Lender Alert: California Supreme Court Holds Predispute Waivers of Right to Jury Trial Are Unenforceable

Lender Alert: California Supreme Court Holds Predispute Waivers of Right to Jury Trial Are Unenforceable

On August 4, 2005, the California Supreme Court, in the case of Grafton Partners LP v. Superior Court (PricewaterhouseCoopers LLP), 36 Cal.4th 944, 32 Cal.Rptr.3d 5, 2005 Daily Journal D.A.R. 9387 (Cal. Aug. 4, 2005) (No. S123344), by unanimous decision, held that contractual predispute waivers of the right to jury trial are unenforceable. Although many pro-business groups filed amicus briefs, urging that the right to contractually waive a jury trial be upheld because such waiver clauses have become commonplace in the commercial context, the Court was not persuaded.

In Grafton Partners, Grafton Partners LP (“Grafton”) retained PricewaterhouseCoopers LLP (“PwC”) to perform certain auditing services. The parties’ engagement letter contained a clause, stating that “[i]n the unlikely event that differences concerning PwC’s services or fees should arise that are not resolved by mutual agreement, to facilitate judicial resolution and save time and expense of both parties, [Grafton and PwC] agree not to demand a trial by jury in any action, proceeding or counterclaim arising out of or relating to the services and fees for this engagement.” A dispute later arose, Grafton brought suit in Alameda County Superior Court and demanded a jury trial. PwC moved to strike the demand based on the engagement letter waiver clause. The trial court granted PwC’s motion, relying on Trizec Properties,Inc. v. Superior Court (1991) 229 Cal.App.3d 1616, which held that, although not authorized by statute, predispute jury trial waivers were enforceable. The Court of Appeal for the First Appellate District reversed the trial court, finding that Trizec was wrongly decided. (See Grafton Partners LP v. PricewaterhouseCoopers LLP, 88 P. 3d 24, 12 Cal.Rptr.3d 287, 2004 Daily Journal D.A.R. 4883 (Cal. Apr. 21, 2004) (No. S123344).

Relying on Section 16 of Article I of the California Constitution and a long line of cases interpreting Section 16, commencing with an 1855 California Supreme Court case, Exline v. Smith (1855) 5 Cal. 112, Chief Justice George, writing for the Court, stated that “[o]ur Constitution treats the historical right to a jury resolution of disputes that have been brought to a judicial forum as fundamental . . . providing that in ‘a civil cause,’ any waiver of the inviolate right to a jury determination must occur by the consent of the parties to the cause as provided by statute.” The italics are those of Justice George, who thus emphasized that legislation should be the source for waiver of a “historical right.”

The exclusive statutory authority for such waivers is found at California Code of Civil Procedure Section 631, which provides six means by which that right can be waived or forfeited: failure to appear at trial, written consent filed with the court, oral consent in open court, failure to timely request a jury trial, and failure to timely deposit jury fees, both before trial and after trial has commenced.

Although Justice Chin wrote a separate concurring opinion, urging the State Legislature to adopt the view of the majority of states and enact legislation expressly authorizing predispute jury trial waivers, it remains to be seen whether the Legislature will take up this issue.

What is the effect of the Grafton Partners decision for lenders whose loan documents contain such predispute jury trial waiver clauses? Clearly, if the loan documents provide that California law applies, such waivers will not be enforced. Not addressed or resolved by the Court, however, is the enforceability of such waivers in documents applying foreign law.

Grafton Partners raises the issue of whether parties relying upon form documents may wish to substitute mandatory arbitration clauses in place of jury waiver clauses. Predispute arbitration agreements are expressly authorized by statute. (See Cal. Code Civ. Proc. § 1281.)

Please contact Larry W. Telford at lwt@severson.com, Duane M. Geck at dmg@severson.com, Mark D. Lonergan at mdl@severson.com, or Susan M. Santerelli at sms@severson.com for further information.