Swift v. Tyson

16 Pet. (41 U.S.) 1 (1842), argued 14 Jan. 1842, decided 25 Jan. 1842 by vote of 9 to 0; Story for the Court. In Swift v. Tyson, the Supreme Court established the freedom of the federal courts to follow principles of general commercial law, even if those principles were contrary to judicial decisions of the state in which the federal court sat. In Swift, New York defendants were sued in a New York federal district court on a bill of exchange made by them and transferred to a nonresident. The defendants invoked New York decisions under which the instrument was defective, but the plaintiffs argued that the general interstate commercial law would uphold the instrument.

The conflict between the New York cases and commercial decisions elsewhere implicated section 34 of the Judiciary Act of 1789, which required federal courts to follow state “laws” whenever they were applicable. Thus the Court had to decide whether New York decisions were “laws” that federal courts were required to follow. Justice Joseph Story wrote:

In the ordinary use of language, it will hardly be contended that the decisions of courts constitute laws. [Section 34 does not] … apply to questions of a more general nature, not at all dependant local statutes or local usages. … As for example, to the construction of ordinary contracts of 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. (pp. 18–19)

Swift was a case falling within the diversity jurisdiction of the federal courts. It did not fall within the exclusive lawmaking authority of New York. The New York decisions cited by the defendants were themselves based upon “general commercial law,” that is, the common commercial custom and jurisprudence applicable to multistate business transactions. Thus Story determined that the New York decisions were not “laws” in the sense of being some fixed and definite pronouncement by the sovereign state of New York but were rather attempts by New York courts to articulate the content of commercial custom common to all the states and, as such, were wrong.

A federal court had no reason to regard as a matter of constitutional law the New York decisions as the sole and exclusive governing rule in an interstate commercial transaction. New York opinions addressed multistate general commercial law, as defined by judicially recognized commercial custom. Story compared the New York decisions to the general body of multistate commercial law and found them to be wrong.

Therefore, the Swift opinion was not meant to determine the substantive content of New York commercial law but rather was intended to vindicate plaintiff's reliance on the general and accepted commercial rule. By his skillful handling of the federalism issue, Story limited the ability of local precedent to upset the reasonable expectations of parties in interstate commercial dealings. He affirmed the power of the federal courts as independent tribunals to invoke established general commercial rules already embodied in judicial precedent. He thereby freed interstate commercial transactions from disruptive local aberrations. At a critical time in the nation's commercial development, Story encouraged independent federal courts to nationalize commercial rules and established the law merchant and its mature body of predictable and efficient rules in national and international commerce. The Swift decision was thus critical in preventing the balkanization of the commercial law that might have otherwise occurred.

In 1938, the Supreme Court in Erie Railroad Co. v. Tompkins repudiated Swift. Story's theory of adjudication as the resolution of disputes under customary standards evolved from private conduct was incompatible with Justice Louis D. Brandeis's scientific positivism, under which an applicable legal rule could come only from the command of the state. His rejection of Swift thus represented a transition from nineteenth‐century liberalism, concerned with a self‐ordering society operating within a federal legal system composed of coequal sovereign states subject to traditional choice‐of‐law rules, to the modern state as exclusive lawgiver.

See also Capitalism; Federal Common Law; Federalism; Judicial Power and Jurisdiction; Lower Federal Courts.

Bibliography

• Tony A. Freyer, Harmony and Discourse: The Swift and Erie Cases in American Federalism (1981)

— Robert Randall Bridwell

Swift v. Tyson, 41 U.S. (16 Peters.) 1 (1842). This Supreme Court decision interpreted the Judiciary Act of 1789's requirement that the federal courts follow the "laws" of the states. Justice Story, for the unanimous Court, held that judicial decisions regarding matters of general commercial jurisprudence were not "laws," but only "evidence of law," and were not binding under the 1789 act. Thus, where no statutes addressed the issue, a federal court sitting in New York could ignore the decisions of New York courts and rule in accordance with those of other states. Swift was reversed by Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938).

