CHAPTER XI.

LAWS IMPAIRING OBLIGATIONS OF CONTRACTS.

§ 226. Constitutional prohibitions. During the disorders consequent upon the Revolution and the exhausted state of public and private credit during the years immediately after, a number of states had passed laws altering or discharging private contracts, greatly to the disturbance of commerce and credit. With very little discussion, therefore, the Philadelphia convention inserted in the proposed Constitution the clause: "No state shall pass any law impairing the obligations of contracts" (1). A proposal that a similar prohibition should be placed upon the United States government was not even seconded in the convention. Probably the framers of the Constitution thought that the national government, subject to the possible hazards and burdens of war, could not be as safely fettered in this respect as might the local state governments relieved of the duty of meeting supreme emergencies. That the United States is not forbidden to impair the obligations of contracts does not mean, however, that it may abrogate at pleasure such as are subject to its jurisdiction. Contracts are property (2), and the Fifth Amendment forbids the United States to take property without due process of law. Any act of

(1) Art. I, Sec. 10, § 1.

(2) Long Island Water Co. v. Brooklyn, 166 U. S., 685, 690-91.

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sheer confiscation, or of unreasonable abrogation of contracts would doubtless fall within this guaranty.

§ 227. What acts of impairment are forbidden? A state may affect the obligation of contracts in a variety of ways. A state court may erroneously interpret a contract in such a way as to deprive one of the parties of a right flowing from it that he should properly have. The Constitution does not forbid this (3). A state court may lay down the law in a certain manner, and upon the faith of this contracts may be made, and then the same court may reverse its former decision and lay down a rule of law so different that the former contracts are seriously impaired or even rendered altogether invalid. This is not forbidden (4). A contract may be unenforceable, and hence impaired, on account of the acts of some administrative officer, or of some private individual, but there is no redress for this under the contract clause of the Constitution.

"In order to come within the provision of the Constitution of the United States which declares that no state shall pass any law impairing the obligation of contracts, not only must the obligation of a contract have been impaired, but it must have been impaired by a law of the state. The prohibition is aimed at the legislative power of the state, and not at the decisions of its courts, or the acts of administrative or executive boards or officers, or the doings of corporations or individuals" (5).

(3) Railway Co. v. Rock, 4 Wall., 177.

(4)

(5)

U. S., 18.

National Loan Asso. v. Brahan, 193 U. S., 635.

New Orleans Waterworks Co. v. Louisiana Sugar Co., 125

The words "pass a law" in the Constitution evidently refer only to legislative law-making, not such incidental law-making as results from the decisions of courts, or the acts of executive officers.

On the other hand legislative enactments against which the prohibition is directed, are not confined to acts of the state legislature. "Any enactment, from whatever source originating, to which a state gives the force of law, is a statute of the state" (6). "The by-laws or ordinances of a municipal corporation may be such an exercise of legislative power delegated by the legislature to the corporation as a political subdivision of the state, having all the force of law within the limits of the municipality, that it may properly be considered as a law, within the meaning of this clause of the Constitution" (note 5, above). A state constitution adopted directly by the people of the state is a "law."

§ 228. What is a contract? The contracts protected by the Constitution are those to the terms of which the parties have assented. Obligations imposed by law irrespective of the consent of the parties are not meant, although they may for some purposes be classified as contracts. For instance, A owes X $100, on which A has agreed to pay 6% interest. The legislature could not reduce the rate of interest to 5% on this contract, because this would impair the rights X had arising out of the original contract under the law as it stood when the contract was made. But, if X sues A and obtains a judgment for the $100 and interest, the contract between

(6) Williams v. Bruffy, 96 U. S., p. 183.

X and A is now destroyed, and its place has been taken by an order of court, in the form of a judgment that A pay its amount or his property will be seized in satisfaction. When the judgment was obtained the law may have entitled X to 6% interest upon the judgment as damages so long as it remained unpaid, but the state may reduce the rate of interest on a judgment at any time. "He has no contract whatever on the subject with the defendant in the judgment, but his right is to receive, and the defendant's obligation is to pay, just what the state chooses to prescribe" (7).

A state may authorize divorces for causes that were not grounds for a divorce when the marriage was entered into; and, where the state constitution does not forbid, the legislature itself may pass an act divorcing parties within the state. The relation resulting from the marriage contract is treated as a status and not merely as a contract, and it is within the legislative power of the state to alter this status in the interest of the public welfare (8).

§ 229. Same: Grants. The first case that came before the United States Supreme Court, requiring an interpretation of the contract clause of the Constitution was the famous case of Fletcher v. Peck. The state of Georgia by an act of its legislature granted land to one Gunn, who sold to various other parties. After Gunn had thus disposed of the land, Georgia passed a statute rescinding the legislative grant previously made to Gunn and

(7) Morley v. Lake Shore Railway Co., 146 U. S., 162.

(8) Maynard v. Hill, 125 U. S., 190.

asserting the title of the state to the land it contained, upon the ground of his alleged fraud in obtaining the grant. The question arose whether this last Georgia statute could affect the title of persons who had previously bought the land from Gunn in ignorance of the alleged fraud. It was claimed that the act by which Georgia purported to do this impaired the obligation of the state's contract with Gunn and hence was unconstitutional. The Federal Supreme Court upheld this contention. Chief Justice Marshall said:

"Is a grant a contract? A contract is a compact between two or more parties, and is either executory or executed. An executory contract is one in which a party binds himself to do, or not to do, a particular thing; such was the law under which the conveyance was made by the governor. A contract executed is one in which the object of contract is performed; and this, says Blackstone, differs in nothing from a grant. A contract executed, as well as one which is executory, contains obligations binding on the parties. A grant, in its own nature, amounts to an extinguishment of the right of the grantor, and implies a contract not to reassert that right. A party is, therefore, always estopped by his own grant” (9).

One of the judges in this case doubted whether there could be said to be any obligations remaining to a contract that had been wholly performed on both sides, and so whether this act of Georgia could impair any obligation of an executed contract. The ruling of the majority,

(9) 6 Cranch, 87, 136-37.