A technology firm based in State X enters into a partnership with a firm from State Y. They have a dispute over the partnership agreement, and the case is filed in federal court located in State X under diversity jurisdiction. There is no specific federal statute that addresses the issues in their contract. Which of the following best explains how the federal court should approach the applicable law in resolving this dispute?
Apply general federal law principles since the case is in federal court.
Develop and apply federal common law principles to address the contract issues.
Refer the case to a state court instead of the federal court.
Apply the substantive contract law of State X to resolve the dispute.
In federal diversity cases, federal courts apply the substantive law of the state in which they sit, known as the 'lex fori.' Since the federal court is located in State X and there is no applicable federal statute, the court should apply the substantive contract law of State X to resolve the dispute.
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