The Contracts Clause is not the most commonly tested topic within Constitutional Law on the bar exam. But it's shown up on both the MBE and on essays, so it's a good idea to go into the test with a framework for addressing it.
The Contracts Clause, in part, provides that no state shall pass any laws impairing the obligation of contracts. In determining whether there has been such an impairment, a few questions are addressed. First, whether there is a contractual relationship at issue. If so, next determine whether a state law substantially impairs that contractual relationship. If it does, determine the state's interest in doing so.
Likely, the the part of the analysis that will require the most attention is determining whether the impairment is substantial. And in making that determination, it's helpful to understand what type of state law will not substantially impair a contract.
A state law does not substantially impair a contract if it merely tracks the contracting parties' likely intent or expectations or if it allows for either party to easily override the statutory provision. In such instances, although there might still be some degree of impairment, the impairment is not deemed substantial. Likewise, a state statute will not substantially impair a private contract if the statute relates to an area already heavily regulated by the state. The parties could have anticipated state involvement and so the impairment will not be deemed substantial.
In contrast, a state statute does substantially impair a private contract if the statute negates a material term of the contract or negates a term of the contract that induced a party to enter into the contract.
Once you've determined that a state statute substantially impairs a private contract, the next element to consider is whether, notwithstanding that impairment, the state statute is an appropriate and reasonable measure to serve a significant and legitimate state interest. Yet another constitutional law test to remember, and it seems like some sort of hybrid of other tests you may have already learned.
The purpose of requiring that a state have a significant and legitimate interest is to ensure that the statute is intended to further that interest rather than to further the interest of one of the privately contracting parties. Because a state statute intended only to favor a privately contracting party will be deemed to violate the Contracts Clause.
