Chesapeake Supply and Equipment v. JI Case Co.

• Decision Date: 23 November 1988
• Docket Number: Civ. A. No. 88-1046-A.
• Parties: The CHESAPEAKE SUPPLY AND EQUIPMENT COMPANY, Plaintiff, Commonwealth of Virginia, Intervenor, v. J.I. CASE COMPANY, Defendant.
• Court: U.S. District Court — Eastern District of Virginia

700 F. Supp. 1415

The CHESAPEAKE SUPPLY AND EQUIPMENT COMPANY, Plaintiff, Commonwealth of Virginia, Intervenor, v. J.I. CASE COMPANY, Defendant.

Civ. A. No. 88-1046-A.

United States District Court, E.D. Virginia, Alexandria Division.

November 23, 1988.

Michael J. Chamowitz, Bruce B. McHale, Chamowitz & Chamowitz, Alexandria, Va., for plaintiff.

Maurice J. McSweeney, Jane Golden Belford, Foley & Lardner, Washington, D.C., for defendant.

MEMORANDUM OPINION

ELLIS, District Judge.

Introduction

This case is a striking example of the potency of choice of law rules in a multi-state contract context. It is a reminder that parties act at their peril when they fail to make explicit their choice of law and instead leave that decision to the conflicts rules of some future, perhaps unforeseen, forum.

The precise choice of law issue presented here is whether Maryland, Virginia, or Wisconsin law applies to a heavy equipment dealer contract ("Agreement") executed in Maryland and Wisconsin, delivered in Maryland, and performed in Maryland, Virginia, and Delaware. Defendant is a Delaware corporation with its principle place of business in Wisconsin. Plaintiff is a Maryland corporation with branches in Maryland, Virginia, and Delaware. Since 1962, plaintiff has been operating under the Agreement or its predecessors as an authorized dealer of defendant's equipment in all three branch locations.¹ Each branch also sells other manufacturers' heavy equipment. The Agreement includes a provision permitting termination by defendant without cause upon six months notice. Defendant exercised this right. On March 11, 1988, defendant notified plaintiff that it was terminating the Agreement effective September 15, 1988.² The validity of that termination turns on the choice of law issue. If Virginia or Wisconsin law governs the Agreement, then arguably the termination notice would be ineffective. Statutes in those jurisdiction proscribe termination without cause in this context. If Maryland law applies, however, defendant claims that termination without cause is valid.

This matter came before the Court initially on plaintiff's motion for a preliminary injunction. By Order dated October 3, 1988, this Court accelerated the trial on the merits and consolidated the hearing for a preliminary injunction with the merits trial, pursuant to Rule 65(a)(2), Fed.R.Civ.P. The Court, sua sponte, ordered further briefing on the potentially dispositive choice of law issues. Both parties submitted additional briefs, and oral argument was heard on the choice of law issues on October 7, 1988, and again on October 28, 1988. Because defendant challenged the constitutionality of the Virginia Heavy Equipment Dealers Act, the Court certified this fact to the Virginia Attorney General and permitted the intervention of the Commonwealth of Virginia. See 28 U.S.C. § 2403(b). The Commonwealth was given the opportunity to express its views orally and in writing. The matter, having been fully briefed and argued, is ripe for summary disposition. Undisputed facts permit resolution of the choice of law question which, in turn, is dispositive of the case.

Analysis

A. Choice of Law Question

In diversity suits, a federal court must apply the law of the forum state, including its choice of law principles. Erie R.R. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938); Klaxon v. Stentor Electric Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941); Equitable Trust Co. v. Bratwursthaus Mfg. Corp., 514 F.2d 565, 567 (4th Cir.1975); Witter v. Torbett, 604 F.Supp. 298, 302 (W.D.Va. 1984). Thus, Virginia choice of law principles govern here. Virginia adheres to a traditional choice of law doctrine;³ it has rejected the more flexible, "significant contacts" approach of the Restatement (Second) of Conflict of Laws the defendant urges the Court to adopt.⁴ In Virginia, questions of breach are determined by the law of the place of performance,⁵ but the validity, interpretation, and construction of a contract are governed by the substantive law of the place of contracting,⁶ that is, "where the final act is done which is necessary to make the contract binding."⁷ Here, plaintiff argues that the final binding act was the last signature on the Agreement. As the Agreement's signature pages clearly indicate, the last signatures were those of defendant's representatives and were apparently made in Wisconsin. Accordingly, plaintiff contends that Wisconsin law should apply to questions of interpretation and validity. Plaintiff's argument, however, ignores the explicit terms of the Agreement which provide that "this Agreement shall become effective as of 7-5, 1978, provided it has been fully executed by the parties and a copy so executed has been delivered to Dealer." (emphasis added). The Agreement was delivered to plaintiff at its headquarters in Maryland. That delivery was the final act necessary to make the Agreement valid and binding.⁸ It follows, therefore, that Maryland law applies to questions of interpretation, validity, or construction of the Agreement.⁹ By contrast, performance of the Agreement occurred in Maryland, Virginia, and Delaware. Questions of breach, therefore, would be governed by the laws of those states.¹⁰

