Reviving the Contract Clause: An Acid Test for Originalism

Whether the Contract Clause will be restored as a protection for private property rights provides an important benchmark for the success of originalism. The Clause was the most litigated provision of the Federal Constitution in the 19th century, but today it has become a shadow of its former self because the Court has abandoned its original meaning. It is difficult to overrule some Supreme Court decisions, even when egregiously wrong, because people have come to rely on them or because essential institutions have grown up around them. But the Contract Clause by its term applies only to new laws that undermine established obligations and does not implicate substantial reliance or other institutional interests. No sound theory of stare decisis should protect the decisions that have distorted its meaning.

The Contract Clause

The Contract Clause provides: “No State shall… pass any… Law impairing the Obligation of Contracts.” The legislative history at the Philadelphia Convention shows that it was modeled on a provision in the Northwest Ordinance intended to protect property and contract rights from the retrospective legislation. Moreover, in The Federalist, Madison argued that the Clause was a “bulwark in favor of… private rights.” Thus, while the Clause certainly protected against legislation by which debtors might extinguish past debts, both its broad language and its origins show it has a more sweeping scope. It is designed to protect an important aspect of the rule of law: a prohibition on the government changing specific plans that autonomous individuals have made. So, the Contract Clause offers the most explicit recognition of the beneficence of private ordering in the entire Constitution.

The Non-Originalist Decline of the Clause

For the 19th and early 20th centuries, the Supreme Court was relatively faithful in interpreting the Clause. In Home Building & Loan Association v. Blaisdell, however, the Court departed from its role as a faithful agent of the Constitution. The case concerned a Minnesota statute which provided that a mortgagor who was in default but whose period for redemption of the property had not yet expired could apply to the state court for an extension of the redemption period. This statute deprived a creditor of the essence of what a mortgage contract provides: the right to foreclose on property if the mortgagor does not make good on his payments.

Thus, it is hard to see how this provision does not impair the obligation of contracts. Yet influenced by the Depression and the growing discontent with the jurisprudence of substantive due process with which it confused the clear command of the Contract Clause, the Court upheld the law. It is true that times were hard, but as Justice George Sutherland’s dissent noted, legislation protecting debtors against creditors is passed precisely at such times, and yet such legislation was exactly the kind of evil which the Clause was designed to prohibit.

The case is striking as an example of one of the most express rejections of originalism. Chief Justice Hughes stated explicitly that the Court was not bound by the original understanding of the Clause. Rather, Hughes posited that the Court must consider the case “in the light of our whole experience and not merely in that of what was said a hundred years ago” and that because of a “growing recognition of public needs… the reservation of the reasonable exercise of the protective power of the State is read into all contracts.” Some have tried to rescue Blaisdell from the charge of anti-originalism by suggesting that it depends on the level of abstraction at which the Contract Clause is read. But in my view the level of abstraction is relatively clear from the language: A contractual impairment is defined by the contract at issue and must encompass at least anything essential to the bargain, like foreclosure rights. And the concern with debtor legislation is an expected application of the Clause that supports reading it at this level of abstraction.

Currently the Court has replaced the rule offered by the Contract Clause with a kind of balancing test. In determining whether a state law passes muster under the Contract Clause, the first issue is whether the state law has operated as a substantial impairment of a contractual relationship. If the Court finds an impairment, then the court inquires “whether the state law is drawn in an ‘appropriate’ and ‘reasonable’ way to advance ‘a significant and legitimate public purpose.’” But if the State shows a significant public purpose and is not a contracting party, then “courts properly defer to legislative judgment as to the necessity and reasonableness of a particular measure.”

Reviving the Contract Clause in the Supreme and Inferior Courts

In contrast, the proper constitutional test would be to require, as with First Amendment protections and other rights, a compelling interest for the state to prevail. (As I will detail in a subsequent article, the compelling interest test can be justified as an original matter by reference to the absurdity doctrine. Even seemingly absolute rules were not interpreted to lead to absurd results, because the absurdity rule was well known at the time of the Framing.)

There is no reason under a proper rule of stare decisis not to follow the original meaning of the Clause. From the early republic, the Clause has always been interpreted to apply only to retrospective interferences with contractual obligations. Thus, there are no substantial reliance interests at stake if the Blaisdell and its progeny were overruled, because the state can always change its law about contracts prospectively. Indeed, the reliance interests are on the side of parties whose contracts are being changed.

Only the Supreme Court can overrule its prior Contracts Clause jurisprudence. But lower courts should read non-originalist precedents where they are ambiguous to preserve as much of the original meaning as possible. That was the approach of Judge Steve Colloton joined by Judge David Stras in the recent case of Association of Equipment Manufactures v. Burgum. North Dakota had prohibited manufacturers of farm equipment from requiring delay to maintain exclusive facilities, “unreasonably” refusing to approve the relocation of dealerships, or imposing “unreasonable” performance standards on dealers. The provisions were to apply retrospectively, substituting for contractual terms agreed upon by farm equipment manufacturers and their dealers.

The majority opinion held that that the North Dakota statute worked an impairment, suggesting that even if North Dakota has previously regulated some aspects of the contractual relationships, the statute imposed additional or expanded regulations. Most importantly, it rejected the argument that these provisions were in the public interest over a dissent that suggested that state action should be presumed in the public interest, and that while the law helped farm equipment dealers at the expense of manufacturers, it would also redound to the benefit of farming communities.

The majority instead saw the law’s principal beneficiaries as the farm equipment dealers who were relieved from their contractual obligations and noted that any interference with contracts would have some secondary effects. In its view, the legislation was a classic example of rent-seeking where one group of businesses use their power in the legislatures to harm another set of businesses. Even if the majority opinion did not impose a compelling interest test, it did make sure that the Contract Clause is not reduced to striking down only legislation without any rational basis. In contrast, if the dissent’s views were to prevail, the Contract Clause would become wholly a dead letter in protecting the rights of individuals in private contracts.

It is also clear that the majority recognizes the original meaning of the Contract Clause, because it spends substantial space discussing it before turning to Supreme Court precedent. As in other cases by lower court originalist judges, the original meaning is not forgotten but is used to favor the more originalist readings of Supreme Court precedents when, as it often the case, the differences among them and indeed their ambiguity considered even individually would otherwise leave discretion with lower court justices.

The case would be a good vehicle for the Court to reexamine its Contract Clause jurisprudence. Unfortunately the last major Contract Clause case, Sveen v. Melin, was one in which the issue was what lawyers call a default rule. The state changed the beneficiary of a retirement account from the designation of a former spouse after a divorce, but permitted the owner of the account to change it back again by filing a piece of paper. Perhaps not surprisingly, the Court doubted that this action was an impairment of any contract in the first place, because the affected just had to file a paper to restore the rights. However, the Association of Equipment Manufacturers case, in contrast, presents an undoubted impairment that would permit the Court to restore the Clause to its important place in the Constitutional firmament as an expression of the American commitment to private ordering and the rule of law.