US Supreme Court: Contract

The Supreme Court has had little impact on contract law, a fact largely attributable to structures and attitudes within the federal system that seek to preserve the states as separate law‐making authorities (see Federalism). The Court has played a more significant role in other areas of commercial law, such as admiralty and bankruptcy, for which there are constitutional provisions assigning responsibility to the national government. There is no comparable provision for contracts. Thus, with few exceptions, contract law has been viewed as within the purview of the states.

Some parts of the Constitution do, however, relate tangentially to contract law. Here the Court has had a significant impact, but one that affects the structures of government rather than the substance of contract law. For example, because the Constitution and national laws are supreme (Art. VI, sec. 2), the Court is the final arbiter of disputes originating in procurement contracts to which the federal government is a party.

The other two relevant provisions of the Constitution are the Contracts Clause (Art. I, sec. 10, cl. 1) and the Due Process Clauses of the Fifth and Fourteenth Amendments. The Court early applied the Contracts Clause, which prohibits states from interfering with the obligation of contracts, in Fletcher v. Peck (1810) and Dartmouth College v. Woodward (1819). In both cases the Court declared state laws unconstitutional as interferences with the obligation of contracts. In the process, the Court gave such a broad definition to “contract” that for most of the nation's history private individuals have had great freedom to form their own contracts. Only under the pressures of the Great Depression did the Court retreat and allow states to modify contracts, and then only to declare a temporary moratorium on making mortgage payments in Home Building & Loan Association v. Blaisdell (1934).

In Lochner v. New York (1905) and Adkins v. Children's Hospital (1923), the Court also excepted important areas from state intervention when it used the Due Process Clauses to protect “freedom of contract” in striking down regulations of conditions of employment such as wages and hours (see Contract, Freedom of). But beyond ensuring a wide range for individual action in shaping contractual relations, the Court again had little to do with the doctrine of contract law.

The only significant exceptions to the Court's general inefficacy with respect to contract law occurred during the second half of the nineteenth century. The Court's influence on commercial law in general peaked in the half‐century following Swift v. Tyson (1842), a decision that held that federal courts could decide questions of commercial law in accord with general principles, without being restricted to the decisions of the state in which the case arose. Thus, for half a century or so, the Court's search for a uniform federal common law coincided with similar interests in uniformity that originated in the growing commercial economy. In the end, however, the Court proved unable to satisfy the calls for a uniform national law.

Even at the peak of its influence on contract law, the Court tended to hear major issues only occasionally—for the simple reason that the Supreme Court is a court of limited jurisdiction. State courts, by contrast, are courts of general jurisdiction, which can hear and decide any issue (see Judicial Power and Jurisdiction). By the end of the nineteenth century, therefore, a number of organizations began to look elsewhere for uniformity. In light of the contemporaneous view that Congress's powers over commerce were limited, the only path to uniformity was for each state legislature to adopt the same act. Moreover, the Court itself backed away from a federal common law when it reversed Swift in Erie Railroad v. Tompkins (1938). In the years since Erie the Court has regularly declined to hear contract cases, thereby continuing its minimal impact on the substantive law.