Dartmouth College v. Woodward
In 1769 the British Crown granted to the trustees of Dartmouth College in the province of New Hampshire, in New England, America, a charter, for "the establishment of a college for the education of Indian and English youth in the province."
After the American Revolution, the legislature of New Hampshire passed a series of three acts starting in 1816 to reorganize and convert Dartmouth College from its original intent to an institution which could be controlled by the government. The trustees of the college sued the governor of the state, William Woodward, for the return of property (such as records and the official seal) belonging to the trustees, which had been seized.
The New Hampshire State Court issued a conditional verdict, finding for the defendant, Woodward, if the acts of the legislature to reorganize the college were valid and not contrary to an interpretation of the Constitution of the United States. Otherwise, the State Court would find in favor of the plaintiff trustees. The court requested a ruling by the U.S. Supreme Court to clarify this issue.
Dartmouth College v. Woodward, centered on the question of whether the state of New Hampshire could transform a private corporation, Dartmouth College, into a state university. When the United States Supreme Court presided over this matter, Chief Justice Marshall concluded that the college's original charter, granted to its trustees by George III in 1769, was a contract. The opinion of the court was delivered by John Marshall, the Chief Justice: "It requires no argument to prove that the circumstances of this case constitute a contract. An application is made to the British Crown for a charter to create a college. The application states that large contributions of property will be conferred on the college on the condition that the charter is granted. This transaction carries every ingredient of a complete and legitimate contract."
The next question Marshall asked was whether the United States Constitution protected this contract. Marshall wrote, " If the granting of the charter by the British Crown was in any way, politically or publicly connected to government then the legislature of New Hampshire may act according to its own judgment in the administration of the college, unrestrained by any limitation imposed by the Constitution of the United States. But Dartmouth College is a charity school, not a civil institution participating in the administration of government. Its trustees were originally named by the founders, and invested with the power of perpetuating themselves; the trustees are not public officers The Constitution is concerned and extends its protection to contracts, where the parties have a vested beneficial interest It, then, is a contract within the letter of the Constitution, and also, within the spirit of the Constitution. The opinion of the court, after serious deliberation, is that this is a contract, the obligation of which cannot be impaired without violating the Constitution of the United States."
This Dartmouth v. Woodward case is considered a landmark United States Supreme Court case because it called for an interpretation of the "obligation clause" of the U.S. Constitution, namely, Article 1, Section 10, which states that "no state shall pass any law impairing the obligation of contracts." It was interpreted by the Supreme Court that since the Constitution specifically forbade states to interfere with contracts, New Hampshire's effort to turn Dartmouth into a state university was unconstitutional. Chief Justice Marshall also set forth the view that the federal and state governments must honor contracts of previous governments, even if the previous governments are no longer in power.
This case further bolstered the strength of Marshall's previous ruling in Fletcher v. Peck which set forth that contracts could not be impaired by state rulings. The precedent established now extended to corporate charters. Charters or acts of incorporation provided their beneficiaries with various legal privileges and were sought by businesses as well as by colleges. As a result of this court case, Marshall declared also that once a state chartered a business (or college), it surrendered both its power to alter the charter and, in large measure, its authority to regulate the beneficiary.
Since the 1819 decision, this case established a precedent that helped resolve several future conflicts; courts have ever since emphatically refused to question the reasoning or to reconsider the conclusion of this interpretation. Although the Dartmouth College Case was notorious as a strong constitutional check on state legislation, the "Contract Clause" was not as widely used after the adoption of the Fourteenth Amendment and the development of the "Due Process Clause" of the Amendment. However, the Contract Clause still remains an important part of the Constitution and its basic meanings are reiterated by several of the U.S. Supreme Court's more current decisions.
Another result of this ruling was that since business corporations were freed from state interference, investors were more willing to support such enterprises. Thus, the whole field of business was encouraged to expand, with far-reaching effects on the American economy. Half a century later, Justice Miller remarked that "it may be doubted whether any decision ever delivered by any court has bad such a pervading operation and influence in controlling legislation as this."