D. IMPAIRMENT OF THE OBLIGATION OF CONTRACTS. §§ 555-560. § 555. Police power restricted with reference to existing contracts.-The right springing from the obligation of a lawful contract has received a special protection through the prohibition contained in the federal constitution and reiterated in many state constitutions, of laws impairing the obligation of contracts. The extent to which this clause restricts the operation of the police power has never been precisely formulated. That it does restrict it can easily be shown by a simple illustration: The rate of interest may be generally reduced from seven to six per cent, but existing contractual obligations at the higher rate, however long they may have to run, remain in force until discharged.48 So there can also be no reasonable doubt that while a railroad corporation is liable to have its traffic rates reduced by the legislature in the interest of the public who have occasion to use its facilities, yet if the railroad company has made a contract with a shipper at rates which, according to the tariff standard, are exorbitant, the legislature can afford no relief. Thus it appears that the earning power of capital may or may not be validly impaired, according as it has not or has been fixed by entering into definite contracts. The legislature may operate upon future contracts but not upon those already in existence. This difference is a matter of constitutional policy: a contract is, as a rule, of limited duration, and in course of time the debtor will be discharged from its operation. His hard Illinois of 1903, in giving cities the power to fix rates and charges, adds, "but such rates and charges shall be high enough to produce a revenue sufficient to bear all costs of maintenance and operation and to meet interest charges on all bonds or certificates issued on account of such railways, and to permit the accumulation of a surplus or sinking fund that shall be sufficient to meet all such outstanding bonds or certificates at maturity." No provision is made for dividends on stock; it is apparently assumed that the whole cost or value of the plant will be represented by bonds. 47 Not judgments; see Morley v. Lake Shore & M. S. R. Co., 146 U. S. 162. 48 Hubbard v. Callahan, 42 Conn. 524; Myrick v. Battle, 5 Fla. 345; Sturges v. Crowninshield, 4 Wheat. 122, 207; contra, Justinian's Codex 6, 32: 27; Lasalle, System der erworbenen Rechte, I 230, 233. ship is temporary, and as he has undergone it voluntarily it is deemed better (provided the contract is not immoral or in its inception contrary to public policy) that he should suffer, than that the faith in the security of promises should be shaken. § 556. Impairment forbidden only if in interest of party obligated.49-It seems, however, that the constitutional prohibition applies only to laws impairing the obligation of the contract for the benefit of the party obligated. It is not an objection to an otherwise valid police regulation that it makes the performance of a contract valid in its inception impossible. Thus the power of the state to regulate railroad rates is not defeated by the fact that the railroad company has made a contract with another railroad company that it will not charge less than the rate fixed by an existing statute,50 or that the railroad company has incurred indebtedness upon the basis of an earning capacity calculated on higher rates,51 and the mere fact that a high rate of interest on bonds cannot be paid under a proposed tariff, would not make that tariff unreasonable. The regulation by the legislature of the pressure of natural gas in pipes was held valid although it affected existing contracts, and it has been held that the operation of an ordinance establishing fire limits is not affected by an existing contract. to erect a frame house on premises covered by the ordinance, although lumber has been bought on the faith of the contract. So the validity of an act requiring a railroad company to elevate or depress its tracks would not be affected by the existence of contracts with adjoining owners for track connections.3 Contrary to this doctrine, it was formerly held in Missouri and Kentucky that the power of the state to prohibit or revoke 49 See, also, §§ 584-586. 50 Buffalo East Side Street R. Co. v. Buffalo Street R. Co., 111 N. Y. 132, 2 L. R. A. 384. 51 Chicago, B. & Q. R. Co. v. Iowa, 94 U. S. 155; this point was made in New York and New England R. R. Co. v. Bristol, 151 U. S. 556, but not considered by the court. 1 Jamieson V. Indiana Natural Gas & Oil Co., 128 Ind. 555, 12 L. R. 2 Salem v. Manyes, 123 Mass. 372; Knoxville v. Bird, 12 Lea (Tenn.) 121. See, also, New York v. Herdje, 68 App. Div. 370, 74 N. Y. Suppl. 104. 3 See Branson v. Philadelphia, 47 Pa. St. 329. lottery grants could not be so exercised as to defeat rights of purchasers or lenders upon the faith of the franchise, especially when the sale of the franchise had been expressly authorised; but the United States Supreme Court has held that the abrogation of monopolies is valid notwithstanding such contracts.5 If, indeed, the grantees of a lottery franchise can be deprived of rights for which they have paid, it follows logically that those claiming under them must be equally unprotected. 