Recent California Court of Appeal Decision Invalidates Jury Trial Waiver Made Under New York Law

In Grafton Partners v. Superior Court, the California Supreme Court in a 2005 decision held that predispute jury trial waivers are unenforceable in California courts under California law.^[2] However, California courts had not applied this rule to agreements expressly governed by New York law. For reasons which may only partially include the desire to obtain an enforceable waiver of the right to a jury trial, parties often choose New York law to govern their agreements, including loan documents.

In Rincon, the Loan Agreement and Cash Management Agreement both included not uncommon New York choice-of-law provisions which specifically stated that the borrower “‘WAIVE[D] ANY CLAIM TO ASSERT THAT THE LAW OF ANY OTHER JURISDICTION GOVERNS THIS AGREEMENT.’”^[3] The subject agreements also expressly waived both the borrower’s and the lender’s right to a jury trial.^[4] Further, both original parties to the Loan Agreement were “‘sophisticated commercial or business entities’” domiciled in New York, the subject contracts were negotiated and executed in New York, and the loan disbursement occurred in New York.^[5]

Nevertheless, applying California’s conflict of laws principles,^[6] the Court of Appeal found that although New York had a substantial relationship to the parties and their transaction^[7] applying New York law allowing predispute jury trial waivers “would be contrary to fundamental California policy.”^[8] Further finding that California had a “materially greater interest than New York in determining the enforceability of the jury waivers,”^[9] the Court held the predispute jury trial waivers were unenforceable in California courts. 

Note, however, the Court only addressed the enforceability of the jury trial waiver provisions; it did not address the applicability of New York law otherwise to the subject agreements. The Court also stated that had the venue been changed to New York—which no party had requested—the California jury trial right “would not [have] travel[ed]” with the plaintiffs (and so presumably a New York court would have enforced the waiver).

Rincon’s Impact On Real Estate Transactions

Impact on Loan Agreements (and other Agreements) choosing New York law

With this Court of Appeal’s holding that predispute jury trial waivers in agreements governed by New York law are unenforceable in California courts, we can expect to see parties seeking to void their jury trial waivers when disputes arise, under existing agreements and under future agreements as well, including by filing litigation in California, rather than New York, courts. We also can expect to see attempts to bolster loan documents and other agreements to make jury trial waiver provisions enforceable. These efforts may include strengthening venue provisions and greater use of judicial reference provisions to avoid jury trials. 

1. Venue Provisions

   Venue provisions (also referred to as forum-selection clauses) are contractual provisions by which the parties expressly decide the court and location where any dispute is to be resolved.^[10] As opposed to choice-of-law provisions, which provide which state’s law applies, forum-selection provisions establish the forum for the dispute itself.^[11] The United States Supreme Court has noted that valid forum-selection clauses should receive “controlling weight in all but the most exceptional cases.”^[12]

   The Court in Rincon did not address, or even note, whether the parties had agreed to have New York, rather than California, courts decide the case. Including, and thereafter enforcing, venue provisions designating New York as the exclusive venue for disputes may also serve to preserve the parties’ intent to waive the right to a jury trial and avoid the effect of the decision in Rincon.

   There are limitations to this, however. For example, New York courts would not have jurisdiction to foreclose on real property located in California, so lenders must craft venue provisions which preserve their ability to foreclose on their security interest(s) in California on California property.
   
   

2. Judicial Reference Provisions

Agreements governed by California law in which the parties seek to agree to avoid a jury trial typically include “judicial reference provisions.” These provisions provide for the appointment of a judicial referee, specifically appointed by the court to resolve disputes. Judicial reference provisions also avoid the limitations on appellate review that affect binding arbitration.^[13]

Although a California court has discretion to deny enforcement of a judicial reference provision if it has concerns about judicial economy or potential for conflicting rulings based on common issue or fact,^[14] judicial reference provisions generally are enforceable in California courts provided they meet the general rules applicable to all contracts.^[15] In Woodside Homes of Cal. Inc.. v. Superior Court, the California Court of Appeal enforced a judicial reference provision despite the plaintiffs’ arguments of unconscionability and unenforceability, noting that judicial reference provisions are “substantially similar to nonjudicial arbitration” provisions, another alternative dispute resolution method toward which “California has historically had a ‘friendly policy[.]’”^[16]

Adding a California judicial reference provision to an agreement otherwise stated to be governed by New York law could be used to “hedge” against the possibility of being in a California court and having a jury trial waiver under New York law invalidated (as occurred in Rincon), with wording to the effect that inclusion of such a provision does not vitiate the parties’ intent to have New York law govern otherwise.

If you would like additional information about the issues addressed in this client alert, please contact Chauncey Swalwell.