ArtI.S10.C1.6.1 Overview of Contract Clause
Overview of Contract Clause
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.
In addition to prohibiting states from enacting bills of attainder and ex post facto laws, the Constitution seeks to protect private rights from state interference by limiting the states’ power to enact legislation that alters existing contract rights.1 The Constitution’s Contract Clause provides:
No State shall . . . pass any . . . Law impairing the Obligation of Contracts.2 Although this language could be read as completely prohibiting a state’s legislative impairment of contracts, the Supreme Court has interpreted the clause to limit a state’s power to enact legislation that: (1) breaches or modifies its own contracts; or (2) regulates contracts between private parties.3
The Supreme Court has held that the Contract Clause does not generally prevent states from enacting laws to protect the welfare of their citizens.4 Thus, states retain some authority to enact laws with retroactive effect that alter contractual or other legal relations among individuals and entities.5 However, a state’s regulation of contracts, whether involving public or private parties, must generally be reasonably designed and appropriately tailored to achieve a legitimate public purpose.6
Prior to the ratification of the Fourteenth Amendment and the subsequent development of the Supreme Court’s Due Process jurisprudence in the late nineteenth and early twentieth centuries, the Contract Clause was one of the few constitutional clauses that expressly limited the power of the states.7 As Chief Justice John Marshall explained in an early opinion interpreting the Contract Clause, the Framers’ intent in including such language in the Constitution was to prohibit states from enacting legislation intended to assist debtors by abrogating or modifying the terms of existing contracts, as many colonies and states had done during the Colonial Era and under the Articles of Confederation.8 Many of the Framers believed that such laws discouraged commerce and the extension of credit, undermining the stability of contractual relations and damaging the national economy.9 Although limited evidence exists to clarify the Contract Clause’s original meaning, James Madison argued during debates over ratification of the Constitution that the Clause would prevent shifting state legislative majorities from retroactively impairing private rights.10 And Alexander Hamilton suggested that the Contract Clause would avoid a breakdown in commercial relations among the states, noting that state laws abrogating private contract rights could serve as a source of hostility among them.11
The Supreme Court’s views on the level of protection that the Contract Clause provides for contract rights have shifted over time. During the 1800s, and in particular prior to the ratification of the Fourteenth Amendment in 1868, the Supreme Court often relied on the Contract Clause to strike down state legislation as unconstitutional when it interfered with existing contract rights.12 The Court interpreted the Clause to protect a variety of property interests, such as an executed grant of land13 and the state-granted charter of a private corporation.14 But even during the early years of the Republic, the Court recognized that the states retained some power to regulate contracts in order to further the public interest.15
During the late nineteenth and early twentieth centuries, the Supreme Court decided cases that gradually weakened the Contract Clause’s protections.16 The Court’s view of the Contract Clause underwent a major change during the New Deal Era when the Court decided Home Building & Loan Ass’n v. Blaisdell.17 In that case, the Court declined to enforce strictly the Contract Clause’s prohibition on state legislation that alters private contracts.18 During the depths of the Great Depression, the Court upheld the Minnesota Mortgage Moratorium Law, which allowed courts to extend temporarily the period of time during which a mortgagor (e.g., a homeowner) could redeem a home after the bank foreclosed on the property.19 The Supreme Court’s decision in Blaisdell marked a turning point in its Contract Clause jurisprudence, signaling that the Court would thereafter be more solicitous of states’ use of their police powers to regulate contracts to
protect the lives, health, morals, comfort and general welfare of the people, even when the exercise of such powers would substantially impact contract rights.20
Since Blaisdell, the Court has permitted state legislatures to modify contract rights to serve the public interest in several cases.21 Nonetheless, since the 1970s, the Court has decided a few cases indicating that the Contract Clause still provides some protection for contracts, at least when the state lacks a legitimate public purpose for substantially interfering with contract rights and has not regulated such rights in a reasonable or necessary way.22 For example, the Contract Clause continues to prohibit states from unreasonably and unnecessarily breaching certain legislative covenants with private bondholders,23 and from enacting legislation that regulates private pension contracts by imposing a substantial new and retroactive payment obligation on a narrow class of companies.24
- Jump to essay-1See Ogden v. Saunders, 25 U.S. (12 Wheat.) 213, 266–67 (1827) (
If it were proper to prohibit a State legislature to pass a retrospective law, which should take from the pocket of one of its own citizens a single dollar, as a punishment for an act which was innocent at the time it was committed; how much more proper was it to prohibit laws of the same character precisely, which might deprive the citizens of other States, and foreigners, as well as citizens of the same State, of thousands, to which, by their contracts, they were justly entitled, and which they might possibly have realized but for such State interference?); see also Home Bldg. & Loan Ass’n v. Blaisdell, 290 U.S. 398, 431 (1934) (
The obligations of a contract are impaired by a law which renders them invalid, or releases or extinguishes them[,] and impairment, as above noted, has been predicated on laws which without destroying contracts derogate from substantial contractual rights.) (citations omitted).
