Text Assist for Contracts Clause Flowchart


Article I, Section 10 forbids any state from passing a law that retroactively impairs the obligation of contracts.

1) Not applicable to the federal government: The Contracts Clause applies to the states only, not to the federal government. Although there is no comparable federal restriction, a blatant contract impairment would be forbidden by the Due Process Clause of the Fourteenth Amendment.
2) Retroactive: The Contracts Clause only applies to contracts that exist at the time of the law’s passage.
3) Legislation Only: The Contracts Clause applies to legislation, not court decisions. The judiciary has the power to invalidate a contract without violating the Contracts Clause. See Tidal Oil v. Flanagan, 263 U.S. 444 (1924).


Is the challenged law directed at existing contractual obligations?
In a case involving a private contract, the law must substantially impair a pre-existing contractual relationship. Once this hurdle is met, the government must demonstrate that the law imposes reasonable conditions appropriate to achieving a significant and legitimate public purpose. Usually, when faced with such an issue, the courts defer to the legislative judgment.


Laws of general application do not implicate the contracts clause:
If a law only has an "incidental effect" on a contractual obligation, it will automatically fail the first prong of the Energy Reserves Test and will, therefore, not be in violation of the Contracts Clause.


A law is directed at contractual obligations if its purpose is to extinguish one party or another’s contractual obligation:
The Contracts Clause prevents the states from passing any law that would extinguish the commitments of one party to a contract or make enforcement of the contract unreasonably difficult. The drafters sought to prohibit the states from legislating in a way that interfered with the contractual arrangements between private citizens. Specifically, the drafters wanted to prevent states from passing debtor relief laws. Banks and financiers wanted security that their credit arrangements would not be wiped out by legislation and the drafters granted them such security through the Contracts Clause. See B. Wright, The Growth of American Constitutional Law 41 (1967). Although the drafters of the Contracts Clause appeared to have a limited application in mind, Chief Justice John Marshall expanded its interpretation to cover almost any contractual obligation of private parties.


Is there a substantial impairment of contract?
In Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 103 S.Ct. 697 (1983), the Court held that the natural gas company’s rights were not "substantially impaired" because the contracting paries were aware of the fact that the contract was subject to a wide range of regulations. The court found that any element of "substantial impairment" that might exist is outweighed by an overriding interest in consumer protection.

A "substantial impairment" destroys most or all of a party’s rights under a contract.


Is there a significant and legitimate public purpose served?
If the court determines that there is a "substantial impairment," then the next hurdle must be met: "the state, in justification must have a significant and legitimate public purpose." Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 411-12, 103 S.Ct. 697, 704-05 (1983).


Is Adjusting the Contracting Parties’ Rights Reasonable and Appropriate in Light of the Public Purpose?

If the court determines that there is a "substantial impairment," and that the state has a significant and legitimate public purpose, then the last hurdle must be met: "the next inquiry is whether the adjustment of rights and responsibilities of contracting parties is based upon reasonable conditions and is of a character appropriate to the public purpose justifying the legislation’s adoption." Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 411-12, 103 S.Ct. 697, 704-05 (1983).

This prong prohibits states from enacting laws that alter the position of the parties so as to favor the party who has the state’s sympathy. There must be a significant and legitimate social purpose to support the legislative impairment of contracts. The law must be a reasonable means to promote the public purpose.


Does the Law Extinguish Contractual Rights or Merely Modify Remedies?
The state may enact legislation that modifies the available remedies for the breach of a contract. See Sturges v. Crowninshield, 17 U.S. (4 Wheat) 122 (1819). The Court clarified this proposition in Bronson v. Kinzie, 42 U.S. (1 How.) 311 (1843), stating that the scope of the modifications a state is allowed to make on contractual remedies depends on the reasonableness of the modifications and whether those changes effect any substantial rights of the parties. However, defining the difference between an "obligation" and a "remedy" is, as precisely described by Justice Cardozo, "at times obscure." W.B. Worthen Co. v. Kavanaugh, 295 U.S. 56, 60, 55 S.Ct. 555, 556 (1935).


Balancing of Public & Private Interests:

An example of such balancing:
The Court held that a Minnesota statute imposing a moratorium on mortgage foreclosures during the Great Depression did not violate the Contracts Clause. Home Building & Loan Association v. Blaisdell, 290 U.S. 398 (1934). The Court recognized, however, that Blaisdell was in response to an "emergency" and in such a situation a law is more likely to be upheld as a reasonable exercise of the police power and not a violation of the Contracts Clause.


Was the contract entered into against a backdrop of heavy state regulation?
In Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 103 S.Ct. 697 (1983), the Court held that the natural gas company’s rights were not "substantially impaired" because the contracting paries were aware of the fact that the contract was subject to a wide range of regulations. The court found that any element of "substantial impairment" that might exist is outweighed by an overriding interest in consumer protection.


Is this an Adjustment of Private or State Contract Rights?
Public Contracts (those in which the state or a political subdivision is a party) receive stricter scrutiny than private contracts because of the potential for abuse of power by the government.

Public Contract Test (variation on the 3-part Energy Reserves Test):
1) Substantial Impairment: There is no substantial impairment if the state has reserved the power to revoke, alter, or amend the terms of which should be considered to be incorporate into the contract. College v. Woodward, 17 U.S. 518 (1819);
2) Significant and Legitimate Public Interest: In analyzing this prong, note that the state cannot contract away its police power.
3) Narrowly Tailored: The law should not constitute an unnecessarily broad repudiation of contract duties.


Mid- to High-Level Scrutiny:
Public Contract Test (variation on the 3-part Energy Reserves Test): 1) Substantial Impairment: There is no substantial impairment if the state has reserved the power to revoke, alter, or amend the terms of which should be considered to be incorporate into the contract. College v. Woodward, 17 U.S. 518 (1819);
2) Significant and Legitimate Public Interest: In analyzing this prong, note that the state cannot contract away its police power.
3) Narrowly Tailored: The law should not constitute an unnecessarily broad repudiation of contract duties.

Note: All three prongs must be met.


Low-Level Scrutiny:
Private Contract Test (3-part Energy Reserves Test): 1) Is there a Substantial Impairment of contractual obligation;
2) Is there a Significant and Legitimate Public Interest ?; and
3) Is the law a reasonable and appropriate MEANS to the ENDS?

Note: All three prongs must be met.


End of Text Assist