May 24, 2010

The Constitution and Contracts

Carroll Andrew Morse

One of the places that my quest for the sources of receivership law in Rhode Island has led me to is the Federal Constitution, Article I, section 10...

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.
But wait; just because the Constitution says that "states shall pass no law impairing the obligation of contracts", doesn't mean that the United States Supreme Court thinks that states shall pass no law impairing the obligation of contracts. The Court, in its 1934 majority decision in Home Building and Loan Association v. Blaisdell authored by Chief Justice Charles Evans Hughes, substantially depreciated the plain meaning of the contract clause...
These put it beyond question that the [contract clause] prohibition is not an absolute one, and is not to be read with literal exactness, like a mathematical formula...

Not only is the constitutional provision qualified by the measure of control which the State retains over remedial processes, but the State also continues to possess authority to safeguard the vital interests of its people. It does not matter that legislation appropriate to that end "has the result of modifying or abrogating contracts already in effect." Not only are existing laws read into contracts in order to fix obligations as between the parties, but the reservation of essential attributes of sovereign power is also read into contracts as a postulate of the legal order. The policy of protecting contracts against impairment presupposes the maintenance of a government by virtue of which contractual relations are worthwhile -- a government which retains adequate authority to secure the peace and good order of society.

In other words, a state cannot impair a contract, unless a state decides that it really needs to -- for the good of the state of course.

I would like to suggest this as an opportunity for reflection on the part of individuals who think they have no stake in the conservative and Tea Party emphasis on respecting Constitutional limitations on government. As the evolution of contract law illustrates, once the only recognized governing principle becomes that government has the power to do whatever government decides is good and necessary, then everything becomes subject to the whim of the ruling class of the moment -- even in areas of the law where the rules seem to have been spelled out in unequivocal terms. And once you accede that government has the right to do anything it decides is important, it is not reasonable to expect that it will always and forever use its unlimited grant of power to only to do the stuff that you like.

Finally, as a historical footnote, readers may be interested in knowing that majority opinion undermining contracts was joined by the justices regarded as enlightened progressives of their era, while the four justices remembered today largely for their repeated opposition to various aspects of the New Deal all dissented.

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Justin, I haven't had time to read the opinon cited; but here is what I suspect.

It would turn out that the contract involved was illegal, or made illegal. It is not necessary to "impair" an illegal contract, illegal contracts are not enforceable to begin with. It might be illegal for "violation of public policy". Just a guess here.

Although I have never had a complete explanation, I have definitely been given to believe that the origins of RI receivership law was "shady". The laws exist in every state. But, in the New England papers I have read the frequency of "receiver's sales" cannot compare with RI. Probably less that 5% of what is seen in RI.

Posted by: Warrington Faust at May 24, 2010 10:51 PM
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