Demise and Evisceration of the Contract Clause

VI.   OGDEN v. SAUNDERS AND A BIBLICAL ANALYSIS

Could Marshall have done better? Perhaps the cryptic language of the clause itself – “No state shall … pass any … law impairing the obligation of contracts” – presents virtually insurmountable obstacles to a principled holding that would make the clause a prohibition against all state insolvency legislation which operated prospectively, but would also save state statutes of fraud, statutes of limitation and statutes prohibiting certain types of contracts. But a Biblically principled approach would have supported the broad principle of right to contract that Marshall’s “obligation” analysis suggested, would have more satisfactorily addressed the knotty problem of existing state statutes and rules of law related to contracts, and could have provided a basis for prohibiting at least some types of state insolvency legislation.

The first error such an approach would avoid is starting the analysis with “downstream” observations, that is, since states have historically passed laws relating to contracts, the states must have authority to do so and those laws must be valid. A Biblically principled approach would instead start “upstream,” at the beginning, with God as Creator, man created in His image, the Creation Mandate to man, and the subsequent institution of civil government with God-given, but limited authority. From that perspective Marshall might then have analyzed the particular statutes that were troublesome to determine whether there was a principled basis for their existence which was consistent with man’s duties under the Creation Mandate and the God-given authority of civil government.

For example, it would appear that appropriately drafted statutes of fraud⁶⁶ and other rules relating to evidentiary matters reflect or are at least consistent with the Biblical “two or three witnesses” principle,⁶⁷ which itself is a recognition not of the power of civil government, but rather of its lack of omniscience and for that reason its justifiable need to act with caution in wielding the sword in judgment. Likewise, statutes of limitation, to the extent they find their basis in the desire to provide an occasion for the presentation of disputes for judgment while evidence and witnesses are still available and memories have not faded, in order that the true facts can be found by an imperfect factfinder, reflect not an unprincipled grab for power by civil government, but rather a principled recognition of its inherent lack of omniscience and the grave responsibility it has for making accurate judgments.

A Biblically principled basis, consistent with Marshall’s “obligation” analysis, also supports the propriety of state laws prohibiting gambling contracts, bribery contracts and the like. For because such agreements are antithetical to the Creation Mandate, even in a state of nature they would give rise to no right in the promisee or obligation in the promisor. Gambling contracts, for example, rather than being an exercise of dominion in accordance with the Creation Mandate, are an abandonment of control over one’s resources to mere chance. Bribery contracts are a form of stealing, endeavoring to enlist another to breach his trust and use his position to transfer a gain or advantage from one who has rightfully been carrying out his dominion duties to the briber who has not. Even in a state of nature such agreements would raise no right in the promisee and no obligation in the promisor. And thus prohibition of the same by statute does no more than reflect the law of nature. Contrary to Marshall’s suggestion, it is not the statute in such cases that prevents the obligation from occurring. Rather, it is the very nature of the agreement itself that prevents the obligation from occurring.

Had Marshall used a Biblical analysis with regard to state usury laws, he may well have concluded such laws were beyond the authority of civil government and in conflict with the Creation Mandate. Such a conclusion might well have deterred him from attempting an artificial and inconsistent argument to save them. Although in the nation of Israel God had forbidden lending to a fellow Israelite, at least to a poor one, at any interest,⁶⁸ the Bible contains no general prohibition against lending at interest. To the contrary, lending to foreigners at interest was expressly sanctioned in Israel.⁶⁹ In parables, Christ used interest as an illustration of an apparently lawful way in which gain on property could be achieved.⁷⁰ These suggest that when one lends at interest he is not an evildoer whom civil government is authorized to punish or restrain. Laws that limit the rate of interest one can charge impinge upon the decision-making duties of both lender and borrower who, under the Creation Mandate, are to be individually accountable for their stewardship and dominion choices. Such laws encourage borrowers to rely upon government to keep them from making what the government believes would be an improvident agreement, and may actually foster the false impression upon borrowers that anything up to the legal limit is good stewardship. They may prevent lenders from obtaining the true market value for the loan, and thus constitute an artificial limitation upon the exercise of their dominion duties.

Had Marshall used a Biblically principled analysis with respect to bankruptcy laws, he might well have determined that there is a Biblical basis for enactment by government of some types of bankruptcy law. For the nation of Israel God established the law of jubilee,⁷¹ which required in every fiftieth year reversion of land and houses in unwalled cities, and sabbatical year laws,⁷² which required remission of debts of fellow countrymen every seven years. Though the jubilee’s provision for reversion of the land may be seen as unique to the nation of Israel and typological,⁷³ perhaps a principle of general application can be seen in Israel’s sabbatical debt remission laws. Although such debt-remission cycle applied only with respect to fellow Israelites (citizens), which might suggest it was unique to that nation and typological,⁷⁴ it may well be an illustration of a law that civil government acting within its Biblical authority may enact in furtherance of its function of providing an environment in which its citizens may carry out their duties to God in all godliness and dignity. A bankruptcy law patterned after the sabbatical year cycle would discourage significant debt formation and the potential for its accompanying bondage,⁷⁵ and would reflect the command of the Creation Mandate to take dominion over the earth and its resources, but not over one’s fellow human beings. Such would also conform to the principle that government is to act impartially,⁷⁶ in that it would establish a uniform standard consistent with the Creation Mandate under which financial relationships among its citizens would be established.

But the state bankruptcy statute presented to the Court in Ogden v. Saunders was not of the sabbatical cycle type. Rather it was a statute directed to relief from individualized business failures. If Marshall had concluded that when the state passed such a bankruptcy statute, it acted outside its Biblical authority in that such a statute encouraged significant indebtedness and bondage of one man to another and impermissibly showed partiality in granting relief from such indebtedness to some but not all while exposing some but not all creditors to loss, he would have had no difficulty holding that its unauthorized action impaired the obligation of contract. Put another way, on Biblical principles such interference with contractual obligations could not be justified.⁷⁷

However, if Marshall had believed there was a Biblical basis for civil government enacting such individualized debtor relief statutes,⁷⁸ then from a Biblical analysis the only remaining questions would be: (1) had the national covenant, the Constitution, taken that power to pass bankruptcy laws from the states and placed it exclusively in the hands of the national government; (2) if not, had the Constitution by the Contract Clause prohibited its exercise? The first question had been answered in the negative in Sturges v. Crowninshield.⁷⁹ Sturges had held the states had authority to pass insolvency laws in the absence of congressional bankruptcy legislation, or in the case of such legislation, as long as they were not inconsistent with the national power to do so.

As to the second question, unless one were willing to adopt an arbitrary theory of an “implied exception for bankruptcy laws,” the cryptic language of the Contract Clause seems incapable of a reading that both permits the states to pass all laws consistent with Biblical principles and yet prohibits the states from passing bankruptcy laws.

VII.   DEMISE OF THE CLAUSE EVEN AS TO RETROSPECTIVE APPLICATION

The failure in Ogden v. Saunders to extend the application of the clause to legislation that operates prospectively helps explain the development of a couple of other channels of constitutional law: substantive due process and the negative, or dormant, commerce clause. Professor Epstein puts it well:

Because prospective limitations can be as mischievous as retroactive ones, strong principles of substantive due process were seized upon toward the end of the nineteenth century in order to fill the gap created by Ogden‘s narrow interpretation. Had the contract clause been construed to apply prospectively, state minimum wage, maximum hour laws and the like could have been scrutinized under that provision without the Court incurring the charge that it had arrogated unto itself control of substantive issues entrusted to the legislature.⁸⁰

With respect to the negative commerce clause, Epstein states:

As drafted, the commerce clause seems only to confer power upon Congress and not to impose any limitations upon the state…. If the contract clause is given prospective application, then there is far less need to worry about the negative implications of the commerce clause. The necessary restrictions upon state power are found elsewhere in the Constitution. But if the contract clause is confined to the protection of existing contracts, then the structural coherence of the Constitution is weakened, as there are no necessary institutional limitations that work against the petty, provincial, and retaliatory trade practices that spurred the original ratification of the Constitution. It is therefore not surprising that the gap in the constitutional structure created by Ogden was filled by the growth of the negative commerce clause ….⁸¹

But the negative commerce clause is helpless to prevent purely intrastate exploitation of one group by another through legislative enactments.

