ArtI.S10.C1.6.17 Private Contracts and the Police Power

Article I, Section 10, Clause 1:

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

The increasing subjection of public grants to the police power of the states has been previously pointed out. That purely private contracts should be in any stronger situation in this respect obviously would be anomalous in the extreme. In point of fact, the ability of private parties to curtail governmental authority by the easy device of contracting with one another is, with an exception to be noted, even less than that of the state to tie its own hands by contracting away its own powers. So, when it was contended in an early Pennsylvania case that an act prohibiting the issuance of notes by unincorporated banking associations violated the Contract Clause because of its effect upon certain existing contracts of members of such association, the state Supreme Court answered: But it is said, that the members had formed a contract between themselves, which would be dissolved by the stoppage of their business. And what then? Is that such a violation of contracts as is prohibited by the Constitution of the United States? Consider to what such a construction would lead. Let us suppose, that in one of the States there is no law against gaming, cock-fighting, horse-racing or public masquerades, and that companies should be formed for the purpose of carrying on these practices. . . . Would the legislature then be powerless to prohibit them? The answer returned, of course, was no. 1

The prevailing doctrine was stated by the U.S. Supreme Court: It is the settled law of this court that the interdiction of statutes impairing the obligation of contracts does not prevent the State from exercising such powers as are vested in it for the promotion of the common weal, or are necessary for the general good of the public, though contracts previously entered into between individuals may thereby be affected. . . . In other words, that parties by entering into contracts may not estop the legislature from enacting laws intended for the public good.2

So, in an early case, we find a state recording act upheld as applying to deeds dated before the passage of the act. 3 Later cases have brought the police power in its more customary phases into contact with private as well as with public contracts. Lottery tickets, valid when issued, were necessarily invalidated by legislation prohibiting the lottery business; 4 contracts for the sale of beer, valid when entered into, were similarly nullified by a state prohibition law; 5 and contracts of employment were modified by later laws regarding the liability of employers and workmen's compensation. 6 Likewise, a contract between plaintiff and defendant did not prevent the state from making the latter a concession that rendered the contract worthless; 7 nor did a contract as to rates between two railway companies prevent the state from imposing different rates; 8 nor did a contract between a public utility company and a customer protect the rates agreed upon from being superseded by those fixed by the state. 9 Similarly, a contract for the conveyance of water beyond the limits of a state did not prevent the state from prohibiting such conveyance. 10

But the most striking exertions of the police power touching private contracts, as well as other private interests within recent years, have been evoked by war and economic depression. Thus, in World War I, the State of New York enacted a statute which, declaring that a public emergency existed, forbade the enforcement of covenants for the surrender of the possession of premises on the expiration of leases, and wholly deprived for a period owners of dwellings, including apartment and tenement houses, within the City of New York and contiguous counties, of possessory remedies for the eviction from their premises of tenants in possession when the law took effect, providing the latter were able and willing to pay a reasonable rent. In answer to objections leveled against this legislation on the basis of the Contract Clause, the Court said: But contracts are made subject to this exercise of the power of the State when otherwise justified, as we have held this to be.11 In a subsequent case, however, the Court added that, although the declaration by the legislature of a justifying emergency was entitled to great respect, it was not conclusive; a law depending upon the existence of an emergency or other certain state of facts to uphold it may cease to operate if the emergency ceases or the facts change, and whether they have changed was always open to judicial inquiry. 12

Summing up the result of the cases referred to above, Chief Justice Hughes, speaking for the Court in Home Building & Loan Ass'n v. Blaisdell, 13 remarked in 1934: It is manifest from this review of our decisions that there has been a growing appreciation of public needs and of the necessity of finding ground for a rational compromise between individual rights and public welfare. The settlement and consequent contraction of the public domain, the pressure of a constantly increasing density of population, the interrelation of the activities of our people and the complexity of our economic interests, have inevitably led to an increased use of the organization of society in order to protect the very bases of individual opportunity. Where, in earlier days, it was thought that only the concerns of individuals or of classes were involved, and that those of the State itself were touched only remotely, it has later been found that the fundamental interests of the State are directly affected; and that the question is no longer merely that of one party to a contract as against another, but of the use of reasonable means to safeguard the economic structure upon which the good of all depends. . . . The principle of this development is . . . that the reservation of the reasonable exercise of the protective power of the States is read into all contracts . . . .14

Footnotes

  1.  Myers v. Irwin, 2 S. & R. (Pa.) 367, 372 (1816); see, to the same effect, Lindenmuller v. The People, 33 Barb. (N.Y.) 548 (1861); Brown v. Penobscot Bank, 8 Mass. 445 (1812).
  2.  Manigault v. Springs, 199 U.S. 473, 480 (1905).
  3.  Jackson v. Lamphire, 28 U.S. (3 Pet.) 280 (1830). See also Phalen v. Virginia, 49 U.S. (8 How.) 163 (1850).
  4.  Stone v. Mississippi, 101 U.S. 814 (1880).
  5.  Beer Co. v. Massachusetts, 97 U.S. 25 (1878).
  6.  New York Cent. R.R. v. White, 243 U.S. 188 (1917). In this and the preceding two cases the legislative act involved did not except from its operation existing contracts.
  7.  Manigault v. Springs, 199 U.S. 473 (1905).
  8.  Portland Ry. v. Oregon R.R. Comm'n, 229 U.S. 397 (1913).
  9.  Midland Co. v. Kansas City Power Co., 300 U.S. 109 (1937).
  10.  Hudson Water Co. v. McCarter, 209 U.S. 349 (1908).
  11.  Marcus Brown Co. v. Feldman, 256 U.S. 170, 198 (1921), followed in Levy Leasing Co. v. Siegel, 258 U.S. 242 (1922).
  12.  Chastleton Corp. v. Sinclair, 264 U.S. 543, 547-48 (1924).
  13.  290 U.S. 398 (1934).
  14.  290 U.S. at 442, 444. See also Veix v. Sixth Ward Ass'n, 310 U.S. 32 (1940), in which was sustained a New Jersey statute amending in view of the Depression the law governing building and loan associations. The authority of the state to safeguard the vital interests of the people, said Justice Reed, extends to economic needs as well. Id. at 39. In Lincoln Federal Labor Union v. Northwestern Iron & Metal Co., 335 U.S. 525, 531-32 (1949), the Court dismissed out-of-hand a suggestion that a state law outlawing union security agreements was an invalid impairment of existing contracts, citing Blaisdell and Veix.