Bibliography

Freyer, Tony Allan. Harmony and Dissonance: The Swift and Erie Cases in American Federalism. New York: New York University Press, 1981.

This entry contains information applicable to United States law only.

For almost one hundred years, the U.S. Supreme Court's decision in Swift v. Tyson, 41 U.S. (16 Pet.) 1, 10 L. Ed. 865 (1842), allowed the federal courts to create their own body of civil common law in cases in which the parties were from different states. In exercising its diversity jurisdiction, a federal court was free to ignore the pertinent common law of the state in which it sat and apply federal common law. Though it was intended to encourage the development of a uniform set of commercial law principles, the Swift decision was sharply criticized as an unwarranted intrusion into areas reserved to state courts.

Swift involved a legal dispute over the law of negotiable instruments. A negotiable instrument is a document by which one party promises to pay either money or goods to another party, called the bearer. For example, a check written on a person's bank account is a negotiable instrument. Negotiable instruments used by business are called commercial paper and played an important role in the U.S. economy in the early nineteenth century. An unresolved issue was whether the bearer could assign a bill of exchange to a third party, who could then collect on the obligation.

The question of assignments was at the heart of Swift. A third-party assignee of a bill of exchange drawn in New York presented it for payment and was refused. The third party, who was not a New York resident, sued in New York federal district court. The New York common law held that a bill of exchange could not be assigned, and the federal judge ruled accordingly. Because New York was the leading commercial center in the United States, this ruling had serious implications for the national economy.

On appeal, the Supreme Court overturned the decision by reinterpreting the federal Rules of Decision Act, originally section 34 of the Judiciary Act of 1789 (1 Stat. 73). In its original form, the act provided that "the laws of the several states … shall be regarded as rules of decision in trials at common law in the courts of the United States in cases where they apply." The main issue before the Court concerned the meaning of the word laws. Was the word limited to legislatively enacted statutes or did it include state common-law decisions as well?

Justice Joseph Story, writing for a unanimous Court, concluded that the term laws did not include common-law decisions. Such decisions were "at most, only evidence of what the laws are, and are not, of themselves, laws." Except for decisions of a "local" nature, such as those dealing with real estate, a federal judge was not required to apply a "general" state common-law rule involving commerce to a diversity-based case. Under the act a federal judge could apply only state statutes to a legal dispute.

Story, who was the leading U.S. authority on commercial law and commercial paper, believed it was imperative for the growth of the U.S. economy that the United States develop a uniform national law of commerce for the federal courts to apply. Therefore, he declared that federal common law permitted the assignment of commercial paper. Economic and legal historians have concluded that Swift did contribute to the growth of multistate transactions and the national economy. Businesses were able to assign commercial paper without fear that a state would invalidate the assignment.

Nevertheless, the decision angered many who believed a federal common law interfered with the right of states to develop their own principles of commercial law. The Swift doctrine also led to situations in which the substantive law applied to litigants might be determined simply by the fortuity of their residences. Two cases might have different legal results depending only on whether the plaintiff and the defendant were from the same state or from different states. This led to significant unfairness and forum shopping. For example, in Black & White Taxicab & Transfer Co. v. Brown & Yellow Taxicab and Transfer Co., 276 U.S. 518, 48 S. Ct. 404, 72 L. Ed. 681 (1928), a Kentucky corporation dissolved and reincorporated in Tennessee to obtain the benefit of substantive federal common law against another Kentucky corporation.

Faced with mounting criticism of Swift, in 1938 the Supreme Court overturned the decision in Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188. Federal courts were again required to apply state law, whether statutory or common, in diversity jurisdiction cases. In a radical shift from Swift, federal district courts periodically refer questions to state supreme courts, asking for a ruling on what the state law is on a specific issue.

See: Erie Railroad Co. v. Tompkins.

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