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Constitutional Corner - The Right of Contract

March 20, 2017


I don’t think many people deny a natural right of contract, except perhaps those who reject the concept of natural rights in its entirety in favor of positive rights, i.e., all rights being a creation of government, not “Nature and Nature’s God.” I feel sorry for such people, their rights are completely alienable: here with one act of the legislature, possibly gone with the next.

Contracts, whether they arise from natural law or civil law, have been around for a long time. One nearly 4,000 year old Babylonian clay tablet[1] was found to contain a letter detailing a contract gone bad; others recorded the contracts themselves.

The Bible describes numerous contracts: In Genesis 9:8, we find God establishing a contract/covenant with Noah in which He (God) agrees to never again destroy life on earth by a flood. In Genesis 31:44-54, Jacob and Laban establish a covenant, a contract between them.

One Biblical example that shows the importance of the terms of a contract occurs in Matthew 20:1–16, often called the Parable of the Workers in the Vineyard. Here Jesus relates a story of a rich businessman who needs workers for his fields. He decides to pay various laborers he contracts with exactly the same wage regardless of how many hours they ended up working. On its face, the businessman’s actions seem patently unfair; each man was paid a “penny” even though some were hired early in the morning and some not until the “eleventh hour,” or 5pm. Their hourly rates, calculated in the standard fashion, were quite different. But the businessman answers a complaint of unfairness with: “Friend, I do thee no wrong: didst not thou agree with me for a penny? Take that thine is, and go thy way: I will give unto this last, even as unto thee. Is it not lawful for me to do what I will with mine own?”[2] (Emphasis added)

For me, that, in a nutshell, describes the right of contract: the freedom to do what we will with whatever property is our own; the freedom to negotiate terms of exchange agreeable to both parties and the confidence to proceed with the understanding that the terms should be met.

Jean-JacquesBurlamaqui, writing in the early 1700s said:  “Natural liberty is the right, which nature gives to all mankind, of disposing of their persons and property, after the manner they judge most convenient to their happiness….” John Locke and other political philosophers of the time expressed similar views. Right of Contract was rooted in natural law.

Edmund S. Morgan, writing in “The Challenge of the American Revolution,”[3] said: “for eighteenth-century Americans, property and liberty were one and inseparable, because property was the only foundation yet conceived for security of life and liberty: without security for his property, it was thought, no man could live or be free except at the mercy of another.” Contracts are a way to ensure the safety or security of property during an economic transaction.
 
But contracts were not very secure during the Articles of Confederation period. As you might expect, the war-disrupted American economy placed both debtors and creditors in peril. In some states, courts began siding with creditors, legislatures with debtors; occasionally the reverse. To bring a sense of stability and predictability to the economy, security of contract was needed.

While the Constitution was being drafted in Philadelphia, in New York, Congress passed the Northwest Ordinance of 1787, which read in part:

“And, in the just preservation of rights and property, it is understood and declared, that no law ought ever to be made, or have force in the said [Northwest] territory, that shall, in any manner whatever, interfere with or affect private contracts or engagements, bona fide, and without fraud, previously formed.”[4]

No doubt informed that this clause had been included in the Ordinance, or perhaps operating in a mind-meld, the framers of the Constitution proposed Article 1, Section 10, which reads:

 “No State shall … pass any Law impairing the Obligation of Contracts.” 

Notice that this amounts to a restriction of only state power, not national power. 

“The Contracts Clause did not prevent judges from relieving debtors from fraud or other creditor overreaching.  Nor did it prevent courts from applying the particular remedy fairest to all concerned. And debtors could still declare bankruptcy if they chose. The Clause was designed only to prevent demagogic politicians from meddling, ad hoc, with honest bargains.”[5]

Things began to change in the late 1800s as “legal positivism” (aka “legal realism”) began making its way into American law schools, thanks to Harvard Law School Dean Christopher Columbus Langdell. “With the rise of legal realism and sociological jurisprudence, the old jurisprudence of natural law and natural rights, which had informed America’s founding generation and the original principle of liberty and property rights they had safeguarded in the Constitution had become obsolete.[6] [Emphasis added by editor, P. Hayden]

Natural law had been dealt a mortal blow, but it was not yet dead. In Allgeyer v. Louisiana(1897), the Court decided that the Due Process clause of the Fourteenth Amendment protected the natural right of contract. The Court also stated, however, that the right was not absolute; it was subject to the police power of the states.

