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Instrumentation Associates Inc. v. Madsen Electronics Ltd.


argued: April 12, 1988.


Appeal from the United States District Court for the Eastern District of Pennsylvania, D.C. Civil Action No. 87-2841.

Hutchinson, Scirica and Garth, Circuit Judges.

Author: Hutchinson


HUTCHINSON, Circuit Judge.


Madsen Electronics (Canada) Ltd. (Madsen) appeals from an order of the United States District Court for the Eastern District of Pennsylvania denying its motion to dismiss appellee Instrumentation Associates Inc.'s (Instrumentation's) action asserting wrongful termination of a distributorship agreement. Madsen's motion to dismiss was premised on a forum selection clause in the distributorship agreement.

The district court had subject matter jurisdiction over this diversity of citizenship action under 28 U.S.C.A. § 1332(a) (West Supp. 1988). We have appellate jurisdiction over an appeal from an order refusing to enforce a forum selection clause as a collateral final order under 28 U.S.C.A. § 1291 (West Supp. 1988), as an interlocutory appeal under 28 U.S.C.A. § 1292(a)(2) (West Supp. 1988), and under the All Writs Act, 28 U.S.C.A. § 1251 (West 1966). In re Diaz Contracting, Inc. v. Nanco Contracting Corp., 817 F.2d 1047 (3d Cir. 1987). The enforceability of a forum selection clause is an issue of law, and our scope of review is plenary. Id. at 1055; General Engineering Corp. v. Martin Marietta Alumina, Inc., 783 F.2d 352, 359 (3d Cir. 1986).*fn1

The district court denied Madsen's motion to dismiss because it found the reference in the forum selection clause to the "laws of Canada" as the law of choice for settling disputes "in connection with [the] agreement" ambiguous and hence unenforceable. In so doing, the court erred by deciding the validity of the contract's choice of law before considering the threshold question of whether the parties' contractual choice of a Canadian forum was enforceable under the conflict of laws principles embodied in Erie R.R. v. Tompkins, 304 U.S. 64, 82 L. Ed. 1188, 58 S. Ct. 817 (1938) and Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 85 L. Ed. 1477, 61 S. Ct. 1020 (1941). Because we find that the forum selection clause would be enforced under the law of any jurisdiction which could be applied in this case, we will reverse the district court's order denying Madsen's motion to dismiss.


Instrumentation is a Pennsylvania corporation with a place of business in Upper Darby, Pennsylvania. It is engaged in the business of selling audiological measuring devices. In August, 1984 it entered into a written agreement with Madsen, a Canadian audiological supply company with a place of business in Oakville, Ontario, Canada. The agreement gave Instrumentation an exclusive right to distribute Madsen products in Delaware, New Jersey, Pennsylvania and parts of New York and West Virginia.*fn2 Joint Appendix (Jt. App.) at 9. The agreement was for an initial one year term from August, 1984 until July, 1985 and provided for automatic annual renewal unless each party gave "at least three months written notice" of termination. Jt. App. at 10. On December 23, 1986 Madsen sent Instrumentation a written termination notice giving Instrumentation ninety days to settle outstanding accounts.

On April 29, 1987, after unsuccessful attempts to resolve the dispute, Instrumentation filed this action for breach of the agreement in the district court. Madsen filed a motion to dismiss the case based on the agreement's forum selection clause, which provided: "Matters of dispute in connection with this Agreement shall be settled by a Canadian Court of Justice in accordance with the laws of Canada." Jt. App. at 15.


In denying Madsen's motion to dismiss, the district court reasoned that the forum selection clause's reference to the "laws of Canada" was too ambiguous to enforce because the "laws of Canada" varied widely from province to province. Madsen alleged in its submissions that the "general rule of Canada" required the forum selection clause to be enforced. However, because Madsen offered no evidence of a uniformly recognized "general rule of Canada," the district court held that the entire clause, including its choice of forum, was unenforceable.*fn3 The agreement, however, purports not only to provide a choice of law, but also a choice of forum.

The district court should have resolved the preliminary issue of whether the parties' forum selection clause is enforceable before reaching the issue of whether the contract provision is ambiguous. This conflicts issue, in turn, requires a determination of what law is applicable.


In choosing what law to apply to the issue of whether the parties' forum selection clause is enforceable, a district court sitting in diversity must first determine whether the issue is encompassed by a federal statute or Rule. See Stewart Organization, Inc. v. Ricoh Corp. 487 U.S. 22, 108 S. Ct. 2239, 101 L. Ed. 2d 22 . 2243 (1988) (holding validity of forum selection clause in diversity case must be determined under applicable federal statute 28 U.S.C. § 1404(a)).*fn4 If there is no applicable federal statute or Rule, the district court must next determine whether to apply federal judge-made law or state law. See id. at 2243 n.6. In doing so, the district court must evaluate whether application of federal judge-made law would discourage forum shopping and avoid inequitable administration of the law. Hanna v. Plumer, 380 U.S. 460, 468, 14 L. Ed. 2d 8, 85 S. Ct. 1136 (1965); Erie, 304 U.S. at 74-75.

