Public Grants that Are Not Contracts

Public Grants That Are Not “Contracts”.—Not all grants by a State constitute “contracts” within the sense of Article I, § 10. In his Dartmouth College decision, Chief Justice Marshall conceded that “if the act of incorporation be a grant of political power, if it creates a civil institution, to be employed in the administration of the government . . . the subject is one in which the legislature of the State may act according to its own judgment,” unrestrained by the Constitution¹⁹⁶⁵ —thereby drawing a line between “public” and “private” corporations that remained undisturbed for more than half a century.¹⁹⁶⁶

It has been subsequently held many times that municipal corporations are mere instrumentalities of the State for the more convenient administration of local governments, whose powers may be enlarged, abridged, or entirely withdrawn at the pleasure of the legislature.¹⁹⁶⁷ The same principle applies, moreover, to the property rights which the municipality derives either directly or indirectly from the State. This was first held as to the grant of a franchise to a municipality to operate a ferry and has since then been recognized as the universal rule.¹⁹⁶⁸ It was stated in a case decided in 1923 that the distinction between the municipality as an agent of the State for governmental purposes and as an organization to care for local needs in a private or proprietary capacity, while it limited the legal liability of municipalities for the negligent acts or omissions of its officers or agents, did not, on the other hand, furnish ground for the application of constitutional restraints against the State in favor of its own municipalities.¹⁹⁶⁹ Thus, no contract rights were impaired by a statute relocating a county seat, even though the former location was by law to be “permanent” and the citizens of the community had donated land and furnished bonds for the erection of public buildings.¹⁹⁷⁰ Similarly, a statute changing the boundaries of a school district, giving to the new district the property within its limits that had belonged to the former district, and requiring the new district to assume the debts of the old district, did not impair the obligation of contracts.¹⁹⁷¹ Nor was the contracts clause violated by state legislation authorizing state control over insolvent communities through a Municipal Finance Commission.¹⁹⁷²

On the same ground of public agency, neither appointment nor election to public office creates a contract in the sense of Article I, § 10, whether as to tenure, or salary, or duties, all of which remain, so far as the Constitution of the United States is concerned, subject to legislative modification or outright repeal.¹⁹⁷³ Indeed, there can be no such thing in this country as property in office, although the common law sustained a different view sometimes reflected in early cases.¹⁹⁷⁴ When, however, services have once been rendered, there arises an implied contract that they shall be compensated at the rate in force at the time they were rendered.¹⁹⁷⁵ Also, an express contract between the State and an individual for the performance of specific services falls within the protection of the Constitution. Thus, a contract made by the governor pursuant to a statute authorizing the appointment of a commissioner to conduct, over a period of years, a geological, mineralogical, and agricultural survey of the State, for which a definite sum had been authorized, was held to have been impaired by repeal of the statute.¹⁹⁷⁶ But a resolution of a local board of education reducing teachers’ salaries for the school year 1933–1934, pursuant to an act of the legislature authorizing such action, was held not to impair the contract of a teacher who, having served three years, was by earlier legislation exempt from having his salary reduced except for inefficiency or misconduct.¹⁹⁷⁷ Similarly, it was held that an Illinois statute that reduced the annuity payable to retired teachers under an earlier act did not violate the contracts clause, since it had not been the intention of the earlier act to propose a contract but only to put into effect a general policy.¹⁹⁷⁸ On the other hand, the right of one, who had become a “permanent teacher” under the Indiana Teachers Tenure Act of 1927, to continued employment was held to be contractual and to have been impaired by the repeal in 1933 of the earlier act.¹⁹⁷⁹

Tax Exemptions: When Not “Contracts”.—From a different point of view, the Court has sought to distinguish between grants of privileges, whether to individuals or to corporations, which are contracts and those which are mere revocable licenses, although on account of the doctrine of presumed consideration mentioned earlier, this has not always been easy to do. In pursuance of the precedent set in New Jersey v. Wilson,¹⁹⁸⁰ the legislature of a State “may exempt particular parcels of property or the property of particular persons or corporations from taxation, either for a specified period or perpetually, or may limit the amount or rate of taxation, to which such property shall be subjected,” and such an exemption is frequently a contract within the sense of the Constitution. Indeed this is always so when the immunity is conferred upon a corporation by the clear terms of its charter.¹⁹⁸¹ When, on the other hand, an immunity of this sort springs from general law, its precise nature is more open to doubt, as a comparison of decisions will serve to illustrate.