- Jump to essay-2U.S. Const. art. I, § 10, cl. 1. The Supreme Court has long considered contractual
obligationsto encompass both the express terms of an agreement and the underlying state law regarding interpreting and enforcing contracts upon which the parties relied when they made the contract. See U.S. Trust Co. v. New Jersey, 431 U.S. 1, 19–20 & n.17 (1977) (
The obligations of a contract long have been regarded as including not only the express terms but also the contemporaneous state law pertaining to interpretation and enforcement.). Such underlying state law may include the law of the place in which the contract was made and the place where it will be performed. Id. Thus, the
obligationof a contract refers to laws that affect its
validity, construction, discharge and enforcement.Blaisdell, 290 U.S. at 429–30 (quoting Von Hoffman v. City of Quincy, 71 U.S. (4 Wall.) 535, 550 (1866)). States have long regulated the formation, interpretation, enforcement, and performance of contracts. Ogden, 25 U.S. (12 Wheat.) at 286 (
But to assign to contracts, universally, a literal purport, and to exact for them a rigid literal fulfilment, could not have been the intent of the constitution. It is repelled by a hundred examples. Societies exercise a positive control as well over the inception, construction, and fulfilment of contracts, as over the form and measure of the remedy to enforce them.).
- Jump to essay-3U.S. Trust Co., 431 U.S. at 17. Notably, the Clause does not apply to acts of the Federal Government. Sinking-Funds Cases, 99 U.S. 700, 718–19 (1878) (acknowledging that the Federal Government is
prohibited from depriving persons or corporations of property without due process of lawbut is
not included within the constitutional prohibition which prevents States from passing laws impairing the obligation of contracts); see also Charles Evans Hughes and the Blaisdell Decision: A Historical Study of the Contract Clause, 72 Or. L. Rev. 513, 519 (1993) (discussing how the Contract Clause ,
differed from the Northwest Ordinance in that it barred only state impairment of contract obligations).
- Jump to essay-4Blaisdell, 290 U.S. at 434–35 (observing that a state
continues to possess authority to safeguard the vital interests of its people[;] . . . [t]his principle of harmonizing the constitutional prohibition with the necessary residuum of state power has had progressive recognition in the decisions of this Court); see also W.B. Worthen Co. v. Thomas, 292 U.S. 426, 433 (1934) (
[L]iteralism in the construction of the contract clause . . . would make it destructive of the public interest by depriving the State of its prerogative of self-protection.).
