Contractual Jury Waivers: New Case Before California Supreme Court Presents a Challenge

A closely watched case now before the California Supreme Court will impact the way equipment lessors do business. In Grafton Partners L.P. v. Superior Court, 9 Cal.Rptr.3d 511 (2004), the California Court of Appeal held that predispute contractual jury waivers are unenforceable under the California Constitution. The case has been accepted for review by the California Supreme Court, and a decision is expected next year.

If upheld, Grafton will call into question the long-standing practice of including jury trial waivers in equipment leases and commercial finance agreements. The outcome of the Grafton case is thus important to equipment lessors not only in California, but across the country. If Grafton is affirmed and predispute contractual jury waivers are invalidated, equipment lessors could face adverse consequences including:

• Increased litigation costs;
• Increases in the time necessary to resolve disputes;
• Increased uncertainty due to the fact that jurors may be unsophisticated and unfamiliar with complex financial transactions; and
• The potential of adverse results due to possible jury bias in favor of lessees and borrowers.

The outcome in Grafton will thus affect not only the manner in which lessors draft their leasing agreements, but the way in which disputes are resolved in the courts. If the California Supreme Court upholds Grafton, lessors will be confronted with increased costs and uncertainty as to their ability to collect from defaulting lessees.

Grafton v Superior Court

Prior to the Grafton decision, the leading California case on the effectiveness of pre-dispute jury waivers was Trizec Properties, Inc. v. Superior Court, 229 Cal.App.3d 1616 (1991). Trizec held that predispute jury waiver clauses are enforceable so long as the provision is “clearly apparent in the contract” and its language is “unambiguous and unequivocal, leaving no room for doubt as to the intention of the parties.” Id. at 1619. The California Constitution permits waiver of a jury trial “by the consent of the parties expressed as prescribed by statute,” (Cal. Const. art. I, ' 16). Trizec found that the only statute addressing the issue, California Code of Civil Procedure ' 631 (' 631), only applies to jury waivers made after a civil action was commenced, and thus was inapplicable to the case before it. (California Code of Civil Procedure ' 631(d) provides that a jury trial may be waived by: 1) failing to appear at the trial; 2) written consent filed with the clerk or judge; 3) oral consent, in open court, entered in the minutes; 4) failure to announce that a jury is required, at the time the case is first set for trial, if it is set upon notice or stipulation, or within 5 days after notice of setting if it is set without notice or stipulation; or 5) failure to deposit jury fees.) The court reasoned, however, that “article I, section 16, of the California Constitution cannot be read to prohibit individuals from waiving, in advance of any pending action, the right to trial by jury in a civil case.” Id. at 1618. The court noted the policy grounds for approving predispute jury waivers, stating, “[I]n many commercial transactions advance assurance that any disputes that may arise will be subject to expeditious resolution in a court trial would best serve the needs of the contracting parties as well that of our overburdened judicial system.” Id. at 1619.

In the Grafton case, Grafton Partners LP retained PricewaterhouseCoopers (PwC) to perform an independent audit of the limited partnership and Allied Capital Partners LP. The engagement letter contained a predispute jury waiver clause. A dispute arose, and PwC sued Grafton and Allied in the California state courts. Defendants demanded a jury trial and PwC moved to strike the demand based on the jury waiver clause. The trial court, relying on Trizec, struck the jury demand.

The decision was reversed on appeal. The appellate court held that under the California Constitution, jury waivers are permitted only when they are “prescribed by statute.” The only statute on point was ' 631; according to the court, all of the methods set out in the statute involve waivers executed in the midst of an ongoing lawsuit. Reasoning that the right to a jury trial “may be waived only as the Legislature prescribes, even in the face of concerns that the interests of the parties and the courts would benefit from a relaxation of this requirement” (9 Cal.Rptr.3d at 516), the court “decline[d] to read into section 631 … an authorization for predispute jury waivers that the Legislature has not provided.” Id. at 518.

Grafton was appealed to the California Supreme Court. The Supreme Court's ruling will be binding in the California state courts and could influence the courts in other jurisdictions with similar statutes. If the Supreme Court holds that the appellate court's interpretation of ' 631 is correct, it could have a disruptive effect on the business community and discourage companies from doing business in California.

Benefits of Pre-Dispute Jury Waivers

While it declined to follow the holding of Trizec, the Grafton court acknowledged that it had “no quarrel with the policy behind Trizec's rule permitting parties to a commercial contract to knowingly and voluntarily enter into a contractual predispute jury waiver.” Id. at 516. Throughout the United States, parties have used predispute jury waiver clauses to limit the potential expense and uncertainty of jury trials and verdicts. Enforcing these clauses allows parties to contract around such variables, to control risk, and limit costs.

There are a number of reasons to choose a bench trial (ie, a trial heard by a judge without a jury) over other forms of dispute resolution. As the Grafton court noted, bench trials are “an attractive middle ground between jury trials, on the one hand, and arbitration on the other.” Id. at 519, n. 10. Bench trials possess some of the benefits of increased efficiency found in arbitration, while maintaining many of the procedural safeguards provided by statute and the California Constitution.

Lessors and commercial lenders often feel a judge, as an experienced and professional trier of fact, is the most reliable and consistent decision maker in dealing with sophisticated commercial matters and disputes involving lengthy or complex documents. A judge has more experience in commercial transactions, and a better understanding of the law. In addition, a judge may review transactional documents in advance and has tools, such as pre-trial and post-trial briefs, to assist him or her. Juries typically only see the transactional documents when introduced into evidence, and may have neither the chance to study the documents nor the expertise to understand them.

