united-states contract-law constitutional-law virginia
Constitutional Law - What is &quot;the obligation of contracts&quot;?
<p>Why is this included in many constitutions and is it relevant today? Please link to any relevant case law. Thank you.</p>

<p>Source: "that the General Assembly shall not pass any law impairing the <strong>obligation of contracts</strong>;" - <a href="http://law.lis.virginia.gov/constitution/article1/section11/" rel="nofollow">Constitution of Viginia 11.I</a></p>

<p>The U.S. Constitution - Article 1, Section 10 is titled "Powers Prohibited of States," and it reads:</p>

<blockquote>
  <p>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 <strong><em>Law impairing the Obligation of Contracts</em></strong>, or grant any Title of Nobility.</p>
</blockquote>

<p>The title of the section, Powers Prohibited of States, tells us that this clause is directed to the states and prevents the states from enacting any state laws that retroactively impair obligations and rights between two contracting parties.</p>

<p>In <a href="http://scholarship.law.marquette.edu/cgi/viewcontent.cgi?article=4859&amp;context=mulr" rel="nofollow">New Orleans Water Works Co. v. Louisiana Sugar Refining Co</a>, the court held that a law passed by the state legislature must be the cause of a contract's obligations to have been impaired in order for relief to be sought under this clause.</p>

<p>The <a href="http://www.heritage.org/constitution/#!/articles/1/essays/72/obligation-of-contract" rel="nofollow">Heritage Guide to The Constitution</a> has a good article explaining the history of this clause.</p>

<p>A central provision of the Northwest Ordinance, which established the Northwest Territory, stated:</p>

<blockquote>
  <p>In the just preservation of rights and property, it is understood and declared, that no law ought ever to be made, or have force in the said territory, that shall, in any manner whatever, interfere with or affect private contracts or engagements, bona fide, and without fraud, previously formed.</p>
</blockquote>

<p>While operating under the Articles of Confederation between 1777 and 1789 when the U.S. Constitution was adopted, some state legislatures were passing laws relieving well-connected people from debts for which they had contracted.</p>

<p>As the Heritage Guide explains, the obligation of contracts section was added to the clause of the Constitution which prevented states from printing money and making treaties. Initially, the clause was meant to prevent state legislation that retroactively changed the terms of private contracts. But as cases worked their way through the courts, the Supreme Court eventually set that standard that the obligation of contracts clause also prevented states from undoing contracts to which the state was a party where the obligation of the contract had been completed. (As opposed to breach of contract claims for uncompleted contracts.)</p>

<p>Ogden v Saunders, in 1827, held that the obligation of contracts clause doesn't apply to contracts that did not exist at the time a statute was passed.</p>

<p>Those states with their own Obligation of Contracts Clause may have had them before the U.S. Constitution was written (Virginia's original constitution was enacted in 1776) or may have added them as an amplification of the prohibition found in the U.S. Constitution.</p>

<p>It doesn't come up a lot in U.S. contract cases so far as I know, mostly because the U.S. does not pass laws to disclaim its own debt.  It can borrow at a very low interest rate because it pays its debts.</p>

<p>There was some academic discussion a few years ago about whether Congress could change the law to eliminate the debt forgiveness and income-based repayment provisions for student loans or whether that would rewrite the promissory notes and impair the obligation of contracts, but I don't know for sure whether it was written up in the literature or was just professors throwing ideas around.  So it's relevant in the US at least to the tune of a trillion dollars or so.</p>

<p>The clause is also still relevant to nations writing constitutions who want to be able to borrow money.  If they can easily rewrite a law to prevent themselves from owing debt, nobody will be willing to lend to them.  Today debt cancellation on the international stage is ideally managed by entities like the IMF as opposed to by default.</p>

<p>That being said, if you eliminated the clause in the US tomorrow, we could still get good interest rates.  A practice of repayment is much more important to creditors than the promise to repay.  But lenders do want the promise.</p>

<p>(Sources: memory and reason.)</p>