Though the Ogden Court narrowly held the Contract Clause had no application to prospective state legislation, it asserted that where the clause did apply to retrospective legislation, its ban was absolute. Justice Trimble expressed that position:

The great principle intended to be established by the constitution, was the inviolability of the obligation of contracts, as the obligation existed and was recognised by the laws in force at the time the contracts were made. It furnished to the legislatures of the States a simple and obvious rule of justice, which, however theretofore violated, should, by no means, be thereafter violated; and whilst it leaves them at full liberty to legislate upon the subject of all future contracts, and assign to them either no obligation, or such qualified obligation as, in their opinion, may consist with sound policy, and the good of the people; it prohibits them from retrospecting upon existing obligations, upon any pretext whatever.⁸²

As will be evident from what follows, the great principle of inviolability, even in the retrospective realm left by Ogden to the Contract Clause, evaporated in the years following its bold proclamation.

Some erosion was manifested ten years later in Proprietors of the Charles River Bridge v. Proprietors of the Warren Bridge,⁸³ wherein Chief Justice Taney announced the appropriate rule of construction that would henceforth be applied in public charters. Grants in such charters were to be construed narrowly and any ambiguities were to be resolved in favor of the state.⁸⁴ Such a rule of construction permitted the Court to find that the grant of a charter to build and operate a toll bridge over the Charles River did not prevent the state from thereafter issuing a charter for the construction and operation of a second bridge built so closely as to virtually duplicate the service of the original and whose operation cut deeply into the traffic and tolls of the original grantee.

A more serious encroachment appeared in the Court’s West River Bridge Co. v. Dix⁸⁵ decision. The dispute arose when the state of Vermont sought to condemn a bridge that it by charter had previously authorized the West River Bridge Company to build and operate. The Court rejected the bridge company’s assertion that such action unconstitutionally impaired its one hundred year exclusive franchise, which still had over fifty years to run. It held the state’s right of eminent domain in no way interfered with the inviolability of contracts. Justice Daniel for the Court reasoned as follows:

[I]nto all contracts, whether made between States and individuals or between individuals only, there enter conditions which arise not out of the literal terms of the contract itself; they are superinduced by the preexisting and higher authority of the laws of nature, of nations, or of the community to which the parties belong; they are always presumed, and must be presumed, to be known and recognized by all, are binding upon all, and need never, therefore, be carried into express stipulation, for this could add nothing to their force. Every contract is made in subordination to them, and must yield to their control, as conditions inherent and paramount, wherever a necessity for their execution shall occur. Such a condition is the right of eminent domain. This right does not operate to impair the contract effected by it, but recognizes its obligation in the fullest extent, claiming only the fulfilment of an essential and inseparable condition.⁸⁶

This was shades of the Ogden majority, but in an expanded version that impinged upon all contracts. While the Ogden majority found contracts formed subsequent to the enactment of legislation subject to and impliedly limited by such legislation, the analysis in Dix required no legislation; it merely required the Court’s recognition of an inherent power of government. What the Ogden majority did to subsequently formed contracts by its “implied terms” or “subject to” theories, the Dix Court, with its “inherent power” theory, did to all contracts.

While the Declaration of Independence and Marshall’s treatment of the Contract Clause had focused upon unalienable rights of individuals, the Dix Court stressed what may be termed the unalienable powers of governments. Certain powers are inherent in government, and government cannot by contract divest itself of them. Any attempt by government to do so is void.

Eminent domain was one such power. Were there others? The power to tax apparently was not, based upon the earlier Marshall Court decision in New Jersey v. Wilson.⁸⁷ But the police power was such a power, as the Court made clear in Stone v. Mississippi.⁸⁸ In Stone, when the state repealed an irrevocable twenty-five year charter to operate a lottery, the recipients claimed such action violated the Contract Clause. Chief Justice Waite disagreed. He asserted the police power could not be bargained away by the state.⁸⁹ For justice Waite the police power encompassed at least all matters affecting the public health or the public morals. For him the essence of government was to protect the public health and morals, that is, “[g]overnment is organized with a view to their preservation, and cannot divest itself of the power to provide for them.”⁹⁰

In the context of Stone, justice Waite also employed Ogden-like reasoning: “Any one, therefore, who accepts a lottery charter does so with the implied understanding that the people, in their sovereign capacity . . . may [reassert their power to stop such activities] at any time when the public good shall require ….”⁹¹ Such an “implied understanding” theory was capable of application not only with respect to governmental grants, but also with respect to private contracts.⁹²

Perhaps Justice Holmes made its application in the private contract context as bluntly as anyone. In Hudson County Water Co. v. McCarter,⁹³ where the Court was confronted with a Contract Clause challenge to legislation that interfered with private contract water rights, Justice Holmes rejected the challenge, finding the state’s conduct was an appropriate exercise of its police power. He stated:

The limits set to property by other public interests present themselves as a branch of what is called the police power of the State….

