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Contract Clause of the US Constitution

9. What is the “Contract Clause”?

Article I, Section 10 states that, “No state shall pass any Law impairing the obligation of contracts.”

The Contract Clause prohibits state governments from specifically legislating to interfere with (or usurp) private contract rights. It is, however, limited by the ability of state governments to legislate to interfere with those rights under their police power. The state may pass legislation impairing a contract if the law is passed to deal with a specific emergency situation. Further, a state government may generally legislate to regulate an industry or commercial activity. Such legislation may have the effect of interfering with existing contracts. Because the legislation is not directly targeted at interfering with an individual’s (or business’s) contract rights, it does not violate the Contracts Clause. The Contract Clause demonstrates the drafters’ regard for the importance of individual contract rights.

•    Note: The Contract Clause does not limit the power of the Federal Government to interfere with private contract.

•    Example: John has a business in State A that conducts international trade. His largest trading contract is with ABC Company (a French Company). State A passes a law requiring that all trading with ABC Company can only be carried out by State A. This would be unconstitutional if State A is intentionally legislating to usurp John’s contract rights. A generally prohibition against all trade with ABC company, however, may be legal.

•    Discussion: Historically, can you think of why the founders felt it necessary to include the Contract Clause into the Constitution?

•    Practice Question: ABC Corporation in Boston has an ample tea trade with England. ABC brings in nearly $500 million annually. The fears that ABC Corp is creating a sort of monopoly and passes a law that no singe corporation can gross more than $100 million in annual sales from a single commodity. Is this type of statute constitutional?

 

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