In State Bank of Ohio v. Knoop,¹⁹⁸² a closely divided Court held that a general banking law of Ohio, which provided that companies complying therewith and their stockholders should be exempt from all but certain taxes, was, as to a bank organized under it and its stockholders, a contract within the meaning of Article I, § 10. The provision was not, the Court said, “a legislative command nor a rule of taxation until changed, but a contract stipulating against any change, from the nature of the language used and the circumstances under which it was adopted.”¹⁹⁸³ When, however, the State of Michigan pledged itself, by a general legislative act, not to tax any corporation, company, or individual undertaking to manufacture salt in the State from water there obtained by boring on property used for this purpose and, furthermore, to pay a bounty on the salt so manufactured, it was held not to have engaged itself within the constitutional sense. “General encouragements,” said the Court, “held out to all persons indiscriminately, to engage in a particular trade or manufacture, whether such encouragement be in the shape of bounties or drawbacks, or other advantage, are always under the legislative control, and may be discontinued at any time.”¹⁹⁸⁴ So far as exemption from taxation is concerned the difference between these two cases is obviously slight, but the later one is unquestionable authority for the proposition that legislative bounties are repealable at will.

Furthermore, exemptions from taxation have in certain cases been treated as gratuities repealable at will, even when conferred by specific legislative enactments. This would seem always to be the case when the beneficiaries were already in existence when the exemption was created and did nothing of a more positive nature to qualify for it than to continue in existence.¹⁹⁸⁵ Yet the cases are not always easy to explain in relation to each other, except in light of the fact that the Court’s point of view has altered from time to time.¹⁹⁸⁶

“Contracts” Include Public Contracts and Corporate Charters.—The question, which was settled very early, was whether the clause was intended to be applied solely in protection of private contracts or in the protection also of public grants, or, more broadly, in protection of public contracts, in short, those to which a State is a party.¹⁹⁸⁷ Support for the affirmative answer accorded this question could be derived from the following sources. For one thing, the clause departed from the comparable provision in the Northwest Ordinance (1787) in two respects: first, in the presence of the word “obligation;” secondly, in the absence of the word “private.” There is good reason for believing that James Wilson may have been responsible for both alterations, inasmuch as two years earlier he had denounced a current proposal to repeal the Bank of North America’s Pennsylvania charter in the following words: “If the act for incorporating the subscribers to the Bank of North America shall be repealed in this manner, every precedent will be established for repealing, in the same manner, every other legislative charter in Pennsylvania. A pretence, as specious as any that can be alleged on this occasion, will never be wanting on any future occasion. Those acts of the state, which have hitherto been considered as the sure anchors of privilege and of property, will become the sport of every varying gust of politicks, and will float wildly backwards and forwards on the irregular and impetuous tides of party and faction.”¹⁹⁸⁸

Furthermore, in its first important constitutional case, that of Chisholm v. Georgia,¹⁹⁸⁹ the Court ruled that its original jurisdiction extended to an action in assumpsit brought by a citizen of South Carolina against the State of Georgia. This construction of the federal judicial power was, to be sure, promptly repealed by the Eleventh Amendment, but without affecting the implication that the contracts protected by the Constitution included public contracts.

