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Beware the long arm of the U.S. courts

Trials & Tribulations
|Written By Margaret L. Waddell
Beware the long arm of the U.S. courts

The United States Court of Appeals for the First Circuit has confirmed that courts can take “long arm” jurisdiction over a Canadian resident corporation, even when the company has no physical presence in the American jurisdiction, and the only contact between the parties was by electronic and telephone communications across the border.

C.W. Downer & Co. v. Bioriginal Food & Science Corp. reflects the contemporary view of American courts that actual presence in the U.S. is not required for the court to assume jurisdiction over a foreign domiciled defendant. It reflects the modern reality that in a world economy, business is often conducted on a remote basis through mail, e-mail, internet, and telephone communications, without the contracting parties ever being present in the same location. Hence the courts must remain flexible in the application of the law to reflect current commercial transactions.

The case also stands as a reminder to contract drafters of the importance of using precise language when jurisdiction clauses are included as a term of the agreement.

Absent clear language evidencing the intent of both parties to submit only and exclusively to one jurisdiction’s courts for resolution of disputes arising from their contractual relationship, there is a high probability that the courts of the injured party will conclude that they have jurisdiction to rule on the impugned conduct.

In this case, the defendant Canadian company, Bioriginal, had entered into a letter agreement with the plaintiff investment bank under which the plaintiff acted as its exclusive financial adviser to assist Bioriginal on the sale of its business. The contract was negotiated and executed remotely. It included a choice of law clause in favour of Saskatchewan, and the parties also consented to the jurisdiction of the Saskatchewan courts; but the jurisdiction clause was not expressly an exclusive jurisdiction clause.

Bioriginal made three of four “milestone” payments to Downer, and Downer performed its services for the defendant from its Boston offices. Communications flowed between the parties electronically and by telephone.

Ultimately Bioriginal was sold to a third party without the assistance of Downer, and Downer sued. Bioriginal countered with a motion to dismiss on the grounds that the Massachusetts court lacked personal jurisdiction over it, and forum non conveniens. The district court allowed the motion on the jurisdiction issue, without determining the forum conveniens issue. This appeal followed.

The “due process” clause of the U.S. Constitution, 14th amendment, governs when a state court may take jurisdiction over a non-resident defendant. It may do so only when assuming jurisdiction will not offend “traditional notions of fair play and substantial justice.”

While this language is remarkably vague, there is a substantial body of interpreting case law that has developed in the States. When the plaintiff asserts the conduct of the defendant that is the subject matter of the suit creates the necessary minimum contact, the court applies a three-part test, each prong of which must be met before the court will exercise its long arm jurisdiction over a foreign defendant.

Unlike the principled test established by the Supreme Court of Canada in Club Resorts Ltd. v. Van Breda, the test applied by the First Circuit seems to be highly discretionary — based in large measure upon the court’s view of the expectations of the parties:

1.    Whether the claim arises directly out of, or relates to the activities of the defendant in the forum;

2.    Whether the defendant’s in-state contacts “represent a purposeful availment of the privilege of conducting activities in the forum state, thereby invoking the benefits and protections of that state’s laws and making the defendant’s involuntary presence before the state courts foreseeable”; and

3.    Whether the exercise of jurisdiction is reasonable.

The lack of certainty surrounding this test is recognized in the case law. Even on the first prong of the test, the U.S. courts have determined it to be a “flexible, relaxed standard.” However, in a breach of contract case, the terms of the contract and the parties actual course of dealing, which are objective measures, are taken into consideration, along with the more amorphous “contemplated future consequences” of the relationship.

In the Downer case, the fact the contract was performed by Downer from Massachusetts and the ongoing communications between the parties over the course of the contract were found to be sufficient evidence the claim related to the activities of the defendant in the jurisdiction.

The second prong of the test, purposeful availment, has been described as a “rough quid pro quo,” so if the conduct of the defendant is directed towards the society or economy of a forum, that forum should have the ability to stand in judgment of the behaviour.

The focus of this inquiry is on whether the defendant voluntarily acted in a manner intended to affect or that foreseeably would affect individuals in the forum. The court found that Biorganic’s contact with the forum was neither random nor attenuated, but rather it had wide-reaching contacts with the state through the activities which it engaged Downer to undertake.

Simply put, entering into a contract with a Massachusetts company was sufficient evidence to meet prong two of the test.

Finally, the state court must be satisfied that it is “fair and reasonable” for the court to take jurisdiction over the foreigner. Where the first two prongs of the test are met, the burden shifts to the defendant to establish that it is unreasonable for the case to proceed in the state forum.

Here, the analysis is much like the considerations on forum conveniens, in that the court is to take into consideration each of:

1.    The burden on the defendant to appear in the state’s courts;

2.    The state’s interest in adjudicating the dispute; (ed. note: even though this seems to repeat prong #2)

3.    The plaintiff’s interest in obtaining convenient and effective relief; (ed. note: how this can ever be found against the plaintiff is questionable)

4.    The judicial system’s interest in obtaining the most effective resolution of the dispute; and,

5.    The common interests of all sovereigns in promoting substantive social policies. (not likely to be an issue of much import in choosing between Canada and the US in an international contract dispute)

In Downer, the Court of Appeal recognized that, typically, it will be in the interests of the court of the plaintiff to adjudicate on the issues affecting the injured party. It will “provide a convenient forum for the its slighted residents.” Hence, the third prong of the test will be very difficult for a foreign defendant to meet in commercial cases — the defendant would have to establish special or unusual circumstances differentiating the case from a typical commercial dispute. It recognized that logistical challenges are shrinking as technological advances are available in the court system.

What Canadian corporations can take away from this case is the fact they will face an uphill battle to challenge a U.S. court taking jurisdiction in respect of a commercial dispute in which the other contracting party is resident in the state. Absent harsh circumstances, which are unlikely to arise in the U.S./Canada cross-border context, the U.S. court will take jurisdiction, unless the contract contains clear language vesting the exclusive jurisdiction for resolution of disputes arising from the contract in a Canadian court.


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