Keith Mack
Contracts are governed by state common law, and while general contract law is common across the US, specific court interpretations of a particular element of a contract may vary between states. In the US, the Supreme Court has described ordinary principles of contract law, which include the intention of the parties being determined by case-specific evidence, and the recognition that contractual obligations generally cease upon termination of the contract. The Supreme Court's views on the level of protection that the Contract Clause provides for contract rights have shifted over time, and it has been interpreted to limit a state's power to enact legislation that breaches or modifies its own contracts, or regulates contractual relationships.
| Characteristics | Values |
|---|---|
| Contractual obligations | Cease upon termination of the contract |
| Contract interpretation | Courts should not construe ambiguous writings to create lifetime promises |
| Contract validity | Determined by the highest state court |
| Contract enforcement | Laws that affect its validity, construction, discharge, and enforcement |
| Contract Clause | Protects contract rights |
| Contract modification | Allowed during the Great Depression to prevent mass foreclosures |
| Contractual agreement | Not enforced by law if it does not meet legal requirements |
| Contract law | Governed by state common law |
| Contractual promises | Must be exchanged for adequate consideration |
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What You'll Learn
The Contract Clause
Article I, Section 10, Clause 1 of the United States Constitution, also known as the Contract Clause, imposes certain prohibitions on the states. These prohibitions are designed to protect individuals from state government interference and to prevent states from interfering with the powers of the federal government.
The Supreme Court's interpretation of the Contract Clause has evolved over time. During the New Deal Era, the Court began to depart from the Lochner era's interpretation of the Commerce Clause, Due Process, and the Contract Clause. In Home Building & Loan Association v. Blaisdell, the Court upheld a Minnesota law that temporarily restricted mortgage holders' ability to foreclose during the Great Depression. The Court held that this law was a valid exercise of the state's police power and that the temporary nature of the contract modification and the emergency situation justified the law. This decision marked a turning point in the Court's Contract Clause jurisprudence, indicating that it would be more receptive to states' use of their police powers to regulate contracts to protect the public interest.
The Court has laid out a three-part test in Energy Reserves Group v. Kansas Power & Light to determine whether a law conforms with the Contract Clause:
- The state regulation must not substantially impair a contractual relationship.
- The state must have a significant and legitimate purpose behind the regulation, such as addressing a broad social or economic issue.
- The law must be reasonable and appropriate for its intended purpose.
While the Contract Clause's protections have been weakened over time, the Court has indicated that it still provides some protection for contracts, particularly when the state lacks a legitimate public purpose for interfering with contract rights and has not regulated those rights reasonably or necessarily.
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State and federal law
The United States Constitution is the foundation of federal law, which is the supreme law of the land. Federal laws are decided by the Legislative Branch of the federal government (Congress) and apply to the entire nation. Congress may also pass legislation to enact new federal laws and amendments to the Constitution. Federal law covers broad topics like immigration law, social security, civil rights law, and federal criminal laws (drug trafficking, money counterfeiting, etc.).
State laws, on the other hand, are specific to each state and are implemented by the state legislature and confirmed by the state governor. They address more specific matters like criminal law, real estate law, and welfare matters. State laws apply to both residents and visitors to the state, as well as corporations, businesses, and organizations operating within the state.
When it comes to contracts, states have long regulated the formation, interpretation, enforcement, and performance of contracts. The Supreme Court has interpreted the Contract Clause to limit a state's power to enact legislation that breaches or modifies its own contracts or regulates contracts. The Court's views on the level of protection that the Contract Clause provides for contract rights have shifted over time. For example, during the Great Depression, the Court upheld the Minnesota Mortgage Moratorium Law, which went against existing contracts but was in the public interest.
In terms of the interplay between state and federal law, federal law takes precedence when there is a conflict. The Supremacy Clause in Article VI of the Constitution states that federal law cannot be impeded or restricted by any state law. However, state law can grant additional rights to citizens that are not explicitly granted by federal law, and in those cases, state law prevails.
In the context of contract law, most contract cases in federal court involve the application of state substantive law. However, in the case of M&G Polymers USA, LLC v. Tackett, the Supreme Court provided insight into the ordinary principles of contract law that federal courts should apply in the absence of applicable state law.
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Contractual obligations
The concept of contractual obligations encompasses various elements, including the validity, construction, discharge, and enforcement of contracts. State courts typically hold the final authority in determining these aspects of a contract, guided by the laws of the state in which the contract was formed. However, the Supreme Court's interpretation of the Contract Clause has, to some extent, influenced the decisions of the highest state courts. This interplay between state laws and the Contract Clause has significant implications for contractual obligations.
The Contract Clause, as outlined in Article I, § 10, of the U.S. Constitution, prohibits states from passing laws that impair the obligation of contracts. This clause has been pivotal in shaping contractual obligations and ensuring the inviolability of sales and financing contracts. The Supreme Court's interpretation of the Contract Clause has evolved over time, with a notable shift during the New Deal Era, when the Court began to depart from the strict constructionist approach of the Lochner era.
