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While Article III of the U.S. Constitution established the federal court system, Congress was left to establish a lower federal court system. It did so with the Judiciary Act of 1789. This Act, in addition to establishing such courts, also contained rules to govern the new courts’ jurisdiction and operation. Significantly, on the issue of choice of law, Section 34 of the Judiciary Act provides:
“The laws of the several states, except where the Constitution or treaties of the United States or Acts of Congress otherwise require or provide, shall be regarded as rules of decision in civil actions in the courts of the United States, in cases where they apply.”
This section is referred to as the Rules of Decision Act and serves as the basis for guiding a federal court’s choice of law analysis. Before the Erie decision in 1938, the Supreme Court’s decision in Swift v. Tyson (1842) provided the authoritative interpretative of what the Rules of Decision Act required – at least in regards to the “laws of the several states” language. More specifically, in Swift, the Court was faced with determining whether the reference to such “laws” encompassed only laws and statutes explicitly promulgated by state legislatures or whether it also encompassed relevant state court decisions interpreting such statutes.
In addressing a contract over a negotiable instrument, the Court in Swift considered whether the certifying court was obligated to apply New York contract law as articulated by New York courts or whether the court would be free to apply “the principles established in the general commercial law.” Ultimately, the Court found that the reference to “laws” in the Rules of Decision Act referred only to the statutory law of a given state, and that a federal court was therefore free to do its own interpretive work rather than being required to rely on an understanding articulated by a state court.
In coming to this conclusion, Justice Story, writing for the Court, explained his reasoning:
“It is observable that the Courts of New York do not found their decision upon this point upon any local statute, or positive, fixed, or ancient local usage: but they deduce the doctrine from the general principles of commercial law. It is, however, contended, that the thirty-fourth section of the judiciary act of 1789 … furnished a rule obligatory upon this Court to follow the decisions of the state tribunals in all cases to which they apply. … In order to maintain the argument, it is essential, therefore, to hold, that the word “laws,” in this section, includes within the scope of its meaning the decisions of the local tribunals. In the ordinary use of language it will hardly be contended that the decisions of Courts constitute laws. They are, at most, only evidence of what the laws are; and are not of themselves laws. They are often re-examined, reversed, and qualified by the Courts themselves, whenever they are found to be either defective, or ill-founded, or otherwise incorrect. The laws of a state are more usually understood to mean the rules and enactments promulgated by the legislative authority thereof, or long established local customs having the force of laws. In all the various cases which have hitherto come before us for decision, this Court have uniformly supposed, that the true interpretation of the thirty-fourth section limited its application to state laws strictly local, that is to say, to the positive statutes of the state, and the construction thereof adopted by the local tribunals, and to rights and titles to things having a permanent locality … It never has been supposed by us, that the section did apply, or was designed to apply, to questions of a more general nature, not at all dependent upon local statutes or … local usages of a fixed and permanent operation, as, for example, to the construction of ordinary contracts or other written instruments, and especially to questions of general commercial law, where the state tribunals are called upon to perform the like functions as ourselves, that is, to ascertain upon general reasoning and legal analogies, what is the true exposition of the contract or instrument, or what is the just rule furnished by the principles of commercial law to govern the case. And we have not now the slightest difficulty in holding, that this section, upon its true intendment and construction, is strictly limited to local statutes and local usages of the character before stated, and does not extend to contracts and other instruments of a commercial nature, the true interpretation and effect whereof are to be sought, not in the decisions of the local tribunals, but in the general principles and doctrines of commercial jurisprudence. Undoubtedly, the decisions of the local tribunals upon such subjects are entitled to, and will receive, the most deliberate attention and respect of this Court; but they cannot furnish positive rules, or conclusive authority, by which our own judgments are to be bound up and governed. The law respecting negotiable instruments may be truly declared in the language of Cicero, adopted by Lord Mansfield in Luke v. Lyde …, to be in a great measure, not the law of a single country only, but of the commercial world.”
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