One important source of this diversity of opinion is to be found in that ever welling spring of constitutional doctrine in early days, the prevalence of natural law notions and the resulting vague significance of the term “law.” In Sturges v. Crowninshield, Marshall defined the obligation of contracts as “the law which binds the parties to perform their undertaking.” Whence, however, comes this law? If it comes from the State alone, which Marshall was later to deny even as to private contracts,¹⁹⁹⁰ then it is hardly possible to hold that the States’ own contracts are covered by the clause, which manifestly does not create an obligation for contracts but only protects such obligation as already exists. But, if, on the other hand, the law furnishing the obligation of contracts comprises Natural Law and kindred principles, as well as law which springs from state authority, then, inasmuch as the State itself is presumably bound by such principles, the State’s own obligations, so far as harmonious with them, are covered by the clause.

Fletcher v. Peck¹⁹⁹¹ has the double claim to fame that it was the first case in which the Supreme Court held a state enactment to be in conflict with the Constitution, and also the first case to hold that the contracts clause protected public grants. By an act passed on January 7, 1795, the Georgia Legislature directed the sale to four land companies of public lands comprising most of what are now the States of Alabama and Mississippi. As soon became known, the passage of the measure had been secured by open and wholesale bribery. So when a new legislature took over in the winter of 1795–1796, almost its first act was to revoke the sale made the previous year.

Meantime, however, the land companies had disposed of several millions of acres of their holdings to speculators and prospective settlers, and following the rescinding act some of these took counsel with Alexander Hamilton as to their rights. In an opinion which was undoubtedly known to the Court when it decided Fletcher v. Peck, Hamilton characterized the repeal as contravening “the first principles of natural justice and social policy,” especially so far as it was made “to the prejudice . . . of third persons . . . innocent of the alleged fraud or corruption; . . . moreover,” he added, “the Constitution of the United States, article first, section tenth, declares that no State shall pass a law impairing the obligations of contract. This must be equivalent to saying no State shall pass a law revoking, invalidating, or altering a contract. Every grant from one to another, whether the grantor be a State or an individual, is virtually a contract that the grantee shall hold and enjoy the thing granted against the grantor, and his representatives. It, therefore, appears to me that taking the terms of the Constitution in their large sense, and giving them effect according to the general spirit and policy of the provisions, the revocation of the grant by the act of the legislature of Georgia may justly be considered as contrary to the Constitution of the United States, and, therefore null. And that the courts of the United States, in cases within their jurisdiction, will be likely to pronounce it so.”¹⁹⁹² In the debate to which the “Yazoo Land Frauds,” as they were contemporaneously known, gave rise in Congress, Hamilton’s views were quoted frequently.

So far as it invoked the obligation of contracts clause, Marshall’s opinion in Fletcher v. Peck performed two creative acts. He recognized that an obligatory contract was one still to be performed—in other words, was an executory contract, also that a grant of land was an executed contract—a conveyance. But, he asserted, every grant is attended by “an implied contract” on the part of the grantor not to claim again the thing granted. Thus, grants are brought within the category of contracts having continuing obligation and so within Article I, § 10. But the question still remained of the nature of this obligation. Marshall’s answer to this can only be inferred from his statement at the end of his opinion. The State of Georgia, he says, “was restrained” from the passing of the rescinding act “either by general principles which are common to our free institutions, or by particular provisions of the Constitution of the United States.”¹⁹⁹³

The protection thus thrown about land grants was presently extended, in the case of New Jersey v. Wilson,¹⁹⁹⁴ to a grant of immunity from taxation that the State of New Jersey had accorded certain Indian lands, and several years after that, in the Dartmouth College case,¹⁹⁹⁵ to the charter privileges of an eleemosy-nary corporation.

In City of El Paso v. Simmons,¹⁹⁹⁶ the Court held, over a vigorous dissent by Justice Black, that Texas had not violated this clause when it amended its laws governing the sale of public lands so as to restrict the previously unlimited right of a delinquent to reinstate himself upon forfeited land by a single payment of all past interest due.

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Last modified: June 9, 2014