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CHAPTER 4

The Contracts Clause

§4.1 INTRODUCTION AND OVERVIEW

The Contracts Clause limits the power of a state to alter the legal obligations created by preexisting contractual relationships. Specifically, Article I, §10, of the Constitution provides, “No State shall … pass any … Law impairing the Obligation of Contracts.” The apparent absolute proscription, however, has been tempered to accommodate the “inherent police power of the State ‘to safeguard the vital interests of its people.’ ” Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 410 (1983). In other words, the Contracts Clause is subject to the reserved powers of the states to protect the health, safety, and welfare of their citizens. Thus, not all state laws that alter contractual obligations are void under the Contracts Clause. In general, the test is one of reasonableness, in which a court must examine the expectations of the contracting parties, the severity of the impairment, and the public interest at stake.

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