January 01, 2018

Book Review: The Contract Clause: A Constitutional History

Reviewed by Steven J. Eagle

Some constitutional mandates wax and wane in importance, depending on the changing passions of the times. Few provisions of the U.S. Constitution have fluctuated more in importance than the Contract Clause. Article I, section 10, provides in part: “No state shall . . . pass any . . . Law impairing the Obligation of Contract.” Since 1787, judges, public officials, business leaders, and citizens have debated the meaning of these apparently simple words in the context of a changing American society and economy.

Those interpreting the clause face a dilemma. An overly lenient approach invites the plunder of wealth and erosion of trust in contract promises on which the commitments of investors are predicated. An overly strict approach denies business flexibility and government the ability to deal with emergencies. Is the clause concerned with contract rights, remedies, or both? Does it pertain to government contracts as well as private agreements? Does its prohibition, on its face applicable only to the states, mean that the federal government is free to disregard the contract rights of others in its own promises?

James Ely, a professor emeritus of law and history at Vanderbilt Law School, has written numerous books about American legal history, including his widely praised The Guardian of Every Other Right: A Constitutional History of Property Rights (3d ed. 2008). In The Contract Clause, Prof. Ely does a masterful job in discussing a related aspect of the framers’ efforts to ensure liberty and prosperity for their countrymen and posterity. Using a discursive style and measured tone, Ely delves into the motivations and apprehensions of those advocating differing views of the Contract Clause and the analyses employed by federal and state judges in deciding cases.

“I have endeavored,” Prof. Ely writes in his introduction, “to place evolving contract clause jurisprudence within the broader context of the legal culture, which values contracts as an expression of individualism and a market economy.” He adds that the book “takes account of social, economic, and political developments.” The ensuing chapters, which are arranged chronologically by era in American history, fulfill that commitment.

Prof. Ely observes that the clause was inserted into the Constitution without much debate and resulted from the “sour experiences” with state debt-relief laws that were enacted after the revolution. It was grounded, he adds, “on the premise that honoring contractual commitments served the public interest by encouraging commerce.” Often public figures and judges spoke of the “sanctity” of contracts, thereby suggesting a moral as well as utilitarian basis for the importance of keeping promises. The protection of corporate charters in the seminal case of Dartmouth College v. Woodward (1819) helped enshrine that view.

If the sovereign state was bound not to impair the obligation of contract, it also had an intrinsic power to protect the public health, safety, welfare, and morals. That “police power,” as it is known, has existed for many centuries but has grown in importance in America, particularly since the Great Depression. As Prof. Ely notes, the inalienable police power and other exceptions “gradually began to swallow” the Contract Clause. A “near-fatal blow,” he relates, was delivered in Home Building and Loan Association v. Blaisdell (1934), when the Supreme Court upheld a Minnesota moratorium on mortgage foreclosures.

Since the 1970s, Ely observes, the Contract Clause has enjoyed a “modest revival of interest” among both courts and commentators. Particularly spurring that interest was United States Trust Company v. New Jersey (1977), in which the Supreme Court considered how the relevant Contract Clause standard by which states’ alleged impairments of their own contracts should be judged.

In his first chapter, “Origins and Early Development,” Prof. Ely notes the paucity of materials pertaining to the adoption of the Contract Clause and surmises that it resulted from two principal causes. The first was the supplanting of mercantilism and price regulation by free markets and the commercialization of landed property. The second was the post-Revolutionary War adoption by states of statutes interfering with contracts, most particularly (but not limited to) debtor-relief provisions. Early federal court decisions enforced the clause as it pertained to private contracts and, in Justice James Wilson’s separate opinion in Chisholm v. Georgia (1793), the state’s own contracts, as well.