- Jump to essay-5See Blaisdell, 290 U.S. at 428 (
[T]he prohibition is not an absolute one and is not to be read with literal exactness like a mathematical formula.); U.S. Trust Co., 431 U.S. at 17 (
[T]he Contract Clause does not prohibit the States from repealing or amending statutes generally, or from enacting legislation with retroactive effects.); El Paso v. Simmons, 379 U.S. 497, 506–09 (1965) (
[I]t is not every modification of a contractual promise that impairs the obligation of contract under federal law . . . . The State has the ‘sovereign right . . . to protect the . . . general welfare of its people . . . . Once we are in this domain of the reserve power of a State we must respect the wide discretion on the part of the legislature in determining what is and what is not necessary.’) (quoting E. N.Y. Sav. Bank v. Hahn, 326 U.S. 230, 232–33 (1945)); Trs. of Dartmouth Coll. v. Woodward, 17 U.S. (4 Wheat.) 518, 628–30 (1819) (
Taken in its broad unlimited sense, the [Contract Clause] would be an unprofitable and vexatious interference with the internal concerns of a State . . . . [T]he framers of the constitution could never have intended to insert in that instrument a provision so unnecessary, so mischievous, and so repugnant to its general spirit.). Notably, other constitutional provisions may limit a state’s power to enact retroactive legislation that, for example, imposes a punishment (e.g., a bill of attainder or ex post facto law). See U.S. Trust Co., 431 U.S. at 17 n.13. For example, the Contract Clause generally does not prevent a state from altering laws governing state offices or civil institutions, or from enacting laws on the subject of divorce. Trs. of Dartmouth Coll., 17 U.S. (4 Wheat.) at 627–30 (
That the framers of the constitution did not intend to retrain the States in the regulation of their civil institutions, adopted for internal government, and that the instrument they have given us, is not to be so construed, may be admitted. The provision of the constitution never has been understood to embrace other contracts, than those which respect property, or some object of value, and confer rights which may be asserted in a court of justice. It never has been understood to restrict the general right of the legislature to legislate on the subject of divorces.). The Court has cautioned, however, that the clause should not be interpreted to imply that parties may contract to obtain immunity from state regulation. U.S. Trust Co., 431 U.S. at 22 (
The States must possess broad power to adopt general regulatory measures without being concerned that private contracts will be impaired, or even destroyed, as a result. Otherwise, one would be able to obtain immunity from state regulation by making private contractual arrangements.); see also Hudson Cnty. Water Co. v. McCarter, 209 U.S. 349, 357 (1908) (
One whose rights, such as they are, are subject to state restriction, cannot remove them from the power of the State by making a contract about them.).
- Jump to essay-6U.S. Trust Co., 431 U.S. at 22 (
Legislation adjusting the rights and responsibilities of contracting parties must be upon reasonable conditions and of a character appropriate to the public purpose justifying its adoption.). A court’s evaluation of the reasonableness of state legislation that affects private contract rights may include consideration of the background circumstances that motivated the state law’s adoption and the measure’s duration, among other factors. See Blaisdell, 290 U.S. at 444–47. Courts accord legislatures some deference in determining necessity and reasonableness of such legislation. U.S. Trust Co., 431 U.S. at 22–23.
- Jump to essay-7See Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 241 (1978) (characterizing the Contract Clause as
perhaps the strongest single constitutional check on state legislation during our early years as a Nation); U.S. Trust Co., 431 U.S. at 15 (
Over the last century, however, the Fourteenth Amendment has assumed a far larger place in constitutional adjudication concerning the States [than the Contract Clause].). As noted in McDonald v. Chicago, 561 U.S. 742 (2010), during the 1960s, the Court
shed any reluctance to hold that rights guaranteed by the Bill of Rights met the requirements for protection under the Due Process Clause. The Court eventually incorporated almost all of the provisions of the Bill of Rights. Only a handful of the Bill of Rights protections remain unincorporated.Id. at 764–65; see e.g., Duncan v. Louisiana, 391 U.S. 145, 161–62 (1968) (holding that the Fourteenth Amendment’s Due Process Clause incorporates the Sixth Amendment right to trial by jury and makes it applicable to the states). For a discussion of the limitations that the Due Process Clause imposes on states with respect to retroactive deprivations of a life, liberty, or property interest, see . In addition, the Dormant Commerce Clause doctrine, although not specifically directed at protecting contract rights, limits state power by restraining state authority to regulate interstate commerce. For more, see ArtI.S8.C3.7.1 Overview of Dormant Commerce Clause.