This Court has not yet decided what law a district court sitting in diversity must apply in deciding whether a forum selection clause is enforceable. We have decided that such clauses are enforceable in other contexts. See Diaz, 817 F.2d at 1050 (bankruptcy); Martin Marietta, 783 F.2d at 357 (dispute between residents of Virgin Islands).

Fortunately, we need not resolve this unanswered question of whether federal law, the law of the forum state, the law of Canada, or one of its provinces applies.*fn5 All of these jurisdictions look favorably on forum selection clauses. Thus, even assuming paragraph 21 of the contract is ambiguous as to choice of a particular jurisdiction, the judge-made law of all involved jurisdictions would honor the parties' choice of a Canadian forum for resolution of their disputes in connection with this distributorship agreement.

In this case, the choice narrows to Pennsylvania, Ontario and federal judge-made law.*fn6 In The Bremen, the Supreme Court held that a forum selection clause is "prima facie valid and should be enforced" in the absence of a compelling countervailing reason making enforcement unreasonable. 407 U.S. at 10.

A Pennsylvania court would conclude that a forum selection clause is enforceable in the absence of a compelling, countervailing reason. See, e.g., Central Contracting Co. v. C.E. Youngdahl & Co., 418 Pa. 122, 133, 209 A.2d 810, 816 (1965) (Supreme Court of forum state, Pennsylvania, held contract's forum selection clause enforceable unless enforcement would "seriously impair plaintiff's ability to pursue his cause of action"). This circuit applied that test in Central Contracting Co. v. Maryland Casualty Co., 367 F.2d 341, 345 (3d Cir. 1966) (diversity case).

An Ontario court would also enforce the clause unless the forum selected could not possibly give any relief. In Poly-Seal Corp. v. John Dale Ltd., [1958] O.W.N. 432 (Ont. H.C.), the Ontario High Court of Justice enforced forum selection clauses which chose the jurisdiction of English and Swedish courts, even though there was doubt about the ability of those courts to grant the injunctive relief which the American corporations sought. The Ontario High Court said "the Canadian Courts ought not to interfere, unless it was shown that the foreign Courts could not possibly give any relief to the parties." Id.; see also Gulf Canada Ltd. v. Turbo Resources Ltd., 18 C.P.C. 146, 148 (Ont. H.C. 1980) (deferring to parties' choice of courts of Alberta in forum selection clause); but see Khalij Commercial Bank Ltd. v. Woods, 50 O.R. (2d) 446, 448 (Ont. H.C. 1985) (failure of parties to use the word "exclusive" before the word "jurisdiction" in forum selection clause allowed for jurisdiction in any other court before which matter is properly brought). Instrumentation's asserted conflict between the law of Pennsylvania and the law of Ontario, with respect to the enforceability of a forum selection clause, is a false conflict.


We have determined that under Pennsylvania, Ontario and federal judge-made law, forum selection clauses are enforceable. Alternately, we could inquire whether those forums would honor the parties' choice of law as "the laws of Canada." Klaxon, 313 U.S. at 496. Arguably, they would not do so if the clause is ambiguous. However, it is not.

Canada has adopted the English rule for determining what law governs a contract. Specifically, the Supreme Court of Canada has held that the "proper law" of the contract is defined by considering the contract as a whole in light of all the surrounding circumstances and applying the law of the forum which has the closest and most substantial connection to the contract. The Imperial Life Assurance Company of Canada v. Colmenares, [1967] S.C.R. 443, 448.*fn7 That principle would be uniformly applied by all Canadian courts, federal and provincial. See G. Robertson, Jurisdiction Clauses and the Canadian Conflict of Laws, 20 Alberta L. Rev. 296, 312 (1982):

It is well established that the interpretation of a contract is governed by its proper law. In this regard a jurisdiction clause should be treated no differently from any other clause in the contract, Consequently, the issue of whether a jurisdiction clause is exclusive in nature should be determined by the proper law of the contract and not by [local law].

The district court erred in holding the forum selection clause so ambiguous on its face as to be unenforceable, because Canada has a national choice of law rule for determining the governing law in contract cases. The district court premised its holding that the reference in the contract to "the laws of Canada" is ambiguous on an assumption that there would be no uniform treatment of forum selection clauses among the Canadian provinces. This may be true with respect to the local law of the provinces but, as Madsen argues, Canada's uniform law obviates any ambiguity arising out of provincial differences. The Canadian uniform law eliminates the ambiguity the district court saw.*fn8

Any jurisdiction whose law could properly apply to this case would enforce the parties' choice of a Canadian forum to settle their disputes "In connection" with this contract. We will therefore reverse the district court's order denying Madsen's motion to dismiss.

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