This section is from the book "The Law Of Contracts", by William Herbert Page. Also available from Amazon: Commercial Contracts: A Practical Guide to Deals, Contracts, Agreements and Promises.
Whether a change of judicial decision, making invalid a contract which under prior decisions was valid, amounts to a law within the meaning of this clause of the statute, is a question which cannot be answered either by a simple affirmative or negative. Since the validity of a law impairing the obligation of a contract is affected by a clause in the Constitution of the United States, the Supreme Court of the United States is the final arbiter as to the validity of such law. Accordingly, the question of the validity of a change of judicial decision, affecting prior contracts, necessarily involves the extent to which federal courts follow the decisions of state courts. It is at this point that a distinction, too often ignored, must be insisted upon. Cases of this sort are divided into two classes. (1) If the case originates in or is removed to an inferior Federal court and is taken from such court to the Supreme Court of the United States on error or appeal, the Supreme Court of the United States will, indeed, in some cases, apply the law of the state in which the cause of action arose,1 but will not necessarily follow the latest decision of such state. Leaving for discussion elsewhere2 the question of what state decision in case of conflict will be followed when the cause of action arises after the later decision, we find that if the action is brought to enforce contract rights which were acquired before the later decision was promulgated, the Supreme Court will follow the rule as laid down by the courts and existing when the contract was entered into.3 The inferior federal courts, before which such cases are heard, follow the decisions of the Supreme Court of the United States as a matter of course, and apply the rule of law as recognized by the state courts when the contract was made.4 So if contract rights are statute, there being no intervening change in the statute, does not present an example of a law impairing the obligation of contracts.8 The distinction indicated in the text is clearly made in Central Land Co. v. Laidley ;9 in which case the court points out that the distinction is an old one. Thus the Supreme Court of Iowa had once held bonds issued by a municipality in aid of a railroad to be valid, but had subsequently overruled its earlier decision and held them invalid. Bonds were issued before the second line of decisions was promulgated. In a case coming before an inferior Federal court and thence taken to the United States Supreme Court, it was held that the earlier line of decisions must be followed, ignoring the later ones,10 while a writ of error to the state supreme court was refused in a case which presented the same question and in which the state supreme court had followed the later line of decisions.11 The supreme court of Texas12 has endeavored to tabulate the decisions of the United States Supreme Court, a summary of which is here given, though the applicability of the cases to the propositions under which they are cited may be questioned in some instances.13 The explanation of this doctrine is found in the relation of judicial decisions to the law. They are not law.
7 Williams v. Bruffy, 96 U. S. 176; White v. Hart, 13 Wall. (U. S.) 646.
8 owings v. Speed, 5 Wheat. (U. S.) 420. '
9 Herman v. Phalen, 14 How. (U. S.) 79; following League v. De Young, 11 How. (U. S.) 185.
10 Southwest Missouri Light Co. v. Joplin. 101 Fed. 23; Mercantile, etc.. Co. v. By., 99 Fed. 812; Iron Mountain By. Co. v. Memphis, 96 Fed. 113; 37 C. C. A. 410; Neill v. Gates. 152 Mo. 585; 54 S. W. 460.
11 See Ch. LXXX.
12 Canada Southern By. v. Geb-hard. 109 U. S. 527.
1 City of Los Angeles v. Water Co., 177 U. S. 558; Houston, etc.,
By. v. Texas, 170 U. S. 243; Bier v. McGehee, 148 U. S. 137; St. Tammany Water Works v. Watei Works, 120 U. S. 64; Fiske v. Police Jury, 116 U. S. 131; New Orleans Gas Co. v. Light Co., 115 U. S. 650; Ede v. Knight, 93 Cal. 159; 28 Pae. 860.
2 Mobile, etc., B. B. v. Tennessee, 153 U. S. 486; Chicago Ins. Co. v. Needles, 113 U. S. 574; Louisiana v. Pilsbury, 105 U. S. 278.
3 Southwest Missouri Light Co. v. Joplin. 101 Fed. 23; Mercantile, etc., Co. v. By., 99 Fed. 812; Iron Moun-tain By. v. Memphis. 96 F(.l. 113; 37 C. C. A. 410: Neill v. Gutes, 152 Mo. 585; 54 S. W. 460.
1 See Sec. 1738 et seq.
2 See Sec. 1740.
3 Los Angeles v. Water Co., 177 U. S. 558; McCullough v. Virginia, 172 U. S. 102; Anderson v. Santa Anna Township, 116 U. S. 356; Louisiana v. Pilsbury, 105 U. S. 278; Douglass v. Pike County, 101 U. S. 677; Oleott v. Supervisors, 16 Wall. (U. S.) 678; Chicago v. Sheldon. 9 Wall. (U. S.) 50; Havemeyer v. Iowa County, 3 Wall. (U. S.) 294; Ohio, etc., Co. v. Debolt. 16
How. (U. S.) 416; Rowan v. Runnels, 5 How. (U. S.) 134.
4 Union Bank v. Oxford, 90 Fed. 7, (The validity of the bonds in ques-tion in this case depended upon the validity of the construction of the state statute under which they were issued. The decision of the Supreme Court of North Carolina as to the validity of the statute, in Carr v. Coke, 116 N. C. 223; 47 Am. St. Rep. 801; 28 L. R. A. 737; 22 S. E. 16, and as to the validity of acquired before the question of law has been (Weided by the state supreme court, the Federal courts will not necessarily follow a decision of the state court rendered thereafter. Thus a building contract was entered into and a sub-contractor's lien for material was taken before the state supreme court had passed upon the question of the validity of the sub-contractor's mechanic's lien law under which such lien was taken. Subsequently the State Supreme Court held such law to be unconstitutional.5 Suit was brought to enforce such lien after such decision was rendered. The United States courts refused to follow the decision of the state court; but in accordance with the weight of authority preferred the view that such statute was constitutional.6
(2) If the case comes to the Supreme Court of the United States on error to the court of a state, a change of judicial opinion alone, there being no change in the written law, is not a law impairing the obligation of contracts within the meaning of this clause.7 Thus a contract and conveyance of realty by a married woman which is valid as the statute concerning conveyances by married women is then construed, but which is invalid under the construction subsequently given to the same the bonds thereunder in Bank v. Commissioners, 116 N. C. 339; 21 S. E. 410, was followed, ignoring subsequent decisions.) Southern Ry. Co. v. Ry., 81 Fed. 595.