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The Contract Clause WISCONSIN LEGISLATIVE REFERENCE BUREAU The Contract Clause Mark Kunkel senior legislative attorney READING THE CONSTITUTION • November 2017, Volume 2, Number 2 © 2017 Wisconsin Legislative Reference Bureau One East Main Street, Suite 200 • Madison, Wisconsin 53703 www.legis.wisconsin.gov/lrb/ • 608-266-3561 This work is licensed under the Creative Commons Attribution 4.0 International License. To view a copy of this license, visit http://creativecommons.org/licenses/by/4.0/ or send a letter to Creative Commons, PO Box 1866, Mountain View, CA 94042, USA. The Contract Clause Wisconsin Constitution, Article I, Section 12 jected.7 A reporter observed that the convention prob- ably concluded that the amendment was not necessary No . law impairing the obligation of contracts, shall based on U.S. Supreme Court decisions regarding the ever be passed. scope of the similarly worded federal contract clause.8 After voters rejected the constitution drafted by the 9 In its Declaration of Rights, the Wisconsin Constitution 1846 convention, a second constitutional convention provides that no “law impairing the obligation of con- was held in 1847. The second convention made only tracts, shall ever be passed.”1 This provision is known one change to the clause drafted by the first conven- as the “contract clause” (hereinafter, the “state contract tion. Without debate, the second convention prohib- clause”) and is based on the Contract Clause of the U.S. ited impairing the “obligation” of contracts instead of 10 Constitution, which prohibits states from passing laws their “validity.” As a result, when voters ratified the that impair the obligation of contracts (hereinafter, the second convention’s constitution, the language of the “federal contract clause”).2 The constitutions of 39 oth- state contract clause was made consistent with that of er states include a similar contract clause.3 the federal contract clause. In interpreting the state Wisconsin’s contract clause originated in the state’s contract clause, the Wisconsin Supreme Court has first constitutional convention of 1846. The convention’s relied for guidance on the U.S. Supreme Court’s inter- delegates drafted a clause that prohibited laws “impair- pretation of the federal contract clause. Therefore, to ing the validity of contracts.”4 The first convention con- understand how Wisconsin courts have interpreted the sidered three amendments to that prohibition. One of state contract clause, it is helpful to review the federal the amendments would have prohibited interfering with contract clause. or affecting private contracts, and another would have prohibited depriving parties to a contract of any rem- The federal contract clause edy that existed when the contract was made. Both of those amendments were rejected without any recorded Framers’ intent 5 debate. A third amendment would have prohibited any What did the framers of the U.S. Constitution intend retroactive law impairing the validity or remedy of con- regarding the scope of the federal contract clause? One 6 tracts. That amendment was debated, but ultimately re- scholar has concluded: “There is very little reason to think that the framers had any theory about the contract clause, or pondered its implications for cases to which 1. WIS. CONST. art. I, § 12. 2. U.S. CONST. art. I, § 10. 3. The constitutions of the following states do not have a similar contract clause: Connecticut, Delaware, Hawaii, Kansas, Maryland, 7. Id. at 371–72, 374–85. Massachusetts, New Hampshire, New York, North Carolina, and 8. See THE STRUGGLE OVER RATIFICATION 1846–1847, in 28 PUBLICATIONS OF THE Vermont. However, two of those states (Hawaii and New York) STATE HISTORICAL SOCIETY OF WISCONSIN, 115 (Milo M. Quaife, ed., 1920). have a narrower type of clause that prohibits the impairment of public sector retirement benefits. Alaska, Illinois, and Michigan 9. The rejection was due to controversy over the constitution’s re- have constitutions with both types of clauses. strictions on banking, its homestead exemption, and its guarantee of separate property rights for married women. Joseph A. Raney, HE ONVENTION OF UBLICATIONS OF THE TATE ISTORICAL 4. See T C 1846, in 27 P S H The Making of the Wisconsin Constitution, WISCONSIN LAWYER, Sept. SOCIETY OF WISCONSIN, 749 (Milo M. Quaife, ed., 1919). 1992, at 15. 5. Id. at 372–73. 