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What Is a Diversity Breach of Contract?

By Grygor Scott
Federal courts can try breach-of-contract lawsuits if they have diversity jurisdiction.

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A diversity breach-of-contract case occurs when a plaintiff files a lawsuit in a federal court claiming that the defendant failed to fulfill the terms of a contract. In general, state courts have jurisdiction over contract cases, including those involving breach of contract. Federal law, however, empowers federal courts to hear breach-of-contract lawsuits under certain circumstances.

Breach of Contract

A breach of contract may occur when a party fails to fulfill the terms of the agreement. Remedies for a breach of contract include damages to reimburse the plaintiff, specific performance to compel the defendant to fulfill the terms of the contract and cancellation of the contract.

Federal Jurisdiction

Article III, Section 2, of the U.S. Constitution gives federal courts jurisdiction in cases between citizens of different states. This power is called diversity jurisdiction because the plaintiff and the defendant have diverse, or different, state citizenship. Federal law also empowers federal courts to hear cases between citizens of a state and citizens of foreign countries; between citizens of different states in which a citizen of a foreign country is an additional party; and between a foreign country, as plaintiff, and a citizen of a state.

Diversity

Filing a breach of contract lawsuit in a federal court requires complete diversity between parties. For example, a federal court does not have jurisdiction over a case between a citizen of California who is suing two defendants, one from New York and the other from California. Federal law mandates that "a corporation shall be deemed to be a citizen of any State by which it has been incorporated and of the State where it has its principal place of business." In 2010, the U.S. Supreme Court clarified how federal courts should determine a corporation's citizenship, holding that "principal place of business" refers to the state "where a corporation's high level officers direct, control, and coordinate the corporation's activities," rather than to the state where a corporation conducts most of its business activities.

Amount in Controversy

Under federal law, diversity jurisdiction extends only to cases in which plaintiffs claim more than $75,000 in damages. If a plaintiff's claim is below this amount, he must file his lawsuit in an appropriate state court.

Removal

A plaintiff may choose to file a claim exceeding $75,000 in a state court. Defendants, however, can have the case transferred to a federal court.

About the Author

Grygor Scott has written professionally since 1991, with a focus on law, government, food and travel. His work has appeared in "New York Resident" and on several websites. The author of more than 20 nonfiction books, Scott graduated with honors from the University of North Carolina School of Law.

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