The formal Contract Clause is Article I, Section 10, Clause 1, of the United States Constitution. The Contract Clause holds that states are not allowed to enact a law that retroactively impairs an individual or legal entity from forming a legally valid contract. The Contract Clause prevents states from retroactively impairing contract rights, although it only applies to State legislation, not to court decisions.
The Contract Clause was added due to concerns that states would grant “private relief” laws, laws that would invalidate certain elements of a contract in order to allow particular persons to relieve their obligations to repay a debt. The same concern that caused the Founding Fathers to include the Contract Clause in the Constitution also caused the founders to make Bankruptcy law within the purview of the Federal Government.
In addition to referring to a part of the Constitution, a contract clause can also refer to a specific phrase in a contract, which is also called a contract clause. Each contract clause includes one of the essential elements of a contract. The elements of a contract can include offer, acceptance, consideration, capacity to contract, intention to contract, and a contract being formed for a legal purpose.