Law School Case Brief
Energy Reserves Grp. v. Kan. Power & Light Co. - 459 U.S. 400, 103 S. Ct. 697 (1983)
Although the language of the Contract Clause is facially absolute, its prohibition must be accommodated to the inherent police power of the state to safeguard the vital interests of its people
A public utility entered into a contract with an oil company to purchase gas at a set price. There were two price escalators in the contract. First, if a government fixed a price higher than that in the contract, the price would rise to that level. Also, the oil company could determine a new price every two years based upon market fluctuations. Then, Congress passed the Natural Gas Policy Act of 1978 (Act), 15 U.S.C.S. § 3301 et seq., which allowed for computation of prices at the lower of those set in existing contracts or at a price fixed by the Act. Kansas then adopted the Kansas Natural Gas Protection Act (Kansas Act), Kan. Stat. Ann. § 55-1401 et seq., which permitted increases under escalator clauses. The oil company sought to terminate the contracts, but the utility refused. Thus, the oil company filed suit seeking declaratory relief. The oil company complained that the Kansas Act violated the Contract Clause of the U.S. Constitution.
Did the Kansas Act violate the Contract Clause of the U.S. Constitution?
The Court noted that the Contract Clause's prohibition of any state law impairing the obligation of contracts must be accommodated to the State's inherent police power to safeguard the vital interests of its people. The threshold inquiry is "whether the state law has, in fact, operated as a substantial impairment of a contractual relationship." If a substantial impairment is found, the State, in justification, must have a significant and legitimate public purpose behind the regulation. Once such a purpose has been identified, the adjustment of the contracting parties' rights and responsibilities must be based upon reasonable conditions and must be of a character appropriate to the public purpose justifying the legislation's adoption. In this case, the Court held that the Kansas Act has not impaired substantially the oil company’s contractual rights. The parties were operating in a heavily regulated industry, and the statement of intent in their contracts made clear that the escalator clauses were designed to guarantee price increases consistent with anticipated regulated increases in the value of appellant's gas, not that appellant expected to receive deregulated prices. To the extent, if any, the Kansas Act impaired oil company’s contractual interests, it rested on significant state interests in protecting consumers from the escalation of natural gas prices.
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