The Constitution, the legislature, and unfair surprise: toward a reliance-based approach to the Contract Clause.

• Author: Graham, Robert A.

Introduction

During the first eighty years of the Republic, the Contract Clause(1) was the constitutional rule most frequently invoked to strike down state legislation.(2) Private parties successfully cited the clause's prohibition in challenges to impairments of land grants,(3) Corporate charters,(4) and private debts.(5) After a period of somewhat reduced activity,(6)however, the Contract Clause fell into disuse between 1934 and 1977.(7) It enjoyed a brief renaissance in the late 1970s,(8) but more recent Contract Clause challenges to state legislation have met with limited, if any, success.(9)

Over the course of our constitutional history, the Supreme Court's focus in Contract Clause jurisprudence has shifted from a concern for individual expectations to the protection of the public good.(10) The Court's early decisions concerning retroactive state statutes(11) highlight the clause's original purpose of ensuring that states not defeat private parties' reliance interests.(12) More recent decisions demonstrate the Court's departure from the reliance standard.(13) In addressing Contract Clause challenges today, the Court weighs the competing state and private interests.(14) In doing so, the Court asks whether the law at issue substantially impairs the individual's contractual rights, whether the law is intended to serve a significant and legitimate public purpose, and whether the means utilized by the government to effect that purpose are reasonable and necessary.(15) Further, the Court now takes a less deferential stand than it once did toward legislative determinations of reasonableness and necessity when the state is a party to the impaired contract.(16)

From a methodological standpoint, the Court's approach has progressively limited the scope and meaning of the Contract Clause by reading into it various exceptions. From the landmark case of Home Building & Loan Assn. v. Blaisdell(17) through more recent cases,(18) Contract Clause decisions have moved incrementally toward what is essentially a test of governmental prerogatives. The current standard determines the clause's applicability according to the strength of the particular interests a piece of state legislation represents. Through this piecemeal approach, over time, the Court has moved away from its original concern for contractual expectations and speaks now primarily in terms of state powers and private impairments.(19) This process of defining Contract Clause doctrine through a balancing of interests has deprived the clause of the clarity it once possessed.

In two cases from the 1980s,(20) however, the Court resurrected a modified form of the reliance logic in one factor of its determination. This factor is known as the "heavily regulated industry" doctrine (HRID). Under this doctrine, when a party conducts business in a "heavily regulated" field, the retroactive effects that a new rule imposes on that business will survive Contract Clause scrutiny. The doctrine assumes that a private actor, in entering a heavily regulated field, knows the government exercises a great deal of control over that industry. The doctrine further assumes that the actor also realizes that the legal backdrop against which she conducts business is subject to change. Therefore, the private party cannot reasonably expect her operations and relations, as subject to the changing regulatory scheme, to remain unaffected by a modification in the law.(21)

This Note argues that the Court should return to a reliance-based approach to Contract Clause challenges, fashioned loosely along the same lines as the HRID. Although it does not advocate that the Court revivify the rules created by the early decisions, the Note proposes that the Court look to the private parties' expectations and, more specifically, to the reasonableness of those expectations in deciding the clause's applicability to a particular case. Part I provides a brief history of the Contract Clause and its development. This Part follows the clause from the Constitutional Convention through the 1980s to illustrate the Court's departure over time from the original meaning of the clause. Part II discusses the heavily regulated industry doctrine and demonstrates how it represents a return to a focus on party expectations. Having set forth the theoretical underpinnings of the heavily regulated industry doctrine, this Note in Part III extends the doctrine's logic to create a modified reliance model for applying the Contract Clause. The Part argues that the reasonableness of a party's expectations as to the validity or enforceabihty of her contracts varies according to the amount of previous legislation in an area, as well as the "publicness" of the party's transactions. This Note concludes that this modified reliance approach has several advantages over the Court's current test, including greater continuity with early Court precedent and better guidance both for private parties and legislatures.