The threshold question then is whether plaintiff's claim raises a question of validity or one of breach. If the claim is for breach, then Virginia law may arguably apply to the Virginia dealership branch. If, instead, the claim is one of validity or interpretation, Maryland law governs. Given these principles, it is important to focus sharply on plaintiff's claim. In essence, plaintiff's claim raises two related questions: (1) whether the termination-at-will clause of the Agreement is valid, and (2) whether defendant, in fact, purported to terminate under the contract's at-will provision or, as plaintiff asserts, under the so-called "for cause" contractual provision.¹¹ The first question challenges the validity of a contract provision and is, therefore, governed by the law of the place of making. Because the second question requires the interpretation of contract provisions, its resolution is similarly governed by the law of the place of making. Virginia choice of law rules, therefore, dictate that Maryland law governs the questions presented.

B. Termination Without Cause

Under Maryland law, a supplier who terminates a heavy equipment dealership agreement must provide the dealer at least six months notice of the termination. See Equipment Dealer Contract Act, Md. Com.Law Code Ann. § 19-301 (1987) ("Act"). That notice must be in writing, delivered by certified mail or in person, id. § 19-305(a), and include "(1) a statement of intention to terminate the contract; (2) a statement of the reasons for the termination; and (3) the date on which the termination takes effect." Id. § 19-305(b).¹² Plaintiff argues that, by requiring the supplier to state the reasons for termination, the Act implicitly demands that the proffered reasons meet some standard of reasonableness. Defendant counters that such an implication is not warranted by the language or purpose of the Act. This is a matter of first impression; no Maryland court has definitively decided this question.

The statutory interpretation path in Maryland is well-marked. Maryland's well-settled principles of statutory construction command the Court to strive to "ascertain and carry out the legislative intent." G. Heileman Brewing Co., Inc. v. The Stroh Brewery Co., 308 Md. 746, 753, 521 A.2d 1225, 1229 (1987). See also Mayor of Baltimore v. Hackley, 300 Md. 277, 283, 477 A.2d 1174, 1177 (1984). The starting point in the quest for legislative intent is to examine the statutory language.¹³ That language must be interpreted in accordance with its ordinary meaning in the context in which it appears.¹⁴ Here, the Act explicitly requires only that a "statement of the reasons for the termination" be included in the notice of termination. Md. Com.Law Code Ann. § 19-305(b). Nothing in the language of the Act itself suggests that the supplier's reasons be "reasonable" or satisfy some standard of "good cause." Significantly, no statutory standard is given by which to measure the acceptability of any reason. Presumably acceptable reasons might include the desire to replace a barely satisfactory dealer with a more vigorous, more promising one or a desire to replace a multiple supplier dealer with one who will focus solely on that supplier's line. If these reasons are not acceptable, then it must be asked what standard strikes them down. The answer must be that the court must not only imply from the silent statute a requirement that termination be based on a reason, but it must also devise a standard for acceptable reasons. At this point, the court's effort impermissibly crosses the line from statutory interpretation to drafting. Simply put, the Maryland Act does not, by its terms, require "good cause" for the termination of heavy equipment dealer agreements. There is no warrant for interpreting it otherwise.¹⁵

Legislative history also supports this conclusion. The Maryland General Assembly's Committee Reports on the Act confirm that its primary focus was to ensure that heavy equipment dealers could resell their inventories to their suppliers in the event of termination.¹⁶ With that statutory assurance of guaranteed resale, Maryland dealers would then be encouraged to maintain adequate inventories of equipment and parts for farm and outdoor power equipment "essential to the State economy."¹⁷ No mention is made in the various committee reports or analyses of any limitation on the supplier's or dealers's right to terminate the dealership agreement with proper notice.¹⁸ Such silence is not insignificant; a limitation on termination rights is too important a subject to go unremarked. More explicit is the testimony of representatives of several trade associations representing Maryland farm, industrial and...