The Constitution of the United States is the bedrock of American law, and it lays out the framework for the country`s political system. One of the most important parts of the Constitution is the contract clause, which is found in Article I, Section 10. This clause is often misunderstood, so it`s important to know what it means and how it has been interpreted over the years.
The contract clause states that “No State shall … pass any … Law impairing the Obligation of Contracts.” This means that once two parties enter into a contract, the state cannot pass a law that would interfere with that contract. This includes laws that would make it more difficult to enforce the contract, or that would change the terms of the contract after it has been signed.
The contract clause was included in the Constitution because the framers wanted to protect the rights of individuals and businesses to enter into contracts with each other, without fear that the government would interfere. This was especially important at a time when many states were passing laws that would interfere with existing contracts, particularly with regard to debtors and creditors.
Over the years, the contract clause has been the subject of many court cases, as individuals and businesses have tried to use it to protect their contractual rights. One of the most important cases was Dartmouth College v. Woodward, which was decided by the Supreme Court in 1819. In this case, the Court held that a state could not change the terms of a contract between Dartmouth College and its trustees, even though the state had originally granted the charter creating the college.
However, the Court has also recognized that the contract clause has its limits. For example, a state may pass a law that interferes with a contract if the law serves an important public interest, such as protecting public health or safety. In addition, the clause only applies to contracts that were entered into before the law was passed – if a law is passed before a contract is signed, the contract is subject to that law.
In recent years, the contract clause has been in the news again due to the financial crisis. Many homeowners have argued that banks and other lenders have violated the contract clause by changing the terms of their mortgages, even though the mortgages were signed before the crisis began. However, courts have generally been reluctant to apply the contract clause in these cases, since they involve complex financial instruments and the public interest in stabilizing the financial system.
In conclusion, the contract clause is an important part of the American Constitution, and it protects the rights of individuals and businesses to enter into contracts without government interference. However, the clause also has its limits, and it cannot be used to protect contracts that are against the public interest. As always, the courts will be the ultimate arbiters of how the contract clause is interpreted and applied in specific cases.