- Jump to essay-8Cf. Trs. of Dartmouth Coll., 17 U.S. (4 Wheat.) at 628–30 (
That anterior to the formation of the constitution, a course of legislation had prevailed in many, if not in all, of the States, which weakened the confidence of man in man, and embarrassed all transactions between individuals, by dispensing with a faithful performance of engagements.); Sturges v. Crowninshield, 17 U.S. (4 Wheat.) 122, 199, 203 (1819) (
[T]he prevailing evil of the times, which produced this clause in the constitution, was the practice of emitting paper money, of making property which was useless to the creditor a discharge of his debt, and of changing the time of payment by authorizing distant instalments.).
- Jump to essay-9Blaisdell, 290 U.S. at 427–28.
- Jump to essay-10The Federalist No. 44 (James Madison).
- Jump to essay-11The Federalist No. 7 (Alexander Hamilton) (
Laws in violation of private contracts, as they amount to aggressions on the rights of those States whose citizens are injured by them, may be considered as another probable source of hostility [among the states].).
- Jump to essay-12See, e.g., Trs. of Dartmouth Coll., 17 U.S. (4 Wheat.) at 627, 654 (striking down as unconstitutional a state law that interfered with a private corporate charter established under state law); Sturges, 17 U.S. (4 Wheat.) at 208 (holding a bankruptcy law that allowed insolvent debtors to obtain the discharge of their debts by surrendering their property violated the Contract Clause); Fletcher v. Peck, 10 U.S. (6 Cranch) 87, 127, 135–39 (1810) (interpreting the Contract Clause to prohibit a state from breaching its own contracts by rescinding a land grant); see also The Contract Clause: A Constitutional History 1 (2016) ( ,
Under the leadership of John Marshall, the Supreme Court construed the provision expansively, and it rapidly became the primary vehicle for federal judicial review of state legislation before the adoption of the Fourteenth Amendment. Indeed, the contract clause was one of the most litigated provisions of the Constitution throughout the nineteenth century . . . .).
- Jump to essay-13Fletcher, 10 U.S. (6 Cranch) at 137.
- Jump to essay-14See Trs. of Dartmouth Coll., 17 U.S. (4 Wheat.) at 644, 652–54. As the Court noted in Blaisdell, the Clause has been held not to encompass a marriage contract as it pertains to divorce laws, a judgment rendered upon a contract, or a state’s waiver of sovereign immunity in general legislation. Blaisdell, 290 U.S. at 429 n.8.
- Jump to essay-15See, e.g., W. River Bridge Co. v. Dix, 47 U.S. (6 How.) 507, 535–36 (1848) (upholding a state’s authority to use the power of eminent domain to take a company’s toll bridge franchise in order to construct a public highway as not violative of the Contract Clause).
- Jump to essay-1612, at 1 ( , supra note
Over time . . . courts carved out several malleable exceptions to the constitutional protection of contracts . . . thereby weakening the protection of the contract clause and enhancing state regulatory authority.).
- Jump to essay-17290 U.S. 398 (1934).
- Jump to essay-18Id. at 444–48.
- Jump to essay-19Id. at 415–16, 424. The law prevented the mortgagee from obtaining possession during that time. Id. This right ran contrary to existing contracts, which granted the lender the right to foreclose. Id. at 424–25.
- Jump to essay-20Allied Structural Steel Co v. Spannaus, 438 U.S. 234, 241 (1978) (quoting Manigault v. Springs, 199 U.S. 473, 480 (1905)).
- Jump to essay-21See, e.g., Keystone Bituminous Coal Ass’n v. DeBenedictis, 480 U.S. 470, 474–78, 502, 506 (1987) (upholding a Pennsylvania safety and environmental law—which prohibited mining that would damage existing structures, such as public buildings and homes, by eliminating underground support—against a Contract Clause challenge where the challengers argued the law nullified the surface owner’s contractual waiver of liability for damage to the surface estate from coal mining); Exxon Corp. v. Eagerton, 462 U.S. 176, 178–79, 196 (1983) (upholding an Alabama law that increased the severance tax on oil and gas extracted from wells located in the state—which the state imposed on producers at the time of severance and which exempted the owners of royalty interests but forbid producers from passing the tax increase on to purchasers or consumers—against a Contract Clause challenge alleging the law impaired the obligations of oil and gas producers’ contracts with royalty owners and consumers).