… One whose rights, such as they are, are subject to state restriction, cannot remove them from the power of the State by making a contract about them. The contract will carry the infirmity of the subject matter.⁹⁴

And in Marcus Brown Holding Co. v. Feldman,⁹⁵ Holmes put the matter even more curtly: “[C]ontracts are made subject to this exercise of the power of the State when otherwise justified ….”⁹⁶

VIII.   GROWTH OF POLICE POWER AND EVISCERATION OF THE CONTRACT CLAUSE

It is the police power that has really proved to be the clause’s undoing. When the police power was perceived as a limited authority of government to protect the public health, safety and morals in the traditional sense, it posed a significant but not debilitating limitation upon the application of the clause to protect existing contract rights. But as the scope of the police power expanded to include, as well, the authority to “provide for the general welfare,”⁹⁷ and as that latter undefined term has come to take on greater and greater scope, the police power has virtually eclipsed the Contract Clause.

Professor Schwartz traces the expansion of the police power to a changing perception of the role of government

Originally … the police power may have been concerned only with the preservation of public peace, safety, health, and morals. But that was the case only because those were the primary social interests to be vindicated under the essentially negative theory of government that then prevailed. A century ago, the State acted merely as policeman, soldier, and judge. “Leviathan hath two swords: war and justice,” stated Hobbes in a famous passage. When the governmental armory included only those two weapons, the police power itself could scarcely be more sweeping.

Modern public opinion has more and more required the State to assume an affirmative duty to eliminate the excesses and injustices that are the inevitable concomitants of a wholly unrestrained industrial economy. In addition, the State has had to bring ever-increasing parts of the population directly under its fostering guardianship. From the turn of the century at least, government has become increasingly positive in a new sense.

As government has come to be conceived of in positive terms, the same has come to be true of the police power. In this sense, the police power has been necessarily an expansive power, changing to meet new conceptions of the governmental role …. What was a century ago regarded as an improper exercise of the police power may now, because of such changes, be recognized as legitimate.⁹⁸

One need not agree with Schwartz’s conclusion that the state “had to” move into its present expansive guardianship and regulation role to agree with his conclusion that as society believes the ends of government expand to include an ever-widening range of social interests, the police power expands accordingly, at the expense of previously recognized private rights.⁹⁹

Expansion of the role of government and, correspondingly, of the scope of the police power in the economic sphere has drained most of the life from the Contract Clause. The Court’s 5-4 decision in Home Building & Loan Association v. Blaisdell¹⁰⁰ reflects that expansive perception of the proper role of government and illustrates a view of the Contract Clause which stands in sharp contrast to that espoused by the majority in Ogden v. Saunders who believed the clause stood as a firm barrier against any form of retrospective debtor relief legislation, remedial or otherwise. The legislation in question was the Minnesota Mortgage Moratorium Law, which purported to alter the pre-existing contractual rights of mortgagees to foreclose on their mortgages or collect deficiency judgments against the mortgagors. It was conceded by all that the legislation impaired the obligations of pre-existing mortgages, but it was asserted that such impairment was a permissible exercise of the police power of the state, notwithstanding the Contract Clause. Chief Justice Hughes delivered the opinion of the Court upholding the legislation against the Contract Clause challenge. Although the setting was identified as an emergency one, the language of the Court’s opinion was quite expansive with regard to the role of government, the power of the Supreme Court, scope of the police power, and the diminished position of the Contract Clause and private rights. Consider the following:

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 worth while, – a government which retains adequate authority to secure the peace and good order of society.¹⁰¹