6 Undoubtedly in all these cases the obligation of a contract is impaired, but it is not impaired in order to confer a benefit upon the obligor or debtor. The principle is that a person cannot, by entering into a contract, impair the power which the state must have for the protection of peace, safety, health and morals. If this were not so, an owner of property who apprehended that a police regulation would be passed affecting his property, would have it in his power to nullify its effect in advance, by making contracts inconsistent with its enforcement. That the relief from the contractual obligation individually benefits the party previously bound by it, is no objec tion to the validity of the statute, provided such relief is not the primary object of the law. For this purpose laws which impair existing contracts as being prejudicial to public safety and morals should be treated as not enacted for the primary benefit of the party bound. Upon this theory a law limiting hours of labor in the interest of safety or health may apply to existing contracts, although it is within the legislative power to exempt existing contracts from its operation. Strong considerations of public policy require the exemption of existing contracts, and this policy is raised into a principle of constitutional law when the object of the statute is relief from pecuniary or economic burdens. § 557. Legislation for the relief of debtors.-The federal constitution renders impossible many of the devices formerly 4 State v. Hawthorn, 9 Mo. 389, 1845; State v. Miller, 50 Mo. 129, 1872; Gregory's Executrix v. Trustees of Shelby College, 2 Met. (Ky.) 589, 1859. 5 Douglas v. Kentucky, 168 U. S. 6 This was pointed out in People v. Hawley, 3 Mich. 330. 7 Re Ten Hour Law for Street Railroad Corporations (R. I.), 54 Atl. 602. resorted to by the sovereign power to relieve debtors from existing obligations, such as the annulment of existing debts, the retroactive reduction of the rate of interest on loans,8 all stay and respite laws, and the retroactive operation of homestead and exemption laws.10 Nor is it within the power of the states to enact insolvent laws operating on debts previously incurred.11 But in the absence of a specific prohibition the relief of debtors by bankruptcy legislation is commonly regarded as a legitimate exercise of sovereign power, and the retroactive operation of the federal bankruptcy acts has not been questioned.12 § 558. Retrospective legal tender laws.-Another device of relieving debtors consists in legislation which allows existing obligations to be discharged in a currency inferior to that which was legal tender at the time the obligations were incurred. It has been maintained by the United States. Supreme Court in the Legal Tender Cases13 that such legislation does not impair the obligation of contracts, since parties are supposed to contract with reference to the continuing power of Congress to determine what shall be money. But the very idea of a law impairing the obligation of contracts presupposes that parties do not contract subject to the expectation of any and every change in governmental regulations. "If one law enters into all subsequent contracts, so does every other law which relates to the subject. A legislative act, then, declaring that all contracts should be subject to legislative control, and should be discharged as the legislature might prescribe, would become a component part of every contract and be one of its conditions. Thus, one of the most important 8 See § 555, supra. 9 Barnes v. Barnes, 8 Jones L. (N. C.) 366, 1861; Billmeyer v. Evans, 40 Pa. St. 321, 1861, as to lettres de repit and moratoria see Rescher I 286; Just. Cod. 1, 19: 2. 10 Gunn v. Barry, 15 Wall. 610. For another illustration of devices to aid debtors see the relief legislation of Kentucky of 1818, the judicial condemnation of which sought to be nullified by legislative action; Blair v. Williams, 4 Littell was 34; Lapsley v. Brashear, 4 Littell 47. 11 Sturges v. Crowninshield, 4 Wh. 122, 1819. 12 The Constitution of the Confederate States (VIII, 4), however, provided, in giving power to establish uniform laws on the subject of bankruptcies: "but no law of Congres shall discharge any debt contracted before the passage of the same." 13 12 Wall. 457. features in the constitution of the United States, one which the state of the times most urgently required, one on which the good and the wise reposed confidently for securing the prosperity and harmony of our citizens, would lie prostrate, and be construed into an inanimate, inoperative, unmeaning clause. ''14 It is a technical and specious argument to say that contracts for the payment of money are engagements to pay with lawful money of the United States, that Congress is empowered to regulate that money, and that therefore every change in money is within the contemplation of the parties. The controlling factor is that a retrospective legal tender act directly alters the substance of contractual obligations, giving to the same words a different content. The dissenting judges in Hepburn v. Griswold,15 whose opinions later on prevailed in the Legal Tender Cases, frankly recognised this, Justice Miller saying: "Undoubtedly it is a law impairing the obligation of contracts made before its passage. But while the Constitution forbids the States to pass such laws it does not forbid Congress." It is therefore impossible to acIcede to the statement made in the Legal Tender Cases that "there is no well founded distinction to be made between the constitutional validity of an act of Congress declaring Treasury notes a legal tender for the payment of debts contracted after its passage, and that of an act making them a legal tender for the discharge of all debts, as well those incurred before as those made after its enactment. 9716 § 559. Contracts to pay in specific kind of money. In arguing that retrospective legal tender acts did not impair the obligation of contracts, Justice Strong was careful to add: "We speak now of contracts to pay money generally, not contracts to pay some specifically defined species of money.' Contracts of the latter kind have been held to be enforceable according to their terms, and not intended to be covered by the legal tender acts.17 Should a legal tender act undertake to operate upon contracts of that kind existing at the time of its 14 Marshall, Ch. J., in Ogden v. Saunders, 12 Wh. 213, 339. 15 8 Wall. 603. 16 12 Wall. 457, 530. Trebilcock v. Wilson, 12 Wall. 687. 17 Bronson v. Rodes, 7 Wall. 229; Legal Tender, p. 156. |