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The Contract Clause: Taking Another Look

Published onApr 15, 2018
The Contract Clause: Taking Another Look

The right to contract and the protection thereof is a fundamental piece of the societal and economic machine that provides prosperity to our country. The Contract Clause of the Constitution (Article I, Section X, Clause I)  states that “[n]o State shall … pass any … Law impairing the Obligation of Contracts … .” In debating this clause at the Constitutional Convention, its proponents argued that it is intended to protect private contracts from legislative actions. Despite this clear purpose, the Contract Clause has not been so clearly interpreted by the Supreme Court.

 The Founders feared the results of the poor treatment of contracts under the Articles of Confederation. For example, Charles Pinckney, a representative of South Carolina to the Constitutional Convention, declared that with this clause, “Public as well as private confidence shall again be established; industry shall return among us …”. Early interpretation of the Contract Clause remained consistent with its purpose. In Sturges v. Crowninshield, the Supreme Court in 1819 stated that there is no clearer interpretation than a complete prohibition of legislation that impairs a contract. This tradition lasted for over one hundred years. Justice Strong in 1878 wrote that “[i]t is one of the highest duties of this Court to take care that this prohibition shall neither be evaded nor frittered away.” This principle held strong until the Great Depression placed new stresses on our society.

The United States faced a new reality with the Great Depression. In Home Building & Loan Association v. Blaisdell, the Supreme Court in 1934 began parsing the powers of a state to which this prohibition applies. In Blaisdell, the Court held that the policing power of a state is not inhibited by the clause because of the need for a moratorium on mortgage foreclosures. Since the Great Depression, the Commerce Clause has never been the same. The Court developed narrow rulings for Contract Clause cases.

In 1978, the Supreme Court reaffirmed the test seeded by Blaisdell in Allied Structural Steel Co. v. Spannaus, but some argue it was modified to be more consistent with the original intent of the clause. The Court created a two-step method that is now considered the modern interpretation of the Contract Clause. The first step was to determine whether there was a “severe” impairment of the contract. If the impairment was not severe, then the Court would affirm the legislation. The second step was to determine the legislative intent of the statute. This step required an analysis of the emergency the legislature was attempting to solve. If the reasons were reasonable and appropriate with a “significant and legitimate legislative purpose”, then the statute would be upheld. The Court in this case sadly found it necessary to state that the Contract Clause “remains part of the Constitution. It is not a dead letter.”

Whether or not the Contracts Clause is dead, it may have a chance to be strong again. The Supreme Court recently heard oral arguments for Sveen v. Melin on March 19, 2018. This case asks whether a Minnesota statute that retroactively amends who the beneficiary of a life insurance policy is after a divorce is constitutional based on the Contract Clause. Mr. Sveen was married to Ms. Melin in 1997, and Mr. Sveen purchased a life insurance policy and made his new wife the beneficiary with his children as contingent beneficiaries. In 2002, Minnesota passed a law that stated that upon divorce, a now ex-spouse will no longer the beneficiary of a life insurance policy. In 2007, the couple divorced and in 2011, Mr. Sveen passed away.

The question of whether Minnesota’s retroactive alteration of the life insurance policy was constitutional was brought before federal district court where the statute was upheld. On appeal, the Eighth Circuit reversed the district court holding that the policy holder’s intent should be preserved through the contract as written. The Supreme Court granted certiorari.

The Supreme Court has the opportunity to strengthen the Contract Clause of the Constitution to what will provide greater prosperity. It is argued that this clause is not about fairness. That fairness actually contradicts the clause. The purpose of the clause is to bolster the confidence in private contracts though certain enforcement.

Andrew Homer is a second-year law student at Wake Forest University School of law. He holds a Bachelor of Arts in Chemistry and Economics from Texas Christian University and a Master of Science in Financial Economics from Texas A&M University. Upon graduation, he intends to practice patent law.

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