Practical Application: Understanding the Contracts Clause

Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

The United States Constitution's Obligation of Contracts Clause prevents state governments from interfering with personal contracts. However, there are exceptions. Practice recognizing its condition and relevance in these three scenarios.

Contracts Clause

Most people, when entering into a contract such as purchasing a house, trust that the contract will hold and that they won't lose the house just because the state governor doesn't like them. The trust lies in the Obligation of Contracts Clause, which basically says that state governments are not allowed to interfere with personal contracts except in certain situations.

Therefore, state governments are not allowed to pass a law that would interfere with an existing contract. For example, say Jenny has an existing rental contract where she is required to pay a pet security deposit. Well, because this is an existing contract, the state can't pass a law that makes it illegal to charge a pet security deposit.

This protection only works for state legislation, it doesn't apply in the courthouses. Jenny can sue the landlord and say that she shouldn't have to pay a pet security deposit because her pet is a service animal. The court can decide in Jenny's favor and change the existing contract, deleting the pet security deposit requirement. This is perfectly legal.

For further review, check out the lesson Contracts Clause: Examples & Definition. Remember that if a situation meets the following three criteria, then the state does have legal right to interfere:

  1. The state doesn't substantially impair contract rights.
  2. The state law has a significant and legitimate purpose.
  3. The state law is reasonable and appropriately tailored to its purpose.

In addition to meeting these three criteria, states can intervene and interfere by applying either eminent domain or police power. Eminent domain is when a state decides to demolish houses in the path of a proposed freeway. Police power is when a state makes laws and regulations that protect its residents.

Questions to Consider

Let's consider three scenarios and see how the Contract Clause is relevant to each. Use these questions as an aid to applying the clause or considering its exceptions:

  • Does the contract follow all current laws and regulations at the time of its agreement?
  • What reasons does a state government have for interfering with a contract?

Scenarios

Cleaning Contract

Mario has entered into a cleaning contract with a company that offers daily office cleaning and weekly deep office cleaning. The contract followed all applicable laws and regulations at the time. Mario hand-wrote his signature on the contract and the cleaning company hand-wrote the specific schedule including times that Mario has requested.

The state passes a law requiring only digital signatures. Does it apply to this scenario?

The answer is no. Using the contracts clause, the state cannot interfere in this personal contract because it has been made already and was in regulation at the time.

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