Company’s physical presence not prerequisite for US to exercise jurisdiction

Jurisdictional ‘boundaries’ are becoming increasingly indistinct as a recent ruling of the Court of Appeals for the First Circuit in the US illustrates. The cross border attorneys at Rogerson Law Group have years of experience advising and representing commercial organisations and individuals in cross-border disputes.

‘Long arm jurisdiction’

The US Court of Appeals for the First Circuit has clarified that the courts have long-arm jurisdiction over a Canadian defendant – in this case, a Canadian resident corporation with no physical presence in the American jurisdiction1. In addition, the only contact between the defendant and the plaintiff bank was by electronic and telephone communications across the two borders.

In today’s global market place, parties to commercial transactions are routinely in different countries. In this case, the defendant company entered into a letter of agreement with an investment bank under which the bank acted as its exclusive financial adviser to assist the company on the sale of its business. The agreement was negotiated and executed remotely but the jurisdiction clause within the agreement did not amount to an exclusive jurisdiction clause.

The defendant company made three out of four ‘milestone’ payments to the bank which, in turn, fulfilled its own contractual obligations from its offices in Boston. Eventually, the company was sold on – without the bank’s assistance. The bank sued but the company unsuccessfully argued at first instance that the Massachusetts court did not have personal jurisdiction.

Due process

The First Circuit applied the ‘due process’ clause of the US Constitution, 14th amendment under which a state court may take jurisdiction over a non-resident defendant only when assuming jurisdiction will not offend “traditional notions of fair play and substantial justice”. The court also considered existing case law on the issue of jurisdiction.

Notably, the First Circuit determined that the issue of jurisdiction depends largely on the parties’ expectations in relation to:

  • whether the claim arises directly out of, or relates to the defendant’s activities in the forum (this is a “flexible, relaxed standard”)
  • whether the defendant’s in-state contracts “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”. Here, entering into a contract with a Massachusetts company was sufficient evidence to meet this element of the test
  • whether the exercise of jurisdiction is reasonable. The burden is on the defendant to establish that it is unreasonable for the case to proceed in the state forum – a difficult hurdle for a commercial party defending a case

The facts of this case led the court to find there was sufficient evidence that claim related to the defendant’s activities in the jurisdiction.

The ruling confirms that a party’s actual physical presence in the US is not prerequisite for the US to have jurisdiction over it.

The approach of the First Circuit indicates that the judiciary accepts the modern reality that cross-border digital communication, whether through email, internet, social networking media and modern payment platforms, is a vital component of the way business is conducted in the 21st century.

Interestingly, the case follows the ruling of the OSC in the Conrad Black case that the convictions and orders arising from the US proceedings were a reliable basis for an enforcement proceeding in Ontario.

What does this mean?
Commercial contracts must be drafted carefully, particularly clauses dealing with issues such as jurisdiction, and arbitration and potential disputes. What’s clear is that Canadian companies are likely to find it difficult to challenge the jurisdiction of the US courts in the event of a commercial dispute where the other party is a US resident.

How can we help?
If you are party to a commercial contract with a commercial organisation that is resident in the UK, or any other jurisdiction, contact the expert cross border solicitors at Rogerson Law for urgent, strategic advice.

Rogerson Law Group provides cross-border litigation services in the entire GTA including Toronto, Scarborough, Mississauga, Vaughan, Brampton, Richmond Hill, Etobicoke, and Barrie and surrounding areas with offices located in downtown Toronto, Barrie, and associated offices in Ottawa.

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1 C.W. Downer & Co. v. Bioriginal Food & Science Corp. No. 14-1327