The Dual Standard of Review in Contracts Clause Jurisprudence: A Partial Defense

Abstract

It seems obvious that there is something suspicious about a state entering into a contract only to later use its legislative power to escape from fulfilling that obligation. When the government enters into contracts, it binds itself according to the dictates of private law but, nevertheless, remains the sovereign. How can a space be preserved wherein a legislature can exercise its authority for the common good while simultaneously being bound to abide by agreements it made at an earlier time? This is the dilemma posed in a narrow band of Contracts Clause jurisprudence that culminates in United States Trust Co. of New York v. New Jersey. In that case, the Supreme Court attempted to solve the dilemma by reviewing a legislature’s repudiations of its own contracts with heightened scrutiny. Legislative repudiations of private agreements, though, would be accorded substantially more deference. This “dual standard of review” was justified by a reference to the “State’s self-interest” in altering or repudiating its own obligations. This all seems like good common sense, and since the promulgation of the doctrine, it has been continuously reaffirmed and supported by the Court. Despite this judicial consensus, the doctrine has been the subject of fierce criticism from the legal academy (with very few defenders). This Note will contribute to the debate about this doctrine and will conclude that it is entirely defensible. In the contemporary era, government contracting has become more prevalent than ever, and the government is again involved in alleviating the economy through various financial involvements. A sympathetic reassessment of the dual standard is appropriate and will hopefully inform the inevitable litigation following this recent recession. Part I will discuss the historical and doctrinal background of the Contracts Clause and the dual standard of review. This will set the stage for a presentation of the major academic critiques of the doctrine in Part II. These include critiques from the standpoints of trusteeship and public choice theory, as well as the criticism that the dual standard is underinclusive. Part III will assess the strength of these objections and reveal important weaknesses of those objections. Then, Part IV will present a substantive defense of the doctrine, suggest- ing that the proper interpretation of United States Trust, given both the text of the opinion and the doctrinal context in which the dual standard is expected to be applied, is that there is an implied limitation to the theory: it is meant to be employed only in cases of “purely financial” public contracts. Part V makes a case for why this implied limitation makes good sense, in that there are features peculiar to the financial context that make heightened scrutiny especially appropriate.