A plaintiff files a diversity jurisdiction case in federal court, alleging breach of contract against a defendant. The contract was executed in State X, which has distinct rules for contract interpretation under its state law. Which law should the federal court apply to interpret the contract?
The federal court applies federal statutes governing all contracts.
The federal court applies the substantive law of State X for contract interpretation.
The federal court applies federal common law for contract interpretation.
The federal court applies the law of the defendant’s home state for contract interpretation.
In diversity jurisdiction cases, federal courts apply the substantive law of the state in which they are located. Therefore, the federal court will use State X's rules for contract interpretation. Federal courts do not apply their own federal common law for state law claims, nor do they apply the law of the defendant’s home state unless it is the state where the court is located. Federal statutes related to contracts are also not typically applied unless specifically relevant.
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Why don't federal courts apply federal common law in state law claims?