1. The Court's Shift in Perspective

   The Supreme Court's emphasis in its Contract Clause jurisprudence has drifted sipificantly since the Constitution's ratification. The clause's early history reflects an overarching theme emphasizing private reliance marks.(22) Beginning with Home Building & Loan Assn. v. Blaisdell(23) in 1934, however, the Court has forsaken its original focus on party expectations in favor of a more fluid, but less certain and less predictable, balancing of state power against private interests. Ultimately, this shift deprives the Contract Clause of a single guiding principle and gives both legislatures and courts more freedom than the Framers intended.(24)

   This Part illustrates the differences in the Court's treatment of the Contract Clause from the time of the Constitution's ratification through the present. It further indicates some of the weaknesses of the Court's current test. Section I.A discusses the clause's early history and its original aim of protecting individuals' reasonable reliance interests. Section I.B examines the Supreme Court's more recent treatment of Contract Clause challenges and illustrates the Court's change in perspective over time. This section argues that the doctrinal shift from protection of party expectations leaves individuals without standards by which to judge the wisdom of entering into particular transactions. Such an effect is particularly perverse in light of the Contract Clause's purpose of providing stability in private contracts. This departure also permits a lack of discipline on the part of both courts and legislatures in determining the wisdom and constitutionality of a given piece of legislation.

   1. Early History: Focus on Party Expectations

      An examination of the preratification history of the Contract Clause demonstrates that the Framers' purpose in including the clause was to protect contracting parties from the unfair surprise(25) wrought by state legislatures.(26) Although the Contract Clause was not the subject of heavy debate in the Constitutional Convention,(27) the records of the Framers and the contemporaneous public discussion reveal an intent to protect contracting parties' expectations by prohibiting legislative interference with those expectations.(28) The clause derives from a portion of the Ordinance of the Northwest Territory providing that no law "shall in any manner whatever interfere with, or affect private contracts or engagements, bona fide, and without fraud previously formed."(29) The purpose of the quoted enactment was the "just preservation of rights and property."(30)

      Unfortunately, unlike the Ordinance, the Contract Clause as ratified includes no statement of intent. Further, the debate in the Federal Convention centered more on the wisdom of the rule the clause embodies than on its purpose.(31) Nonetheless, the ratification debates demonstrate a clear intent to preserve "rights and property" from retroactive state legislation.(32)

      James Madison provided a detailed discussion of the clause's groundings in the Federalist Papers, in which he indicated that the clause was intended to create security in private expectations. In Federalist No. 44, Madison wrote:

      Very properly therefore have the Convention added this constitutional bulwark in favor of personal security and private rights; and I am much deceived if they have not in so doing as faithfully consulted the genuine sentiments, as the undoubted interests of their constituents. The sober people of America are weary of the fluctuating policy which has directed the public councils. They have seen with regret and with indignation, that sudden changes and legislative inferences in cases affecting personal rights, become jobs in the hands of enterprizing and influential speculators; and snares to the more industrious and less informed part of the community. They have seen, too, that legislative interference, is but the first link of a long chain of repetitions; every subsequent interference being naturally produced by the effects of the preceding. They very rightly infer, therefore, that some thorough reform is wanting which will banish speculations on public measures, inspire a general prudence and industry, and give a regular course to the business of society.(33)

      Although some have argued that the "fluctuating policy," "sudden changes," and "legislative interferences" to which Madison referred consist only of debtor relief laws,(34) the clause's broad language does not suggest such a limited reading.(35) Moreover, Madison's own reference to the Contract Clause as a "constitutional bulwark in favor of personal security and private rights" plainly addresses all types of unfair retroactive legislation, not merely a narrow segment of such laws.(36)

      Early in its history, the Supreme Court adopted a similar view of the Contract Clause and unfair surprise. The Court's early Contract Clause decisions hinged on what this Note terms the "traditional reliance model."(37) In these cases, the...