The Essentials of American Constitutional Law

by Francis Newton Thorpe

70. The supreme law of the land provides that no State shall pass any law impairing the obligation of contracts.[184] A contract is an agreement between competent persons to do or not to do a certain thing; the law is part of the contract.[185] An unlawful contract cannot be made, for the so-called contract, being unlawful, has never existed as a contract. The limitation as to contracts in the Constitution is on the States. Thus a State can no more impair its own contracts, by legislation, than it can impair the obligation of the contracts of individuals.[186] A sovereign State is supposed to have a more scrupulous regard to justice, and a higher morality than belongs to the ordinary transactions of individuals.

71. A State may incorporate a bank which, by its charter, is empowered to issue, and does issue, stock, bills, or notes. These are contracts. By its police power the State may repeal that section of the bank’s charter authorizing issues of notes, but legislation affecting the stock, or notes, so as to impair their obligation is unconstitutional.[187] The question is not one of currency but of impairing the obligation of a contract. A legislature may make a contract binding upon later legislatures,—as a law existing at the time contracts under it are made, it becomes part of them, but a municipal act levying a tax upon city bonds held by non-residents diminishes the value of the bonds and therefore impairs the obligation of a contract.[188] For the bonds call for a certain interest payment at a certain time, and a tax upon them, and retaining the same from payment, make an entirely different contract from the original. The constitutional provision against impairing contract obligations is a limitation on the taxing power as well as on all legislation—whatever its form.[189]

72. But such limitation must not be confused with legitimate exercise of the police powers of the State. Thus an arrangement determinable at the will of either party is not a contract beyond control, change, or cessation under the police power. For example, a bounty law, as for killing destructive animals, or for the encouragement of manufactures (the boring of salt wells and pumping of water from them for making salt), does not involve the State in a contract. It is a matter purely voluntary on the part of those who avail themselves of the opportunity, and the Legislature may or may not continue the law at discretion, as a matter of public policy.[190]

73. The execution of an office to which a person has been lawfully elected, or appointed, by the performance, by him, of its duties, is a completed contract, with perfect obligation to pay for services rendered at the rate of compensation fixed by the contract, and this obligation can no more be impaired by a law of the State than that arising on a promissory note.[191]

74. The charters of private charitable institutions are contracts within the letter of the Constitution, and their obligation cannot be impaired without violating it.[192] But if a charter to a corporation, for example a railroad, or a college, provides for possible alteration or amendment by the Legislature of the State, such power of alteration duly exercised by a later Legislature is not unconstitutional as impairing the obligation of a contract.[193]

75. The police power of the State extends to the protection of the lives, health, and property of citizens, and to the preservation of good order and the public morals, nor can the Legislature, by any contract, divest itself of the power to provide for these objects.

They belong emphatically to that class of objects which demand the application of the maxim, salus populi suprema lex; and they are to be attained and provided for by such appropriate means as the legislative discretion may devise. That discretion can no more be bargained away than the power itself.[194]

In exercise of this police power the Legislature prohibits the manufacture and sale of malt liquor. Such manufacture or sale is not an exercise of a right by contract, and prohibition of the business is not legislation impairing the obligation of a contract.[195] So too, a provision in a State constitution forbidding lotteries and gift enterprises within a commonwealth, and revoking lottery charters theretofore granted, is not a law impairing the obligation of a contract.[196] The principle followed here is expressed by the Chief Justice (Waite): “No legislature can bargain away the public health or the public morals.” Thus it may be accepted as settled constitutional law that the people in their sovereign capacity and through their properly constituted agencies may exercise powers as the public good may require.[197] But corporations and private persons possessing and exercising rights and franchises vested in them by law and possessing property rights by contract are entitled to compensation when, under the State power of eminent domain, such vested rights are taken away.[198]

76. Whether property or employment possesses the qualities or attributes of a public use will largely determine the character of legislative control for the purpose of safe-guarding the public against “danger, injustice, and oppression”; the police power of the State is here paramount.[199]

77. The principle involved in the obligation of contracts is clearly set forth by the Supreme Court: