U.S. Constitution: The Constitution and Contract Law
Article I, section 10, of the Constitution prohibits states from passing any law impairing the obligation of contracts. This clause is vitally important for financial and business activity. Without enforceable contracts, almost any transaction beyond simple barter requires some way to allow transactions over time. Transactions often must take place over months or years, as is true, for example, in buying expensive properties, such as a home or an automobile.
Article III provides for a single Supreme Court and such other federal courts as Congress may decide to create, generating a national court system to resolve—among other things—disputes between citizens in different states. The Supreme Court also interprets the language in the Constitution and arbitrates disputes between the federal government and the various states. For example, early in U.S. history, the Supreme Court in Fletcher v. Peck (1810) voided a Georgia state law in which the Georgia legislature attempted to nullify a contract a previous legislature had made. Virtually every legislator in the previous legislature had taken a bribe to give away 35 million acres of state land for 1.5 cents per acre. No matter how corrupt the contract, however, the Court held that contracts were sacrosanct, thereby underscoring how important contracts are to the business life of a nation.
Protecting private property is a major concern of the Constitution that is exemplified by the Fourth Amendment, which prohibits, among other things, unreasonable searches and seizures. Private property is further protected by the Fifth Amendment’s guarantee that it cannot be taken for a public purpose without just compensation. The Fifth Amendment also prohibits the federal government from taking property without due process of law.
About eighty years after the nation’s founding, the Fourteenth Amendment was added to the Constitution, enacting two important provisions that have had a great impact on business and finance. This amendment guarantees that no state can deprive any “persons” of their property without due process of law. The Supreme Court held during the late nineteenth century that a corporation was a legal “person” entitled to Fourteenth Amendment protection, powerfully advancing the power of corporations in the United States. This decision meant that states were limited in the amounts and kinds of regulations they could impose on corporations, and it allowed for a dramatic increase in corporate power well into the twentieth century.
By the middle of the twentieth century, the Supreme Court decided that the Fourteenth Amendment’s “equal protection” clause guaranteed individuals a number of important rights that have served to limit corporate power. This decision demonstrates that the U.S. Constitution can both strengthen and weaken business interests. Despite these and other limits on business and finance, the basic rule of law provided by the Constitution remains the most important underpinning for the stable peaceful environment in which American business and finance operate.
