Full Faith and Credit: Supreme Court Considers Reviving Trust in Constitution’s Contract Clause

Institute for Justice Amicus Brief argues that Court should return to the plain meaning of the Contract Clause

Arlington, Va.–On Monday, the U.S. Supreme Court will hear oral argument in a case questioning whether the U.S. Constitution allows states to enact laws that rewrite existing contracts. The question should be an easy one. The Contract Clause of the Constitution provides that “[n]o state shall…pass any…Law impairing the Obligation of Contracts.” But over the years the Supreme Court has issued a series of decisions holding that the Contract Clause doesn’t really mean what it says in plain English. In an amicus brief submitted to the Court, the Institute for Justice and the nation’s leading Contract Clause scholar, Professor James Ely, argue that the court should return to the plain meaning of the Clause and hold that existing contracts are “inviolable”—or, in other words, states do not get to change the terms of bargains that have already been struck.

The case—Sveen v. Melin—concerns a life insurance policy purchased by a Minnesota resident named Mark Sveen. He made his wife, Kaye Melin, as the beneficiary of his policy. They divorced in 2007, and Sveen died in 2011. In 2002, however, Minnesota had passed a law that automatically revoked any spousal life insurance benefits after a divorce. Melin argued that she was entitled to the benefits because the Minnesota statute was unconstitutional. The U.S. Court of Appeals for the Eighth Circuit agreed, holding that the statute violated the Contract Clause for contracts that were agreed to before the law was enacted. IJ and Professor Ely are asking the Supreme Court to affirm.

The brief explains how the Contract Clause was drafted in a post-Revolutionary period characterized by collapsing commerce and credit markets. In those hard times, well connected insiders asked their friends in the state legislatures to pass laws to help them escape their bad bargains. The subsequent laws invalidating legal contracts only served to further erode trust in the nascent economy, because businesses could never be sure that the deals they made would be honored. The new Constitution solved this problem, in the words of Chief Justice John Marshall, by “establish[ing] a great principle, that contracts should be inviolate.”

“For the first 100 years of the Republic, the Contract Clause was one of the most important and frequently litigated provision of the Constitution, and the Court faithfully applied the Clause as it was written,” explained Professor Ely. “In a series of decisions in the 20th Century, however, the Court largely read the Clause out of the Constitution, holding in one case, for instance, that it should ‘not be read with literal exactness’—a shockingly candid admission that the Court was ignoring a part of the Constitution that it didn’t like.”

More recently, the Court has held that only “substantial” and “unreasonable” interference with contracts is unconstitutional, and that courts should largely let state legislatures do what they want.

“For decades, Americans have assumed that the Contract Clause is basically a dead letter,” said IJ attorney Jeffrey Redfern. “But for the first time in a generation, the Supreme Court has decided to hear a Contract Clause case. This is an opportunity for the Court to reinvigorate a crucial safeguard for private property rights.”

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