ArtI.S10.C1.6.8 Contracts Include Public Contracts and Corporate Charters

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 question, which was settled very early, was whether the clause was intended to be applied solely in protection of private contracts or in the protection also of public grants, or, more broadly, in protection of public contracts, in short, those to which a state is a party. 1 Support for the affirmative answer accorded this question could be derived from the following sources. For one thing, the clause departed from the comparable provision in the Northwest Ordinance (1787) in two respects: first, in the presence of the word obligation; secondly, in the absence of the word private. There is good reason for believing that James Wilson may have been responsible for both alterations, as two years earlier he had denounced a current proposal to repeal the Bank of North America's Pennsylvania charter in the following words: If the act for incorporating the subscribers to the Bank of North America shall be repealed in this manner, every precedent will be established for repealing, in the same manner, every other legislative charter in Pennsylvania. A pretence, as specious as any that can be alleged on this occasion, will never be wanting on any future occasion. Those acts of the state, which have hitherto been considered as the sure anchors of privilege and of property, will become the sport of every varying gust of politicks, and will float wildly backwards and forwards on the irregular and impetuous tides of party and faction.2

Furthermore, in its first important constitutional case, Chisholm v. Georgia, 3 the Court ruled that its original jurisdiction extended to an action in assumpsit brought by a citizen of South Carolina against the State of Georgia. This construction of the federal judicial power was, to be sure, promptly repealed by the Eleventh Amendment, but without affecting the implication that the contracts protected by the Constitution included public contracts.

One important source of this diversity of opinion is to be found in that ever welling spring of constitutional doctrine in early days, the prevalence of natural law notions and the resulting vague significance of the term law. In Sturges v. Crowninshield, Chief Justice Marshall defined the obligation of contract as the law that binds a party to perform his undertaking.4 Whence, however, comes this law? If it comes from the state alone, which Marshall was later to deny even as to private contracts, 5 then it is hardly possible to hold that the states' own contracts are covered by the clause, which manifestly does not create an obligation for contracts but only protects such obligation as already exists. But, if, on the other hand, the law furnishing the obligation of contracts comprises natural law and kindred principles, as well as law that springs from state authority, then, as the state itself is presumably bound by such principles, the state's own obligations, so far as harmonious with them, are covered by the clause.

Fletcher v. Peck6 has the double claim to fame that it was the first case in which the Supreme Court held a state enactment to be in conflict with the Constitution, and also the first case to hold that the Contract Clause protected public grants. By an act passed on January 7, 1795, the Georgia Legislature directed the sale to four land companies of public lands comprising most of what are now the States of Alabama and Mississippi. As soon became known, the passage of the measure had been secured by open and wholesale bribery. So when a new legislature took over in the winter of 1795-1796, almost its first act was to revoke the sale made the previous year.

Meantime, however, the land companies had disposed of several millions of acres of their holdings to speculators and prospective settlers, and following the rescinding act some of these took counsel with Alexander Hamilton as to their rights. In an opinion which was undoubtedly known to the Court when it decided Fletcher v. Peck, Hamilton characterized the repeal as contravening the first principles of natural justice and social policy, especially so far as it was made to the prejudice . . . of third persons . . . innocent of the alleged fraud or corruption; . . . moreover, he added, the Constitution of the United States, article first, section tenth, declares that no State shall pass a law impairing the obligations of contract. This must be equivalent to saying no State shall pass a law revoking, invalidating, or altering a contract. Every grant from one to another, whether the grantor be a State or an individual, is virtually a contract that the grantee shall hold and enjoy the thing granted against the grantor, and his representatives. It, therefore, appears to me that taking the terms of the Constitution in their large sense, and giving them effect according to the general spirit and policy of the provisions, the revocation of the grant by the act of the legislature of Georgia may justly be considered as contrary to the Constitution of the United States, and, therefore null. And that the courts of the United States, in cases within their jurisdiction, will be likely to pronounce it so.7 Hamilton's views were quoted frequently in the congressional debate over the Yazoo Land Frauds, as they were contemporaneously known.

So far as it invoked the Contract Clause, Marshall's opinion in Fletcher v. Peck performed two creative acts. It recognized that an obligatory contract was one still to be performed – in other words, was an executory contract, also that a grant of land was an executed contract – a conveyance. But, Marshall asserted, every grant is attended by an implied contract on the part of the grantor not to claim again the thing granted. Thus, grants are brought within the category of contracts having continuing obligation and so within Article I, § 10. But the question still remained of the nature of this obligation. Marshall's answer to this can only be inferred from his statement at the end of his opinion. The State of Georgia, he says, was restrained from the passing of the rescinding act either by general principles which are common to our free institutions, or by particular provisions of the Constitution of the United States.8

The protection thus thrown about land grants was presently extended, in the case of New Jersey v. Wilson, 9 to a grant of immunity from taxation that the State of New Jersey had accorded certain Indian lands, and several years after that, in Dartmouth College, 10 to the charter privileges of an eleemosynary corporation.

In City of El Paso v. Simmons, 11 the Court held, over a vigorous dissent by Justice Black, that Texas had not violated this clause when it amended its laws governing the sale of public lands so as to restrict the previously unlimited right of a delinquent to reinstate himself upon forfeited land by a single payment of all past interest due.

Footnotes

  1.  According to Benjamin F. Wright, throughout the first century of government under the Constitution the contract clause had been considered in almost forty per cent of all cases involving the validity of State legislation, and of these the vast proportion involved legislative grants of one type or other, the most important category being charters of incorporation. However, the numerical prominence of such grants in the cases does not overrate their relative importance from the point of view of public interest. B. Wright, The Contract Clause of the Constitution 95 (1938).

    Madison explained the clause by allusion to what had occurred in the internal administration of the States in the years preceding the Constitutional Convention, in regard to private debts. Violations of contracts had become familiar in the form of depreciated paper made legal tender, of property substituted for money, of installment laws, and of the occlusions of the courts of justice. 3 M. Farrand, The Records of the Federal Convention of 1787 548 (rev. ed. 1937); The Federalist, No. 44 (J. Cooke ed. 1961), 301-302.

  2.  2 The Works of James Wilson 834 (R. McCloskey ed., 1967).
  3.  2 U.S. (2 Dall.) 419 (1793).
  4.  17 U.S. (4 Wheat.) 122, 197 (1819).
  5.  Ogden v. Saunders, 25 U.S. (12 Wheat.) 213, 338 (1827).
  6.  10 U.S. (6 Cr.) 87 (1810).
  7.  B. Wright, The Contract Clause of the Constitution 22 (1938). Professor Wright dates Hamilton's pamphlet as from 1796.
  8.  10 U.S. (6 Cr.) 87, 139 (1810). Justice Johnson, in his concurring opinion, relied exclusively on general principles. I do not hesitate to declare, that a State does not possess the power of revoking its own grants. But I do it, on a general principle, on the reason and nature of things; a principle which will impose laws even on the Deity. Id. at 143.
  9.  11 U.S. (7 Cr.) 164 (1812). The exemption from taxation which was involved in this case was held in 1886 to have lapsed through the acquiescence for sixty years by the owners of the lands in the imposition of taxes upon these. Given v. Wright, 117 U.S. 648 (1886).
  10.  Dartmouth College v. Woodward, 17 U.S. (4 Wheat.) 518 (1819).
  11.  379 U.S. 497 (1965). See also Thorpe v. Housing Authority, 393 U.S. 268, 278-79 (1969).