This set the stage for events related in Ely’s second chapter, “The Era of John Marshall, 1801–1835.” Marshall, a staunch Federalist and unifier of the Court, often is referred to as the “Great Chief Justice.” His opinion in Fletcher v. Peck (1810) sustained a sale of land by the Georgia legislature in the face of later rescission by the state. As Prof. Ely notes, the statute of rescission “was void either because it violated ‘the general principles which are common to our free institutions’ or the constitutional ban against impairing the obligation of contracts.” In discussing the significance of the case, he concludes that it followed earlier federal decisions. Ely adds that Marshall’s “reference to natural rights was not necessarily inconsistent with reliance of an express constitutional provision,” although subsequently noting that Marshall later made no reference to natural law in Dartmouth College and that “the relationship between natural law and written constitutional texts was elusive.”

Dartmouth College, perhaps the most celebrated Contract Clause case, involved a 1769 royal charter for a religious and educational institution in New Hampshire. The college’s corporate charter was to have “continuance forever,” and its board of trustees was to be self-perpetuating. In 1816, New Hampshire changed the charter to, among other things, give the state’s governor a veto power over the trustees’ actions. Chief Justice Marshall held that the college was a private institution that was privately endowed and that the charter change was an impairment of contract. Ely cautions, however, that “the long-term significance of Dartmouth College should not be overstated.” Soon after it was decided, states began including reservation clauses in corporate charters, giving the states the right to amend or repeal them in the public interest.

Although sanctity of contract enjoyed wide sway during Marshall’s time, Prof. Ely observes that, by the time of his death in 1835, “Jacksonian democracy had become the dominant political force,” in America. Ely’s third chapter, “The Taney Era,” focuses on that development and the antebellum period. Roger Taney had been Andrew Jackson’s attorney general before his appointment as chief justice. “Contrary to the fears of many,” Ely states, “Taney proved to be a champion of economic growth and was protective of property and contractual rights.”

In Charles River Bridge Company v. Warren (1837), the company had been granted a charter by the Massachusetts legislature that empowered it to build and operate a toll bridge. The state subsequently authorized Warren to build a parallel bridge, however, that, after recoupment of construction costs, would revert to the state, and its tolls lifted. Although there was no explicit grant of a monopoly in its charter, Daniel Webster argued for the Charles Bridge Company that competition from the adjacent free bridge would effectively destroy its ability to collect tolls and hence constitute an impairment of contract. Chief Justice Taney held that governments cannot be assumed to relinquish powers by implication. Prof. Ely concludes: “The upshot of Charles River Bridge was to afford the states, unless restrained by express language in a charter, wide range to regulate corporations under the police power and to sponsor new projects.” Ely adds, however, that, aside from claims of implied monopoly privilege, courts during the Taney era generally strengthened Contract Clause protections.

“The Eras of the Civil War and Reconstruction,” Ely’s fourth chapter, were notable for the abolition of slavery and the tumultuous Reconstruction period. The Fourteenth Amendment (1868) provided that no state shall “deprive any person of life, liberty, or property, without due process of law.” According to Prof. Ely, this due process guarantee “created new possibilities for federal judicial supervision of state laws and in time would partially eclipse the contract clause.” Notable during that era were the “legal tender cases.” Before the Civil War, legal tender consisted of gold or silver coin. In 1862, however, Congress issued new notes, popularly called “greenbacks,” that it declared to be “lawful money and a legal tender in payment of all debts, public and private, within the United States.”

In Hepburn v. Griswold (1870), a creditor had refused payment in greenbacks of a promissory note issued before enactment of the 1862 law and demanded specie instead. Chief Justice Salmon Chase found the Legal Tender Act unconstitutional. As Ely relates it, Chase “struggled to formulate a persuasive rational for his ruling. He recognized that the contract clause did not by its terms apply to the federal government, yet nonetheless maintained that the provision impliedly inhibited national power.” Although Ely asserts that “[r]eliance on an amorphous ‘spirit’ of the contract clause was problematic,” he concludes that many pre-1862 obligations already had been satisfied and that the practical effect of the ruling was limited.

