee at the foreclosure sale was equal to the debt secured by the mortgage.²²¹⁹ “Mortgagees,” the Court said, “are constitutionally entitled to no more than payment in full. . . . To hold that mortgagees are entitled under the contract clause to retain the advantages of a forced sale would be to dignify into a constitutionally protected property right their chance to get more than the amount of their contracts. . . . The contract clause does not protect such a strategical, procedural advantage.”²²²⁰

More important, the Court has been at pains most recently to reassert the vitality of the clause, although one may wonder whether application of the clause will be more than episodic.

“[T]he Contract Clause remains a part of our written Constitution.”²²²¹ So saying, the Court struck down state legislation in two instances, one law involving the government’s own contractual obligation and the other affecting private contracts.²²²² A finding that a contract has been “impaired” in some way is merely the preliminary step in evaluating the validity of the state action.²²²³ But in both cases the Court applied a stricter-than-usual scrutiny to the statutory action, in the public contracts case precisely because it was its own obligation that the State was attempting to avoid and in the private contract case, apparently, because the legislation was in aid of a “narrow class.”²²²⁴

The approach in any event is one of balancing. “The severity of the impairment measures the height of the hurdle the state legislation must clear. Minimal alteration of contractual obligations may end the inquiry at its first stage. Severe impairment, on the other hand, will push the inquiry to a careful examination of the nature and purpose of the state legislation.”²²²⁵ Having determined that a severe impairment had resulted in both cases,²²²⁶ the Court moved on to assess the justification for the state action.

In United States Trust, the Court ruled that an impairment would be upheld only if it were “necessary” and “reasonable” to serve an important public purpose. But the two terms were given restrictive meanings. Necessity is shown only when the state’s objectives could not have been achieved through less dramatic modifications of the contract; reasonableness is a function of the extent to which alteration of the contract was prompted by circumstances unforeseen at the time of its formation. The repeal of the covenant in issue was found to fail both prongs of the test.²²²⁷

In Spannaus, the Court drew from its prior cases four standards: did the law deal with a broad generalized economic or social problem, did it operate in an area already subject to state regulation at the time the contractual obligations were entered into, did it effect simply a temporary alteration of the contractual relationship, and did the law operate upon a broad class of affected individuals or concerns. The Court found that the challenged law did not possess any of these attributes and thus struck it down.²²²⁸

Whether these two cases portend an active judicial review of economic regulatory activities, in contrast to the extreme deference shown such legislation under the due process and equal protection clauses, is problematical. Both cases contain language emphasizing the breadth of the police powers of government that may be used to further the public interest and admitting limited judicial scrutiny. Nevertheless, “[i]f the Contract Clause is to retain any meaning at all . . . it must be understood to impose some limits upon the power of a State to abridge existing contractual relationships, even in the exercise of its otherwise legitimate police power.”²²²⁹