Contracts Clause: Examples & Definition

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  • 0:07 Obligation of Contracts Clause
  • 1:36 Application of the…
  • 3:17 Early Interpretation…
  • 5:12 Later Interpretation…
  • 5:59 Exceptions to the…
  • 7:51 Lesson Summary
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Lesson Transcript
Instructor: Ashley Dugger

Ashley has a JD degree and is an attorney. She has taught and written various law courses.

The United States Constitution's Obligations of Contracts Clause was drafted in order to keep states from interfering with private contracts. This lesson explains the use of the Contracts Clause in business and how the interpretation of the Contracts Clause has changed over time.

The Obligation of Contracts Clause

The Obligation of Contracts Clause is commonly referred to as simply the Contracts Clause. The clause is found in Article I of the United States Constitution. Generally speaking, this clause was added to the Constitution in order to prohibit states from interfering with private contracts. The clause states that, 'No State shall...pass any...Law impairing the Obligation of Contracts...'

The clause can be applied to protect all sorts of everyday business dealings. Though, at the time, the framers mostly sought to protect contracts between debtors and creditors. Under the Articles of Confederation, it was common for a state to pass legislation that granted debt relief to a particular individual. The framers sought to prevent this when they drafted the Constitution. They based the Contracts Clause on a similar provision from the Northwest Ordinance that was already in effect at the time the Constitution was drafted.

The Contracts Clause is in a section of our Constitution that lists certain prohibitions on the states. These prohibitions are meant to protect individuals from intrusion by state governments and to keep the states from intruding on the Federal government's duties. Among other things, this section of the Constitution prohibits states from issuing their own paper money and from regulating economic affairs.

Application of the Contracts Clause

The Contracts Clause applies to ordinary contracts made between private citizens or entities, including partnerships and corporations. This includes a variety of business contracts, such as vendor contracts and lease contracts. For the most part, a state can't enact a law that retroactively obstructs a private individual's contract rights. This means that a state law can't hinder a legally binding contract that has already been made between two or more private parties.

The clause applies only to state legislation. It doesn't apply to court decisions. Let's say I make a contract with Bobby. Later, I decide I don't like the terms of the contract, and I don't want to perform the contract. I sue Bobby to get my money back. A state court can decide that my contract shouldn't be enforced and can order Bobby to return my money. This affects Bobby's rights under the contract, but it doesn't violate the Constitution's Contracts Clause.

Also notable, the clause doesn't keep a state from making laws that set requirements for contracts that aren't yet made. For example, the state of Kansas can make a law that says all plumbing contracts must be written in blue pen. My contract with my plumber is a private contract between two private parties - the plumber and me. The Contracts Clause may keep Kansas from interfering with our contract once a legally binding contract is made, but it won't keep Kansas from setting the requirements for the contract before it's made.

Early Interpretation of the Contracts Clause

The Obligation of Contracts Clause has been interpreted differently throughout history. Originally, the clause prohibited states from meddling with contracts made between private parties. This served to competently protect and preserve private business dealings.

For example, Fletcher v. Peck is a landmark Supreme Court case from 1810. This case marked the first time a state law was declared unconstitutional. Georgia's state legislature granted land, resulting in ownership by several different companies. But the following year, Georgia sought to rescind the land contracts and the companies' land ownership rights. Peck obtained land that was part of the original Georgia grant and then sold that land to Fletcher. Fletcher later sued, arguing that since the original sale of the land had been rescinded, Peck had no legal right to sell the land to Fletcher. The Supreme Court decided that the contract between Peck and Fletcher was valid. Because of the Contracts Clause, Georgia's legislature couldn't invalidate their contract or take Fletcher's land.

In early cases like this one, the Contracts Clause was broadly interpreted, and the states were often prohibited from interfering. By 1934, however, the Court seemed to narrow its interpretation of the clause. In the case of Home Building & Loan Ass'n v. Blaisdell, the Court upheld a Minnesota law that temporarily restricted foreclosures. Minnesota wanted to prevent mass foreclosures during the Depression era. The Supreme Court, in upholding Minnesota's law, essentially declared that the Contracts Clause doesn't necessarily prohibit a state from interfering or affecting a private contract.

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