Obligation of Contracts

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OBLIGATION OF CONTRACTS

the constitutional convention of 1787, engaged as it was in producing a frame of national government, provided in the Constitution for only a very few restrictions on the legislative power of the states. Among these was the proscription of any state law impairing the obligation of contracts; that the delegates omitted to include a similar prohibition as to Congress is attributable entirely to the fact that they did not contemplate the existence of national contract law. The phrase "obligation of contracts" did not exist as a term of art, but originated in the Constitution; its meaning is not as obvious as it may seem.

The moral obligation of contracts derives from the voluntary agreement of parties who promise to perform certain duties in exchange for some valuable consideration. In the natural rights political philosophy of the Framers of the Constitution, the obligation to obey the law itself derives from a social compact, in which the individual obliges himself to obey in exchange for the state's guarantee of security for his life, liberty, and property. The moral obligation of contracts, of course, cannot be impaired by state law.

But contracts are also legally binding under the common law (as modified from time to time by statute). One of the things that induces men to enter into contracts is the knowledge that the state, by its courts and officers, stands ready to enforce the contractual duties undertaken by the parties. This knowledge is especially important when, as in contracts for lending money, one party will have already performed his side of the bargain while the promise of the other party remains "executory," that is, to be performed in the future. The contract clause of the Constitution was intended to prevent state law from undermining the enforceability at law of obligations voluntarily entered into.

The Framers of the Constitution well knew the temptation to repudiate obligations improvidently undertaken. shays ' rebellion, which had just been suppressed in Massachusetts, had been directed against judicial enforcement of farm mortgage loans. The continental congress, sitting at the same time as the Convention, recognized the same danger and wrote into the northwest ordinance a provision that "no law ought ever to be made or have force in the said territory, that shall, in any manner whatever, interfere with or affect private contracts, or engagements, bona fide, and without fraud previously formed."

The history of the constitutional guarantee against impairment of contracts has been the story of slow, but steady, erosion. Much of the erosion has been effected by limiting the extent of the legal obligation or by discovering remedies that purport to leave the obligation intact while depriving the obligee of the benefit of his bargain. In sturges v. crowninshield (1819) Chief Justice john marshall defined the obligation of a contract as "the law which binds the parties to perform their agreement." Subsequently, in ogden v. saunders (1827), over Marshall's vigorous dissent, the majority held that the "law" in Marshall's definition was the municipal law of contracts in force where and when the contract was entered into, which local law became part of the contract regardless of any contrary intent of the parties to it. The legislature (or courts) may alter the law of contracts so long as the alteration is prospective in effect. Even after Ogden v. Saunders, however, the Supreme Court continued to read the contract clause as proscribing retroactive state legislation affecting contracts.

In times of economic distress, when the number of debtors exceeds the number of creditors, the majority tends to use the political process to shield itself from the consequences of improvident engagements. When the economic hardship is prolonged, even constitutional barriers may be unable to withstand the pressure for relief. Under such pressure, courts have held debtors' relief legislation constitutional by distinguishing the obligation of the contract from the remedies available when the contract is breached. Thus, for example, in home building and loan company v. blaisdell (1933) the hughes court held that a state law extending the contractual time for repayment of mortgage loans and precluding creditors from exercising their contractual right to sell the mortgaged property to satisfy the debt did not impair the obligation of the loan contract (because the debtor still owed the money) but merely altered the remedy. This sophistical holding permitted the form of the constitutional guarantee to endure even as its substance drained away.

In recent years the Court has partially repudiated the rationale of Blaisdell and has revived the contract clause as a check on state economic regulation. In united states trust co. v. new jersey (1977) as regards public contracts, and in allied structural steel co. v. spannaus (1978) as regards private contracts, the Court subjected statutes that apparently impaired the obligation of contracts to a higher standard of review than is commonly applied to economic legislation.

Dennis J. Mahoney
(1986)