Contract Clause

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 ...."

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 combatting 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.