Associate Justice Rufus Peckham proclaimed: “[T]he right of the citizen to be free in the enjoyment of all his faculties; to be free to use them in all lawful ways; to live and work where he will; to earn his livelihood or avocation; and for that purpose to enter into all contracts which may be proper necessary and essential to his carrying out to a successful conclusion the purposes above mentioned.”[7]
 
Enforcement of the Obligation of Contracts clause reached its apogee in the 1905 case of Lochner v. New York, one of the most controversial cases in Supreme Court history and the only case name to be turned into a verb: “to Lochnerize.”[8]

When an employee of Joseph Lochner, owner of Lochner's Home Bakery in Utica, New York, asked to work more than the 60 hours in a week that New York State law allowed, Lochner agreed.  Lochner was sued by the state and fined. A second offense resulted in a larger fine, and Lochner’s appeal to the Supreme Court.

In the opinion, the 5-4 majority found that New York had engaged in: "unreasonable, unnecessary and arbitrary interference with the right and liberty of the individual to contract" by passing a maximum labor hours law.

The Lochner “era,” as it came to be called, would last another 29 years; in Home Building and Loan Assoc v. Blaisdell (1934), Minnesota was allowed to impose a moratorium on the fulfillment of mortgages. The Supreme Court upheld the Minnesota statute, reasoning that the emergency conditions created by the Great Depression "may justify the exercise of [the State's] continuing and dominant protective power notwithstanding interference with contracts."

“The Blaisdell opinion," a long and confused production by Chief Justice Charles Evans Hughes, did what “progressive” justices have so often done: It replaced clear constitutional language with judge-made and judge-administered “balancing tests.”[9]

Three years later, in West Coast Hotel v. Parrish(1937), the Court upheld the constitutionality of minimum wage legislation enacted by Washington State. 

“By the end of World War II, the justices on what some scholars call the ‘Roosevelt Court’ had regularly come to ignore the clear language of certain clauses of the Constitution – among them the Tenth Amendment and the due process clauses of the Fifth and Fourteenth Amendments insofar as they protected economic liberty and property rights – and, in effect, had read them out of [the] document.”[10]

All this in fine and dandy: you have a right to make a contract and (sometimes) you can expect that government will help protect the terms of that contract; but what about a right to not establish a contract? Every business transaction is a type of contract; as a businessman, do you have the right to not engage in business under certain circumstances?  Since there is no explicit mention of a right of contract in the Constitution (only that contracts once established should not be impaired), this answer remains elusive.

One of James Madison’s concerns over a Bill of Rights was that “by enumerating particular exceptions to the grant of power” (i.e. in a “Bill of Rights”), “it would disparage those rights which were not placed in that enumeration; and it might follow by implication, that those rights which were not singled out, were intended to be assigned into the hands of the General Government, and were consequently insecure.” Madison guarded against this by drafting what became the Ninth Amendment:

“The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people.”

So a right of contract is presumably one of those “retained by the people.” But who gets to identify these rights not specifically enumerated, and define their limits: The people, whose document the Constitution is, or the unelected judges of the courts?  In Griswold v. Connecticut the court discovered a right to privacy lurking in “emanations from penumbras.”  In Lochner v. New York, the court was roundly criticized for declaring that a right to contract was “lurking” (not their words) in the 14thAmendment. Is there a difference?

In Allgeyer, Lochner, and other decisions the Court affirmed that a right of contract exists, even if it is not sacrosanct. What then? What are the limits of this right; are there reasonable restrictions governments can impose?

