Contract Clause

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The Obligation of Contract Clause is a provision in the U.S. Constitution that prohibits states from passing any law impairing contractual agreements. Article I, Section 10, clause 1 states, "No State shall ... pass any ... Law impairing the Obligation of Contracts ...." Many states have similar protections in their own state constitutions. For example, the Florida constitution states, "No bill of attainder, ex post facto law or law impairing the obligation of contracts shall be passed." Art. I, Section 10.

Founder James Madison wrote in The Federalist No. 44, "Bills of attainder, ex post facto laws, and laws impairing the obligation of contracts, are contrary to the first principles of the social compact, and to every principle of sound legislation."

This clause prevents states from passing laws that interfere with existing contracts between private parties, or contracts between a private party and the state. In two early Supreme Court decisions, Chief Justice John Marshall used this clause to invalidate state laws that interfered with prior grants by the state in Fletcher v. Peck (1810) and Trustees of Dartmouth College v. Woodward (1819). These decisions held that a state could not abrogate (nullify) its own prior contracts with private parties.

In the 20th century, the Supreme Court began allowing states to interfere with prior contracts in the interest of safety, health, morals and the general welfare. The leading case was Home Building & Loan Ass'n v. Blaisdell (1934), which allowed a state to impose a moratorium (suspension) on mortgages in combating deflation during the Great Depression. The Supreme Court later expanded governmental power to interfere with contracts in Exxon Corp. v. Eagerton (1983), when a "broad societal interest" was the basis for government to prevent Exxon Corp. from enforcing a contractual right to pass an increased tax onto consumers.

An interesting question is whether the Obligation of Contract Clause has only a retroactive effect in protecting contracts already formed, or also has a prospective application to protect the right to enter into future contracts. The view of prominent Professor Richard Epstein is that states may change the rules governing future contracts only to provide greater stability and security in contractual obligations. Examples include a statute of limitations, a statute of frauds and recording acts.

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