Constitutional Clauses and Business Law

Full Faith and Credit Clause

The full faith and credit clause states that businesses are entitled to the protection of their legal rights from state to state. If a business has legal rights in one jurisdiction, a system in which the legal authority of a court of law holds power, then it has legal rights in other jurisdictions as well.

Article 4 of the Constitution, known as the full faith and credit clause, describes the relationships of the states to one another and to the federal government. Section 1 of Article 4 states that "Full faith and credit shall be given in each state to the public acts, records, and judicial proceedings of every other state. And the Congress may by general laws prescribe the manner in which such acts, records, and proceedings shall be proved and the effect thereof." This means that a business that has legal rights in one jurisdiction, a system in which the legal authority of a court of law holds power, then it has these rights in other jurisdictions as well.

This provision of the Constitution is essential to the ability of a company to do business outside the state where it was created. However, Congress and the courts have paid little attention to this provision.

The recognition of the laws of one state in another state has not presented many issues under this clause. Essentially, a state must recognize the laws of another state under which some action has been taken. An exception to the clause allows a state to refuse to recognize a law from another state if that law violates the public policy of the state being asked to recognize the law.

In an early case, Clark v. Graham (1821), the Supreme Court said that a judgment rendered by a court in one state is conclusive of the dispute in that case in every other state. The decision had at least two effects with respect to the full faith and credit clause: judgment and res judicata.

First, if a court in one state renders a judgment, a ruling from a court against a party requiring that party to pay a specific amount of money to the other party, then the party must pay even after moving to another state. This is true even if the judgment would not have been given in the new state.

The second impact has to do with res judicata, a legal concept that says once a court has resolved a dispute, that dispute cannot be relitigated, or pursued for legal action a second time or more. Under the full faith and credit clause, once a court in one state has resolved a dispute, that dispute cannot be relitigated between the same parties in the courts of another state.

Without the full faith and credit clause, a business in one state could not be sure that its dealings with businesses and consumers in other states would be honored and that its legal rights in other states would be protected. It would also encourage businesses and consumers to "forum shop," disputing the same case in state after state in hopes of being heard by a court that will give a favorable judgment.