In NIFB v. Sebelius (2012) we learned that the national government cannot force you to enter into a contract to purchase medical insurance under authority of the Commerce Clause (but that’s OK, the Court determined that the government can tax for any reason, including our choosing not to enter into a medical insurance contract).

As we know, there are all sorts of conditions imposed by the government on certain formal contracts, from mandatory “cooling-off” periods, to specific language that must be used in written contracts. There is even a bureau, the Bureau of Consumer Protection within the Federal Trade Commission, charged with protecting consumers from fraudulent contract actions.

But what of informal contracts, verbal contracts, simple commercial transactions; can the government impose conditions on these as well? 
The bottom line: Can government force a businessman into commercial transactions (a contract) that violates their conscience?  Do you have the right as a businessman to not engage in commerce with a particular customer?

We don’t blink an eye when we encounter a “No Shirt, No Shoes, No Service” sign, do we? Certainly, there are some circumstances where service can be denied, where a businessman can discriminate, not because of the person, per se, but because of their dress or behavior.

Title II of the Civil Rights Act of 1964 outlawed discrimination based on “race, color, religion or national origin” in hotels, motels, restaurants, theaters, and all other public accommodations engaged in interstate commerce (it exempted private clubs without defining the term "private"). But what constitutes interstate commerce? Based on previous court decisions, if a customer visiting from out of state purchases something in your store, it is likely you’ve just engaged in interstate commerce. Note that Title II does not prohibit discrimination based on sexual orientation. Some state anti-discrimination laws, however, do.

This brings us to the Arlene's Flowers lawsuit.

Florist Baronelle Stutzman declined to sell flower arrangements intended for a homosexual wedding. She was sued by the offended customer under Washington’s anti-discrimination statute, which includes “sexual orientation” as a protected class. She was found guilty of discrimination and fined by the Washington Human Rights Commission, a judgment she appealed to the Washington State Supreme Court – and lost. She has announced she will appeal to the Supreme Court.

In my opinion (and that of others) Stutzman did not discriminate against homosexuals as homosexuals, she had been selling other flower arrangements to homosexuals for years, apparently to even these two particular homosexuals. Yet she refrained from entering into a commercial contract with this customer because the intended use of the flowers, celebrating a type of “marriage” she objected to, was an activity to which she could not lend her support.

Would we force a printer to produce a poster with an offensive message, a black carpenter to build wooden crosses that the KKK intends to burn, or force a Muslim butcher to sell pork? No, we would allow these businessmen to allow their right of conscience to guide their right of contract.

I don’t see any way to reconcile the two opposing forces in this Constitutional conflict and given the political climate and division in the country right now, no alternative but the courts.

I’ll leave you with these words, first, of the businessman in Matthew 20: “Is it not lawful for me to do what I will with mine own?”  or as Locke would say: “The Labour of my Body, and the Work of my Hands, we may say, are properly mine.”  Government should be about the business of protecting our property, and its asssociated Right of Contract.

“Constitutional Corner” is a project of the Constitution Leadership Initiative, Inc.


[2]Matthew 20:13-16, King James Version (KJV)
[3]Edmund S. Morgan,  “The Challenge of the American Revolution, New York, W. W. Norton, Company, 1976
[6]Liberty of Contract, p.105.
[7]Justice Peckham in Allgeyer v. Louisana, quoted in David Mayer, Liberty of Contract, p. 117
[8]The term has come to mean a method of legal reasoning where a court substitutes its policy judgment for a legislature in overturning legislation –think Obergefell v. Hodges, Griswold v. Connecticut, etc.
[9]Ibid.
[10]David Mayer, Liberty of Contract, p.109

Copyright ©2017

Gary Porter is Executive Director of the Constitution Leadership Initiative, Inc., a project to inform Americans about the Founder’s view of their Constitution.  In addition to being a regular contributor to CT, he writes regularly for the Fairfax Free Citizen of Fairfax Virginia. Mr. Porter also teaches at various locations around Virginia.
Visit Gary Porter's website at http://constitutionleadership.org/

 


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