Reserved Police Power

• Author: Leonard W. Levy
• Pages: 2218

Page 2218

If a state reserves a power to alter, amend, or repeal a charter of incorporation before or when granting that charter, the CONTRACT CLAUSE is not necessarily a bar to the exercise of the state police power. In HOME BUILDING AND LOAN ASSOCIATION V. BLAISDELL (1934), the Court ruled that a state may modify or abrogate contracts because existing laws, by becoming part of the contracts, limit their obligations and because "the reservation of essential attributes of sovereign power is also read into contracts." That principle had originated in the concurring opinion of Justice JOSEPH STORY in DARTMOUTH COLLEGE V. WOODWARD (1819), when he declared that a corporate charter could not be changed unless a power for that purpose were reserved in the charter itself. Thereafter the states began to reserve such a power not only in charters, but in general acts of incorporation and in state constitutions, which applied to all charters subsequently granted. In 1877, when the court sustained a rate-fixing statute enacted under the reserved police power, it declared that the power must be reasonably exercised, consistent with the objects of the charter, and must not violate VESTED RIGHTS. In a 1936 case in which the Court repeated that formulation, as it had many times before, it stated that the reserved power prevented reliance on the contract clause. Never has the Court clarified its standards to explain why it has struck down some regulations under the reserved power yet has sustained others.

The reserved power nevertheless weakened the contract clause's service as a bastion of inviolable corporate charters. In 1884, for example, the Court held that because a private water works company was a public utility, its rates could be fixed by government authority under a reservation clause enacted after the state granted a charter giving the company an equal voice in the fixing of rates. The rise of the DOCTRINE of the reserved police power and the related doctrine of the INALIENABLE POLICE POWER forced the defenders of property rights to seek a more secure constitutional base than the contract clause, thus contributing to the emergence of...