After referring to the cases showing a “progressive recognition” of an ever-expanding authority of government to impair pre-existing contracts, the Court observed: “The economic interests of the State may justify the exercise of its continuing and dominant protective power notwithstanding interference with contracts.”¹⁰² For Chief Justice Hughes, the “question [was] not whether the legislative action affects contracts incidentally, or directly or indirectly, but whether the legislation is addressed to a legitimate end and the measures taken are reasonable and appropriate to that end.”¹⁰³ He concluded that the statute, which was addressed to a broad economic problem and which impaired but did not destroy all of the mortgagees’ rights, satisfied his standard.¹⁰⁴ The Chief justice justified the propriety of the Court’s establishing this reasonableness standard, notwithstanding the absolute language of the clause, as follows:

It is manifest from this review of our decisions that there has been a growing appreciation of public needs and of the necessity of finding ground for a rational compromise between individual rights and public welfare. The settlement and consequent contraction of the public domain, the pressure of a constantly increasing density of population, the interrelation of the activities of our people and the complexity of our economic interests, have inevitably led to an increased use of the organization of society in order to protect the very bases of individual opportunity. Where, in earlier days, it was thought that only the concerns of individuals or of classes were involved, and that those of the State itself were touched only remotely, it has later been found that the fundamental interests of the State are directly affected; and that the question is no longer merely that of one party to a contract as against another, but of the use of reasonable means to safeguard the economic structure upon which the good of all depends.

It is no answer to say that this public need was not apprehended a century ago, or to insist that what the provision of the Constitution meant to the vision of that day it must mean to the vision of our time. If by the statement that what the Constitution meant at the time of its adoption it means to-day, it is intended to say that the great clauses of the Constitution must be confined to the interpretation which the framers, with the conditions and outlook of their time, would have placed upon them, the statement carries its own refutation. It was to guard against such a narrow conception that Chief Justice Marshall uttered the memorable warning – “We must never forget that it is a constitution we are expounding” … – “a constitution intended to endure for ages to come, and consequently, to be adapted to the various crises of human affairs.” … When we are dealing with the words of the Constitution, said this Court in Missouri v. Holland, we must realize that they have called into life a being the development of which could not have been foreseen completely by the most gifted of its begetters…. The case before us must be considered in the light of our whole experience and not merely in that of what was said a hundred years ago.¹⁰⁵

Of that justification, Professor Epstein has aptly observed:

The passage contains some of the most misguided thinking on constitutional interpretation imaginable. The operative assumption seems to be that questions of constitutional law are to be answered according to whether or not we like the Constitution as it was originally drafted. If we do not, we are then free to introduce into the document those provisions that we think more congenial to our time.¹⁰⁶

And of Blaisdell and its teaching, Professor Epstein says, it “trumpeted a false liberation from the constitutional text which has paved the way for massive government intervention that undermines the security of private transactions.¹⁰⁷

The strong government thrust of Hughes’ Blaisdell opinion was repeated by him three years later in West Coast Hotel Co. v. Parrish,¹⁰⁸ wherein he effectively buried substantive due process, making it also succumb to the expanded police power: “[R]egulation which is reasonable in relation to its subject and is adopted in the interests of the community is due process.”¹⁰⁹ The views expressed by Hughes in those opinions are striking illustrations of the change in perception that had occurred in the first century and a half following ratification about the nature of society and about governmental authority, to say nothing of the change in the perceived role of the Court and the purpose of the constitutional document.

To Hughes…. society is best viewed as a complex, interconnected whole, and not as an amalgamation of discrete individuals. Thus, contractual liberty can no longer be merely a private matter…. [P]ositive government intervention is required both for the protection of the individual and in order to serve collective purposes. In particular, freedom of contract must sometimes be suppressed. This is necessary both because of the individual’s subordination to the group, and because overriding collective concerns may demand it. ¹¹⁰

In the years that have followed Blaisdell, the perception Hughes reflected has not only persisted, but has expanded, prompting Professor Epstein’s accurate observation that “[t]oday the police power exception has come to eviscerate the contracts clause.”¹¹¹

Nor has the “successful” application of the clause in a couple of recent cases altered that fact. In its 4-3 decision in United States Trust Co. v. NewJersey,¹¹² the Court held that the clause prohibited New Jersey’s retroactive repeal of a 1962 statutory covenant limiting the use to which revenues generated by the Port Authority’s operation of a passenger rail transportation system could be applied during the time bonds for construction and operation of that system were still outstanding. By 1974 the New Jersey legislature had determined the most appropriate use of some of the revenues from the passenger rail systems financed by the bonds would be to pay for additional mass transit, and passed the repealer.

The Court’s holding that such was impermissible by no means suggests the return of a revitalized and robust Contract Clause. For Justice Blackmun emphasized:

Although the Contract Clause appears literally to proscribe “any” impairment, the Court observed in Blaisdell that “the prohibition is not an absolute one and is not to be read with literal exactness like a mathematical formula.” . . . Thus, a finding that there has been a technical impairment is merely a preliminary step in resolving the more difficult question whether that impairment is permitted under the Constitution.¹¹³

He further acknowledged that his analysis of the clause’s applicability in this particular case was also premised on the propositions that even with respect to a state’s financial obligations, “[t]he Contract Clause is not an absolute bar to subsequent modification,”¹¹⁴ and “an impairment may be constitutional if it is reasonable and necessary to serve an important public purpose.”¹¹⁵ Only after an analysis under the “reasonable and necessary” standard did the Court narrowly determine that the repealer was barred as “a much more serious impairment”¹¹⁶ than that which the Court had previously permitted, that the impairment chosen was more drastic than would have been necessary to accomplish the state’s purpose, and that perhaps the state could have accomplished its purpose without impairing the bonds at all.¹¹⁷ Though perhaps the case marked somewhat of a departure from the highly deferential philosophy the Court had shown to state legislation in the years following Blaisdell,¹¹⁸ the test stated here, as well as the test stated in Allied Structural Steel Co. v. Spannaus¹¹⁹ the following year, show the meaning of the clause is malleable enough to permit the conclusion that it still operates primarily at sufferance of the Court.

In Spannaus, with justice Stewart writing for the Court in its 5-3 decision, the clause was held to prevent the operation of a Minnesota statute that would have compelled an immediate vesting of pension fund rights in certain employees of Allied Structural Steel contrary to the terms of Allied’s pension plan.¹²⁰ The statute targeted companies with more than one hundred employees who closed their Minnesota offices. Its application to Allied required an immediate “pension funding charge of approximately $185,000.”¹²¹

Stewart prefaced his analysis with the now-standard homage to the police power and the stated assumption that the apparently “unambiguously absolute” language of the clause cannot mean what it says. But in order for the clause “to retain any meaning at all,”¹²² he concluded that “it must be understood to impose some limits upon the power of a State to abridge existing contractual relationships, even in the exercise of its otherwise legitimate police power.”¹²³ He derived those limitations primarily from Blaisdell and a series of other Depression era cases, determining that if the legislation did not substantially impair the obligation, the clause might be no bar at all; but that if it did substantially impair the obligation, then legislation would be valid or not depending upon a number of factors.¹²⁴ Those included: whether it was enacted “to protect a broad societal interest”¹²⁵ or “to deal with a broad, generalized economic or social problem,”¹²⁶ and whether it “operate[d] in an area already subject to state regulation”¹²⁷ at the time the contract was made. Stewart concluded the legislation in this case was barred by the clause since it did substantially impair Allied’s obligation, that it was too narrowly directed, focusing only on companies with one hundred or more employees who sought to close their offices in Minnesota or to terminate their pension plans, that the problem of employers’ closing their offices and leaving the state was not a broad, generalized economic or social problem, and that the state had not been regulating pension funds at the time this fund was established.

Referring to the kind of decision-making required by the “tests” in U.S. Trust and Spannaus, Professor Phillips appropriately observed: “Such determinations are clearly of a broadly ‘legislative’ character, and resemble the sort of socioeconomic judgments common during the reign of economic substantive due process.”¹²⁸

The susceptibility of the clause in its current form to manipulation or even to being blatantly ignored is well illustrated by the Court’s most recent pronouncements. In Energy Reserves Group v. Kansas Power & Light Co.,¹²⁹ the Court was presented with the claim by an energy company that a Kansas statute which prohibited the implementation of “governmental price escalation” clauses in its contracts with a public utility constituted an unlawful impairment contrary to the Contract Clause. The governmental price escalation clauses in its contracts permitted Energy Reserves Group (ERG) to increase prices if a “governmental authority . . . shall … fix a price” higher than that specified in the contract. When the federal government thereafter subjected interstate natural gas sales to regulation and established the maximum lawful price at a level higher than that specified in ERG’s contracts with Kansas Power and Light, ERG sought to increase its prices to that buyer.