10. See THE ATTAINMENT OF STATEHOOD, in 29 PUBLICATIONS OF THE STATE HISTORI- 6. Id. at 369. CAL SOCIETY OF WISCONSIN, 275 (Milo M. Quaife, ed., 1928). Reading the Constitution 2-2 1 it applied.”11 However, other scholars have argued that itself. The Framers fully recognized that nothing the framers intended the clause to broadly prohibit any would so jeopardize the legitimacy of a system of state law that violates vested contractual rights by trans- government that relies upon the ebbs and flows ferring all or part of the benefit of a bargain from one of politics to “clean out the rascals” than the pos- party to another.12 sibility that those same rascals might perpetuate Still other scholars have theorized that, despite the their policies simply by locking them into binding federal contract clause’s broad, unqualified language, contracts.17 the framers intended it to have a narrower meaning. The leading theory is that the clause was intended to Early decisions prohibit states from passing debtor relief laws that In early decisions, the U.S. Supreme Court declined to impaired creditors’ rights.13 During the economic limit the federal contract clause to apply only to debtor depression following the Revolutionary War, debts relief laws or private contracts. For example, in Fletch- mounted and creditors sought to enforce their rights er v. Peck,18 the contract at issue was a land grant by via foreclosures. In response, the former colonies the Georgia legislature. After one of the grantees re- enacted debtor relief laws to suspend debts and stay sold the land to a purchaser, a scandal ensued when foreclosures.14 According to some scholars, the fram- the public learned that bribery had motivated the leg- ers recognized that the new nation’s economic growth islature to make the grants. In response to the scan- “depended in large measure on providing a stable dal, the Georgia legislature rescinded the grants. The environment for those who had money to invest or purchaser argued that the rescission did not affect his loan,” and therefore drafted the clause to restrict the title to the land. The U.S. Supreme Court agreed and power of states to void credit arrangements.15 held that the legislature’s rescission unconstitutionally Another narrow theory is that the federal contract impaired the original grant. In its opinion, the Court clause was intended to apply only to contracts between refused to exempt contracts made by a state from the private parties (private contracts), not those between federal contract clause.19 Likewise, in Trustees of Dart- the state and private parties (public contracts).16 A mouth College v. Woodward,20 the U.S. Supreme Court proponent of this theory is Justice Brennan, who stat- held that salary contracts between the state and public ed in a dissent that: officers had the same protection under the clause as private employment contracts.21 The Framers of our Constitution conceived of the However, early U.S. Supreme Court decisions Contract Clause primarily as protection for eco- did limit the scope of the federal contract clause nomic transactions entered into by purely private with respect to retroactive impairments. In Sturges v. parties, rather than obligations involving the State Crowninshield,22 when a state enacted a law discharg- ing debts owed under contracts entered into before the 11. Richard A. Epstein, Toward a Revitalization of the Contract Clause, law’s enactment, the U.S. Supreme Court held that the 51 U. CHICAGO L. REV. 703, 707 (1984). law’s retroactive application violated the clause. Sub- 12. Douglas W. Kmiec & John O. McGinnis, The Contracts Clause: A sequently, in Ogden v. Saunders,23 the Court found no Return to Original Understanding, 14 HASTINGS CONST. L.Q. 525, 526 (Spring 1987). such violation and upheld a state law that discharged 13. See, e.g., RONALD D. ROTUNDA & JOHN E. NOWAK, 2 TREATISE ON CONSTITU- TIONAL LAW: SUBSTANCE AND PROCEDURE § 15.8 (b), at 879–80 (5th ed. 2012) and WILLIAM J. RICH, 1 MODERN CONSTITUTIONAL LAW: LIBERTY AND 17. United States Trust Co. v. New Jersey, 431 U.S. 1, 45 (1977) (cita- EQUALITY § 17:26, at 688 (3rd ed. 2011). tions omitted). 14. The historical context of those laws is described in the dissenting 18. 10 U.S. 87 (1810). opinion in Home Building and Loan Association v. Blaisdell, 290 19. Id. at 137–39. U.S. 398, 454–58 (1934). 20. 17 U.S. 518 (1819). 15. Rotunda & Nowak, supra note 13 at 880. 21. Id. at 694. 16. See Thomas W. Merrill, Public Contracts, Private Contracts, and the Transformation of the Constitutional Order, 37 CASE W. RES. L. REV. 22. 17 U.S. 122 (1819). 597, 600 (1987). 23. 25 U.S. 213 (1827). 2 Reading the Constitution 2-2 debts under contracts entered into after the law’s enact- the first step in developing a detailed test for the federal ment. According to a dissenting opinion in Ogden, the contract clause. In 1933, Minnesota enacted a law that, rationale for that finding is that “contracts are deemed for a limited period, gave borrowers additional time to to be made in reference to the existing laws, and to be buy back foreclosure properties. When a lender argued governed, regulated, and controlled” by those existing that the law unconstitutionally impaired a preexisting laws.24 Under that rationale, if a contract is entered into mortgage, the Court announced a five-part test and after a law is enacted, the contract is deemed to incor- upheld the law in Home Building and Loan Association porate that law, and the law cannot impair the contract.
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