Importantly, a dissent in Hepburn by Justice Samuel Miller stressed that the Contract Clause did not apply to Congress, and that the Legal Tender Act comported with Congress’s power to enact a uniform system of bankruptcy, “the essence of which is to discharge debtors from the obligation of their contracts.” After two appointments to the Court by President Ulysses Grant, the Court revisited the Legal Tender Act in Knox v. Lee (1871). Writing for the majority, Justice William Strong reversed the Court’s Hepburn decision. He declared that “contracts must be understood as made in reference to the possible exercise of the rightful authority of the government, and no obligation of a contract can extend to the defeat of legitimate governmental authority.” With some understatement, Prof. Ely observes that “[s]uch capacious reading of governmental power to alter contracts would potentially point toward a weakening of the protection afforded by the contract clause.”

By the end of the Reconstruction era, Prof. Ely pronounces the Contract Clause “at the crossroads.” He observes that sanctity of contract remained a societal norm. “Nonetheless, conflict mounted between state police power and the constitutional shelter given contracts.” Although the clause often was invoked by courts, “cracks began to appear . . . as courts sought to deal with novel issues in a complex economy.” He concludes:

The strict construction of corporate charters and the embryonic notion of an alienable police power would in time erode the protection afforded agreements by the contract clause. This process was hastened by the emergence of the due process clause of the Fourteenth Amendment as a shield for economic rights in the late nineteenth century. In short, the decade of the 1870s constituted a high-water mark for the importance of the contract clause in constitutional history.

During “The Gilded Age,” Ely’s fifth chapter, federal and state legislators responded to increased industrialization and centralization of the economy with aggressive new police power regulations. An important manifestation of this, as Prof. Ely notes, was an attack on Dartmouth College as wrongly decided because the framers did not “envision protection for corporate charters,” and because its holding was “simply unworkable in an era of large-scale business enterprises.” In particular, courts held that railroad charter protections against rate regulation did not survive railroad mergers. Also, clauses reserving rights of modification or rescission within charters granted by states became almost universal. Furthermore, Ely notes, “the gradual embrace of the principle of an inalienable police power to protect the public would significantly erode the protection of charters under the contract clause.”

While the number of Contract Clause cases involving land grants abated, an important new limitation on the protective role of the Contract Clause was added by Illinois Central Railroad v. Illinois (1892). There, in what Prof. Ely refers to as a “problematic” and “misleading” opinion, Justice Stephen Field “declared, without precedential support,” that land under navigable waters is “held in trust for the people.” “Nevertheless,” Ely adds, “Illinois Central is the fountainhead of the modern public trust doctrine,” and “the contract clause does not afford much protection to the owners of land deemed subject to [it].”

All this leads Prof. Ely to refer to the Contract Clause as a “waning provision.” “Relegated to a secondary place in constitutional law, the contract clause entered the twentieth century in a weakened condition.”

Ely’s chapter six, “The Early Twentieth Century,” deals with the Contract Clause’s further decline. This reviewer’s principal research interest involves alleged government takings of private property. A towering case in this field is Pennsylvania Coal Company v. Mahon (1922), in which Justice Oliver Wendell Holmes Jr. applied eminent domain beyond physical arrogations of land and held that if a regulation goes “too far,” it would constitute a taking. Landed interests traditionally had been classified as rights to the surface or rights to underlying minerals. At the time, Pennsylvania explicitly recognized the right of support as a separate interest in land.

In Pennsylvania Coal, the homeowner had purchased surface rights from the company, but not the right of support. Being unhappy with having accepted the risk of collapse, buyers implored the Pennsylvania legislature to pass the Kohler Act, which made mineral interest holders responsible for the subsidence of residences or commercial premises. The act did not apply to public streets or vacant parcels, which reinforces its purpose as transferring to landowners the support rights that they had not purchased. Although Justice Holmes found for the coal company, it was on grounds that did not clearly distinguish between due process and takings. As Prof. Ely correctly emphasizes, the company had also made a strong Contract Clause argument, which was not mentioned in Holmes’s opinion. “With the contract clause ignored or dismissed, Pennsylvania Coal highlighted the growing marginalization of the provision in the early twentieth century.”