The Court acknowledged that the ERG-KP & L contract itself and the applicable federal statute were capable of interpretation such that the “governmental escalation clause” was not triggered by federal regulation which merely set a maximum limit on pricing and did not actually fix or require a particular price to be charged by ERG. Three justices concurred in denying ERG’s claims on that limited basis. However, Justice Blackmun, writing for the Court, addressed the constitutional question and concluded the Contract Clause provided no protection for ERG even if the federal regulation had triggered its contractual right to increase prices.

For Justice Blackmun, whether the “substantial impairment” showing had been made by ERG turned not on what the parties had written but rather upon what ERG’s reasonable expectations probably were at the time the contracts made.¹³⁰ And the fact that the parties operated in a heavily regulated industry had a significant bearing on those expectations. That made it “foreseeable” that the state “would alter contractual obligations,”¹³¹ and thus ERG’s reasonable expectations were not impaired by the Kansas statute. One can only wonder if the Contract Clause has any life with regard to contracts made in industries subject to regulation.

Perhaps as disconcerting was justice Blackmun’s analysis of the “significant and legitimate state interests.” Though unnecessary to resolution of the constitutional claim because of the prior conclusion that there was no substantial impairment, Blackmun reasoned that even if there had been substantial impairment it would have been justified by the exercise of the state’s “police power to protect consumers from the escalation of natural gas prices” resulting from deregulation.¹³² He concluded the “legitimate public purpose” for the exercise of the police power could be predicated upon the state’s reasonably finding “that higher gas prices have caused and will cause hardship among those who use gas heat but must exist on limited fixed incomes.”¹³³ If that means “legitimate public purpose” is equated with helping the many at the expense of the few, then as Professor Clarke so aptly observes, it “turn[s] the contract clause on its historical head. After all, the primary purpose of the clause was to prevent debtor classes from passing special interest legislation to relieve them of the burden of their debts.”¹³⁴

That such is what the clause now means is reinforced by the Court’s decision in Exxon Corp. v. Eagerton.¹³⁵ Therein the Court rejected Exxon’s assertion that the Contract Clause made impermissible legislation which prohibited Exxon from passing through a severance tax to its customers, notwithstanding Exxon’s express right to do so under pre-existing contracts. Justice Marshall, for a unanimous Court, found that the legislation prohibiting the pass-through “nullified pro tanto the purchasers’ contractual obligations” to reimburse Exxon.¹³⁶ But he concluded the nullification was valid as an appropriate exercise of the state’s police power because

the pass-through prohibition did not prescribe a rule limited in effect to contractual obligations or remedies, but instead imposed a generally applicable rule of conduct designed to advance “a broad societal interest,” [citing Allied Structural Steel v. Spannous]: protecting consumers from excessive prices. The prohibition applied to all oil and gas producers, regardless of whether they happened to be parties to sale contracts that contained a provision permitting them to pass tax increases through to their purchasers. The effect of the pass-through prohibition on existing contracts that did contain such a provision was incidental to its main effect of shielding consumers from the burden of the tax increase.¹³⁷

Eagerton confirms that the police power is broad enough to sustain any kind of state economic regulation, for all legislation produces winners and losers.¹³⁸ If all that is required to demonstrate proper exercise of the police power is merely a showing that some segment of society is benefitted by the legislation, one can hardly imagine any instance in which that showing cannot be made. And if that were not sufficient to nullify the operation of the Contract Clause, Marshall’s conclusion that the clause does not bar legislation with retroactive application so long as it also has prospective application, surely is.¹³⁹

Such a conclusion effectively nullifies the majority’s position in Ogden v. Saunders, which had held retrospective application of general debtor protection legislation absolutely barred by the clause.¹⁴⁰ Eagerton was, to use the words of Professor Epstein, a textbook case that required “judicial nullification of legislation, even by a court that denies the contract clause any prospective application,” but which instead produced, by way of manipulation of the clause and the police power doctrine, “judicial nullification of the constitutional text.”¹⁴¹