In the case of Home Building & Loan Association v. Blaisdell, the Supreme Court upheld a Minnesota law that temporarily restricted mortgage holders' ability to foreclose on properties, even though it conflicted with existing contracts. This decision marked a turning point, indicating that the Court would prioritize states' use of police powers to regulate contracts for the welfare of their citizens, even if it impacted contract rights. The Court's application of the Contract Clause in this case set a precedent for evaluating the validity of contractual obligations.
The Supreme Court has also provided clarity on the "ordinary principles of contract law." In the case of M&G Polymers USA, LLC v. Tackett, the Court emphasized the importance of interpreting collective bargaining agreements according to ordinary contract law principles, unless inconsistent with federal labor policy. This decision underscored the Court's view that contractual obligations should be based on the intention of the parties, determined by case-specific evidence rather than general suppositions.
In summary, contractual obligations are a complex and dynamic area of law, influenced by state laws, the Contract Clause, and Supreme Court interpretations. The evolution of the Supreme Court's views on the Contract Clause and its application in cases involving state laws and contractual obligations has significant implications for the validity and enforcement of contracts. Understanding the interplay between these legal principles is essential for ensuring that contractual obligations are upheld and that contracts are interpreted fairly and consistently.
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Impairment of contracts
The Contract Clause of the US Constitution bars states from passing any law that impairs the obligation of contracts. The obligation of a contract refers to laws that affect its validity, construction, discharge, and enforcement. The US Supreme Court has held that claims of a contract clause violation must undergo a three-step analysis.
Firstly, it must be determined whether there is a contractual relationship. Secondly, it must be established whether a change in a law has impaired that relationship. Thirdly, it must be assessed whether the impairment is substantial. This three-step analysis was applied in the General Motors Corp. v. Romein case in 1992.
If the court determines that the contract has been substantially impaired, it must then determine whether the law at issue has a legitimate and important public purpose. It must also be assessed whether the adjustment of the rights of the parties to the contractual relationship was reasonable and appropriate in light of that purpose. For example, in Energy Reserves Group v. Kansas Power & Light in 1983, the challenged law was not held to impair the contract clause as the impairment, though substantial, was reasonable and necessary to fulfil an important public purpose.
The Supreme Court’s views on the level of protection that the Contract Clause provides for contract rights have shifted over time. During the late nineteenth and early twentieth centuries, the Supreme Court decided cases that gradually weakened the Contract Clause’s protections. However, in Blaisdell, the Supreme Court marked a turning point in its Contract Clause jurisprudence, signalling that the Court would be more solicitous of states’ use of their police powers to regulate contracts to protect the lives, health, morals, comfort, and general welfare of the people.
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Contract interpretation
When interpreting a contract, courts first examine the four corners of the written instrument to determine the intent of the parties. This involves looking at the contract as a whole and considering the plain language of the contract. The intention of the parties to a contract controls its interpretation, and courts should use case-specific evidence to determine the intentions of the contracting parties rather than their own general suppositions. Where general and specific provisions in a contract are inconsistent, the specific provision prevails. When parties list specific items in a document, any item not so listed is typically thought to be excluded.
Extrinsic evidence, or evidence outside the four corners of the contract, is generally inadmissible to show the parties' intent. However, if the contract is ambiguous, courts may refer to extrinsic evidence to resolve the ambiguity. Such extrinsic evidence may include the parties' course of performance or the facts and circumstances surrounding the transaction. Unresolved ambiguities are construed against the party that drafted the contract. Additionally, a written agreement is presumed to encompass the whole agreement of the parties, and it is not necessary to include a separate durational clause in a contract to terminate any specific provision.
While the highest state court usually has final authority in determining the construction and validity of contracts entered into under state law, this rule does not hold when the contract is alleged to have been impaired by state law. In such cases, the Supreme Court may intervene to protect contracts entered into on the faith of existing decisions from an impairment resulting from a reversal of such decisions. The Supreme Court's views on the level of protection that the Contract Clause provides for contract rights have shifted over time, and it has decided cases that gradually weakened the Contract Clause's protections. For example, during the Great Depression, the Court upheld the Minnesota Mortgage Moratorium Law, which allowed courts to extend the time for a homeowner to redeem a home after foreclosure, despite this running contrary to existing contracts.
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Frequently asked questions
No, a contract cannot override federal law. Contracts are mainly governed by state statutory and common law, and private law (the private agreement). However, federal law will take precedence over any contract if there is a conflict between the two.
No, a contract cannot negate Supreme Court law. The Supreme Court has the final authority in determining the validity of contracts and can intervene to protect contracts if state laws attempt to impair them.
The Contract Clause is a part of the US Constitution, which states that no state shall "pass any [...] Law impairing the Obligation of Contracts". The Contract Clause ensures the inviolability of sales and financing contracts, encouraging an inflow of foreign capital.
