Contract Clause (What It Is And How It Works: US Constitution)

What is a Contract Clause?

What is the purpose of the contract clause?

Why was this provision adopted in the US Constitution?

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What Is A Contract Clause

The Contract Clause refers to Article I, Section 10, Clause 1 of the US Constitution where the state or the government is prohibited from adopting laws that render contracts invalid or impair the contractual obligations.

Particularly, the “Contract Clause” prohibits the government to pass laws in such a way as to invalidate contractual obligations or impair a person’s rights under the contract.

The Contract Clause found in Article I, Section 10, Clause 1 states:

Contract Clause Definition

Now, let’s define contract clause.

According to the Merriam-Webster dictionary, the legal definition of Contract Clause is stated as follows:

As you can see from this definition, the contract clause refers to:

• A provision of the US Constitution
• Limits the state’s power
• To interfere in private contracts

Freedom of Contract

The essence of the Constitution’s Contract Clause is to recognize that individuals have the right to form contracts and their contracts must be respected by the state.

However, the state is given the power to restrict, prohibit, or nullify contracts that may violate public policy.

For example, the state will have the power to prohibit a contract where the object will violate public policy like child labor.  

Purpose of The Contract Clause

The main purpose of the Contract Clause found in the US Constitution is to protect American citizens from the state who may exercise its legislative powers to render contracts invalid or impair contractual dealings.

The reason the contract clause was introduced in the Constitution was to prevent and put an end to the practice of giving private relief under the Articles of the Confederation. 

The practice of passing legislation relieving individuals from their obligations to pay their debt or to provide them various types of relief had become widespread and the Framers of the Constitution considered that such practice would adversely affect their ability to trade.

By putting an end to the state’s power to provide legislative relief to individuals bound under a contract, the Framers of the Constitution hoped to see more foreign merchants trade with the US colonies.

Laws Modifying Contracts

Although the US Constitution Contract Clause prohibits the state from passing private legislative relief rendering contracts invalid or impairing the contractual obligations defined by the parties, the state has the power to modify or abrogate contracts.

To modify private contracts, the US Supreme Court, in the case Energy Reserves Group v. Kansas Power & Light, has established a three-part test to determine if the state law complies with the Contract Clause.

To determine if a state law conforms with the Contract Clause, the court must assess:

• If the law substantially impairs a contractual relationship or not
• The state must have a significant and legitimate interest in adopting the law 
• The law must be reasonable and appropriate to achieve its purpose 

In the matter United States Trust Co. v. New Jersey, the US Supreme Court established that the courts must perform a more thorough scrutiny of state laws adopted to modify its own contracts (government contracts).

In essence, the state may pass laws to regulate a sector, an industry, a commercial practice and that will inherently have the effect of impairing contractual obligations.

To the extent the state has a legitimate purpose to regulate, then the law will not violate the Contract Clause.

However, if the state law is designed to favor a specific individual, company, or group in a specific way, that may result in the violation of the Constitution.

Constitution Contract Clause Takeaways 

So there you have it folks!

What is contract clause?

The “Contract Clause” refers to Article I, Section 10, Clause 1 of the US Constitution stating that no state can pass laws to impair the obligation of contracts.

The notion of passing laws refers to any type of statute, legislation, regulation, ordinance, or other legal decree having the force and operation of a statute.

This provision was included in the Constitution to prevent the state from using its legislative powers to invalidate or impair contractual obligations.

However, the Contract Clause does not prevent the state from passing laws to modify or alter contracts.

For example, if a contract violates public policy, like a contract for sex, then the state may adopt laws to invalidate them.

I hope that I was able to answer your question relating to what is the Contract Clause in the US Constitution.

Good luck!

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Understanding The Contract Clause

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