Also known as: impair the obligation of contracts · impairment of the obligation of contract · impairs the obligation of contract · contracts clause · contract clause
Written by attorneys — see sources below.
A constitutional prohibition barring states from enacting legislation that substantially impairs the obligations of existing private contracts. The prohibition yields when the law addresses an important public purpose through reasonable and narrowly tailored means during an emergency or when the state has reserved alteration power in the original agreement.
During a severe economic downturn, State X enacts a temporary law halting mortgage foreclosures for two years. Homeowner Ivy Ibarra, whose mortgage with Island Manufacturing predates the statute, stops payments. Island Manufacturing sues claiming impairment. The court upholds the law because it serves the legitimate public purpose of preserving homeownership amid crisis and is limited in duration and scope.
State Y enacts a statute retroactively increasing employers’ obligations under existing pension plans. Employer Apex Corp, whose pension agreement with employee group Beta Workers predates the statute, now owes higher payments for work already performed. Beta Workers sues to enforce the increase. The court strikes the law down because it substantially impairs the contractual obligation without addressing an emergency or using narrowly tailored means.
Respondents Italian Colors Restaurant and other merchants who accept American Express cards entered into agreements with petitioners American Express and its subsidiary. These agreements required that all disputes be resolved by arbitration and provided that there shall be no right or authority for any claims to be arbitrated on a class action basis. The agreements also included a jury trial waiver and specified that New York law would govern. Respondents filed a class action complaint in the United States District Court for the Southern District of New York. They alleged that American Express violated section 1 of the Sherman Act by using monopoly power in charge cards to force acceptance of credit cards at rates about 30 percent higher than competitors, seeking treble damages under section 4 of the Clayton Act for the class. Petitioners moved to compel individual arbitration under the Federal Arbitration Act. The district court granted the motion and dismissed the lawsuits. On appeal, the Court of Appeals for the Second Circuit reversed, holding the class-action waiver unenforceable because respondents had shown through an economist's declaration that expert analysis costs would be at least several hundred thousand dollars while individual recovery would be at most $38,549 after trebling. The Supreme Court granted certiorari, vacated the judgment, and remanded for consideration in light of Stolt-Nielsen S.A. v. AnimalFeeds International Corp. The Second Circuit stood by its reversal, then reconsidered sua sponte in light of AT&T Mobility LLC v. Concepcion but again reversed. It denied rehearing en banc, after which the Supreme Court granted certiorari to address whether the FAA permits invalidation of arbitration agreements that do not permit class arbitration of federal claims.
View caseA state law violates the prohibition if it substantially impairs an existing contractual obligation. The law may still stand if it serves an important public purpose and uses reasonable, narrowly tailored means, especially during an emergency.
No. The prohibition reaches only state legislation. Judicial alterations of contract obligations fall outside its scope.
When the original charter or a general statute reserves the state's power to alter, amend, or revoke the arrangement, the resulting change is not treated as a substantial impairment under the prohibition.
…these schemes in the state legislatures, and . . . turned to the idea of a national government so constructed as to prevent laws impairing the obligation of contract, emitting paper money, and otherwise benefiting debtors. It is idle to inquire whether the rapacity of the creditors or the total depravity of the debtors . . . was responsible for this…