The most notable case of the era was Home Building and Loan Association v. Blaisdell (1934), which Prof. Ely terms the “eclipse of the contract clause.” There, Chief Justice Charles Evans Hughes upheld a Minnesota Depression-era law limiting mortgage foreclosures and deficiency judgments. “While emergency does not create power,” Hughes declared, “emergency may furnish the occasion for the exercise of power.” Ely states that the opinion “in effect cut the contract clause loose from the constitutional text as well as the views of the framers.” He adds that Hughes had adopted a “Janus-faced approach to the contract clause” in reserving to the courts the final determination on whether there was an actual emergency. He also cited approvingly Justice George Sutherland’s dissenting observation that the Contract Clause was designed precisely to protect creditors in time of hardship.

While Blaisdell applied to temporary moratoria, courts continued to strike down permanent impairments. Nevertheless, Blaisdell and subsequent New Deal era cases did portend what Prof. Ely terms “a sharply diminished role for the contract clause.”

“The Contract Clause in an Age of Regulation,” Ely’s chapter seven, discusses the Clause in present times. Although he refers to the 1950s through the early 1970s as its “ebb tide,” he does term the subsequent period an “uncertain renaissance.” In particular, in United States Trust Company v. New Jersey (1977), the Supreme Court found an impairment of obligations of contract, but in a disquieting fashion. The case arose from a New Jersey law abrogating a statutory covenant that limited the ability of the Port Authority of New York and New Jersey to subsidize rail passenger transportation from revenues pledged as security for bonds issued by the Port Authority.

Given the measured tone marking the book, Prof. Ely’s critique of Justice Blackmun’s plurality opinion seems particularly scalding. He states that Blackmun “began his rambling opinion by denying that ‘the Contract Clause was without meaning in our modern constitutional jurisprudence . . . .’” Blackmun then “proceeded to shift gears” and assert that “a law impairing private or public contracts would pass constitutional muster ‘if it is reasonable and necessary to serve an important public purpose.’”

“The justice compounded the already muddled understanding of the contract clause,” Ely continues, “by setting forth a higher standard for review when a state impaired its own obligation.” Ely concludes that there was “no textual or historical basis” for different scrutiny for public and private obligations, that there might exist a “state interest” in abrogating private, as well as public, obligations, and that the Supreme Court never has explained the level of deference applicable to state actions affecting public contracts.

Later, however, in United States v. Winstar Corporation (1996), the Supreme Court held that contract obligations should not be impaired. There, it reviewed Congress’s abrogation of inducements given to solvent financial institutions to assist failing lenders by undertaking risky mergers with them. The Court held that the federal government had made an express agreement to give those solvent institutions special accounting treatment. A plurality of the Court stated: “Although the contract clause has no application to acts of the United States, it is clear that the National Government has some capacity to make agreements binding future Congresses by creating vested rights. The extent of that capacity, to be sure remains somewhat obscure.”

At present, important potential Contract Clause cases loom on the Supreme Court’s horizon. A few states and localities face dire financial straits, and many government entities seem overextended. Underfunded public pension liabilities are a significant source of these problems, and the easily foreseeable needs to rebuild failing infrastructure and accommodate climate change play large roles, as well. In times of financial crisis, government continues to bail out important distressed industries to the alleged impairment of contract obligations to others.

What role will the Contract Clause play in probable litigation that, in turn, will shape future government and private conduct? According to Prof. Ely, the Contract Clause has “proven a hardy plant,” and it “retains a degree of vitality even in contexts far removed from those that animated the framers in 1787.”

While he has been a proponent of strong property rights, and an occasional sharp critic of arguments and decisions that subordinate their importance, James Ely has written a thorough, objective, and fair summary of constitutional aspects of the life and times of the Contract Clause. He has eschewed legal jargon and unnecessary complexity, making the book accessible to lay readers. The Contract Clause is a trusty guide for contemporary lawyers, scholars, and citizens.

Reviewed by Steven J. Eagle

Steven J. Eagle is a professor of law at the Antonin Scalia Law School at George Mason University and writes on takings law and the permissible boundaries of government land use regulation.