IX.   CONCLUSION

In concluding his discourse on the jubilee of the Constitution delivered on the fiftieth anniversary of the inauguration of George Washington, John Quincy Adams reflected upon the parallels between the Biblical account of the children of Israel’s mountains respectively of curses (Mount Ebal) and blessings (Mount Gerizim) and the American experience under the Articles of Confederation and the Constitution. He observed:

When the children of Israel, after forty years of wanderings in the wilderness, were about to enter upon the promised land, their leader, Moses, who was not permitted to cross the Jordan with them, just before his removal from among them, commanded that when the Lord their God should have brought them into the land, they should put the curse upon Mount Ebal, and the blessing upon Mount Gerizim. This injunction was faithfully fulfilled by his successor Joshua. Immediately after they had taken possession of the land, Joshua built an altar to the Lord, of whole stones, upon Mount Ebal. And there he wrote upon the stones a copy of the law of Moses, which he had written in the presence of the children of Israel: and all Israel, and their elders and officers, and their judges, stood on the two sides of the ark of the covenant, borne by the priests and Levites, six tribes over against Mount Gerizim, and six over against Mount Ebal. And he read all the words of the law, the blessings and cursings, according to all that was written in the book of the law.

Fellow-citizens, the ark of your covenant is the Declaration of Independence. Your Mount Ebal, is the confederacy of separate state sovereignties, and your Mount Gerizim is the Constitution of the United States. In that scene of tremendous and awful solemnity, narrated in the Holy Scriptures, there is not a curse pronounced against the people, upon Mount Ebal, not a blessing promised them upon Mount Gerizim, which your posterity may not suffer or enjoy, from your and their adherence to, or departure from, the principles of the Declaration of Independence, practically interwoven in the Constitution of the United States.¹⁴²

Adams well understood that the Articles had become a Mount Ebal for the nation because they had been based upon the perceived sovereignty not of the people but of each state, a “departure from the self-evident truths of the Declaration of Independence; the natural rights of man, and the exclusive, sovereign, constituent right of the people.”¹⁴³ The Constitution, on the other hand, had been infused with the “virtue” of those

principles which had been first proclaimed in the Declaration of Independence – namely, the self-evident truths of the natural and unalienable rights of man, of the indefeasible constituent and dissolvent sovereignty of the people, always subordinate to a rule of right and wrong, and always responsible to the Supreme Ruler of the universe for the rightful exercise of that sovereign, constituent, and dissolvent power.¹⁴⁴

Because the drafters of the Constitution had been faithful to the principles of the Declaration, Adams believed the Constitution would prove itself to be for the people as Mount Gerizim.

Adams’ warning uttered a century and a half ago of the consequences flowing from departure from the principles of the Declaration seems almost prophetic. Judicial nullification of the Contract Clause, designed to protect unalienable rights of individuals, accomplished by the Court’s application of an ever-expanding police power doctrine with its foundation upon the unalienable powers of government, seems a clear disregard of Adams’ warning. Today the parallel with Mount Ebal and Mount Gerizim can also be drawn. However, on the basis of the history of the Contract Clause that reflects the great transformation which has occurred with respect to presuppositions about unalienable individual rights and the role and power of government, such a parallel would be drawn differently. To paraphrase Adams, it would be more appropriately said today: Fellow-citizens, the ark of your covenant is the Declaration of Independence. Your Mount Gerizim is the written Constitution. And your Mount Ebal is the judicially revised Constitution, which is fashioned not upon the self-evident truths of the Declaration of Independence – namely the natural and unalienable rights of man, the indefeasible sovereignty of the people, always subordinate to a rule of right and wrong, and always responsible to the Supreme Ruler of the universe for their rightful exercise; but rather upon the unalienable powers of government, the indefeasible sovereignty of the state, guided by expediency upon a sea of shifting values, and responsible for its exercise not to the Supreme Ruler of the universe but only to the Supreme Court.

Adams’ closing admonition urged his fellow citizens to adhere to the principles of the Declaration “as to the cords of your eternal salvation.”¹⁴⁵ Were he speaking today he would modify his admonition to urge them to return to those principles so that “your children’s children [at the Tri-Centennial celebration of the Constitution may] celebrate it again in the full enjoyment … of all the blessings promised to the children of Israel upon Mount Gerizim, as the reward of obedience to the law of God.”¹⁴⁶ Let it be so.