- Jump to essay-22Spannaus, 438 U.S. at 242, 250 (
If the Contract Clause is to retain any meaning at all, . . . it must be understood to impose some limits upon the power of a State to abridge existing contractual relationships, even in the exercise of its otherwise legitimate police power.).
- Jump to essay-23U.S. Trust Co. v. New Jersey, 431 U.S. 1, 26, 32 (1977) (
If a State could reduce its financial obligations [by breaching a legislative covenant to protect private bondholders] whenever it wanted to spend the money for what it regarded as an important public purpose, the Contract Clause would provide no protection at all.).
- Jump to essay-24Spannaus, 438 U.S. at 247–50.
5 Must Have Clauses to Include in your Contract
Being a freelance designer or developer gives you the chance to do what you love with a degree of flexibility and creativity that you may not have with a more traditional 9-to-5 job. To that end, you still have to take care of the business side of freelancing to save yourself headaches on down the road.
That’s right — I’m talking about contracts.
Working without a contract is an invitation to be exploited and swindled. A good contract protects you and your client and establishes a strong business relationship from the beginning. You can streamline your work around a set schedule, and offer clear details of the scope of the project. Whether you are just starting your freelance career or you have years of work experience under your belt, here are a few must-have clauses to include in your contract to make sure you cover your butt and get paid fairly for your time.
Clause 1: Services Rendered
What is the nature of the project? Does the client need specific deliverables? Your contract should state your client’s expectations from the project so you are aware of what they want from you as you work with them. A contract with clear, concise language that spells out the services rendered will remove any surprises and prevent ambiguous results at the end of the project. (And if it doesn’t, there’s an additional clause you should add, but I’ll talk about that in a bit.)
Clause 2: Pricing and Rates
Along with a non-refundable deposit, your contract should also list your rates and the pricing structure set out for the project. Make sure to include a schedule of when payments are due that lines up with the timeline for the project. Having these costs detailed in the contract means you can avoid any disputes about payment later on. Be very clear on how you want to be paid (checks, bank transfers, PayPal, etc.) and don’t forget to include penalties for late payments!
Clause 3: Kill Fee
Sometimes, for reasons beyond your control, a project could get canceled after you’ve already started working on it. Here’s where a kill fee clause comes in play. This can save you from being put at a time or financial disadvantage by getting paid for the work you already have done up to that point in the project. The amount of the kill fee could be a flat fee or a percentage depending on the scope of work already completed. Charge what you feel is fair, but make sure that some form of compensation for your work is spelled out.
Clause 4: Revisions
Endless revisions from clients can slow down momentum on any project. Here’s where you need to have a clause in your contract mentioning a limited number of free revisions (maybe two or three) with additional revisions available for a cost. Keep in mind that lots of revisions can affect the project timeline, so in order to deliver the project on time, this is necessary. This should also reduce the client’s tendency for constant revisions. But if it doesn’t, guess what — at least the client is made aware of the cost, so it shouldn’t be a surprise to them.
Clause 5: Scope Creep
We’ve all faced it — the dreaded scope creep. This occurs when a client adds change after change to the scope of the project, which increases the amount of work you have to do. Effective project management can usually stop scope creep before it happens, but nonetheless, you should have a provision for it in your contract. No one wants to be overworked and underpaid! As the vendor for your client, you reserve the right to adjust the rates of a project if the scope significantly increases. Don’t be afraid of this!
Listen — contracts can be intimidating, but when it comes to business, you have to protect yourself and your client. Having a contract with these clauses is the best way to avoid confusion down the the line and prevent you from getting exploited. Now go forth and create!