Bench trials are also generally more efficient, shorter, and less expensive than jury trials. This is partly due to greater scheduling flexibility in bench trials, which can be interrupted if necessary; interruption of a jury trial can be disruptive and threaten the conduct of a fair trial. More testimony can be taken per day in a bench trial, as there is no need to consider jurors' schedules or to engage in lengthy conferences to address evidentiary issues outside the presence of the jury, and judges can take submission of written deposition testimony, rather than having long sessions where testimony is read into the record.

Further, a bench trial affords the opportunity for the court to issue findings of fact and conclusions of law, which may form a better record on appeal than a judgment entered on a jury award. This also gives the parties greater information as to the basis for the ruling, which may help guide future conduct and reduce future litigation.

The Impact of Grafton Outside California

Many states outside of California have upheld predispute jury waivers in agreements between commercial parties. Sustaining a contractual predispute jury waiver, the Texas Supreme Court recently stated: “[N]early every state court that has considered the issue has held that parties may agree to waive their right to trial by jury in certain future disputes … The same is true in federal courts.” In re Prudential Ins. Co., 2004 Tex. LEXIS 789, 16 (Tex. Sept 3, 2004). State courts in New York, Florida, Missouri, Connecticut, Nevada and Louisiana have approved predispute jury waivers. In addition, in diversity actions commenced in federal courts sitting in California, federal courts routinely enforce predispute jury waivers as a matter of federal law.

As the allowance of predispute jury waivers in other states and the federal courts is based on interpretation of state and federal law and constitutional provisions, the impact of an affirmance of the Grafton case on the law outside California is difficult to gauge at this time. Such an analysis is outside the scope of this article. (In a number of states, the courts have enforced predispute jury waivers on the grounds that state law does not specifically prohibit such waivers, which may be enforced like any contract provision. This rationale is similar to that of Trizec. In Grafton, the court found predispute jury waivers are permitted only if expressly authorized by statute. If Grafton is upheld and other states find its reasoning persuasive, it could significantly impact jury waivers in those jurisdictions. However, if Grafton is upheld by the California Supreme Court, equipment lessors both in California and in other states may well wish to consider choice of law and venue provisions in their lease agreements providing that disputes be adjudicated in states that are more friendly to predispute waivers.)

Jury Trial Waivers and Other Methods of Alternative Dispute Resolution

Justification for upholding predispute jury waivers is not only rooted in the certainty and economic benefit they provide to contracting parties, but also in the fact that California and federal courts enforce predispute arbitration clauses that completely waive a party's right to trial. Grafton recognized that the California Arbitration Act (Cal. Civ.Proc. Code, ' 1280, et seq.) “effectively permits parties to waive a jury trial by agreeing to arbitrate, and these agreements may be entered into before any dispute has arisen.” Grafton, 9 Cal.Rptr.3d at 519. While contractual arbitration is an alternative to trial, it has disadvantages. Under California law, absent fraud or a mathematical error in the calculation of damages, it is almost impossible to appeal or overturn an arbitration award. Further, arbitrators often make an award that is a compromise between the two parties, rather than finding entirely for one side or the other based on the facts and the law.

Conclusion

Throughout the United States, equipment lessors and commercial lenders use predispute jury waiver clauses to limit the expense and uncertainty associated with jury trials. By enforcing these clauses, courts not only benefit the parties, but reduce the burdens on the judicial system. If the California Supreme Court upholds Grafton and disallows these waivers, the ruling could upset current contractual relationships and discourage companies from doing business California. It is possible that the California state legislature, faced with the possible disruption of business, could amend the law to specifically allow predispute jury waivers. Unless and until the legislature takes action, however, the upcoming ruling in Grafton will be binding law in California, and may affect the law in other states as well.

A closely watched case now before the California Supreme Court will impact the way equipment lessors do business. In Grafton Partners L.P. v. Superior Court , 9 Cal.Rptr.3d 511 (2004), the California Court of Appeal held that predispute contractual jury waivers are unenforceable under the California Constitution. The case has been accepted for review by the California Supreme Court, and a decision is expected next year.

If upheld, Grafton will call into question the long-standing practice of including jury trial waivers in equipment leases and commercial finance agreements. The outcome of the Grafton case is thus important to equipment lessors not only in California, but across the country. If Grafton is affirmed and predispute contractual jury waivers are invalidated, equipment lessors could face adverse consequences including:

• Increased litigation costs;
• Increases in the time necessary to resolve disputes;
• Increased uncertainty due to the fact that jurors may be unsophisticated and unfamiliar with complex financial transactions; and
• The potential of adverse results due to possible jury bias in favor of lessees and borrowers.

The outcome in Grafton will thus affect not only the manner in which lessors draft their leasing agreements, but the way in which disputes are resolved in the courts. If the California Supreme Court upholds Grafton, lessors will be confronted with increased costs and uncertainty as to their ability to collect from defaulting lessees.

Grafton v Superior Court

Prior to the Grafton decision, the leading California case on the effectiveness of pre-dispute jury waivers was Trizec Properties, Inc. v. Superior Court , 229 Cal.App.3d 1616 (1991). Trizec held that predispute jury waiver clauses are enforceable so long as the provision is “clearly apparent in the contract” and its language is “unambiguous and unequivocal, leaving no room for doubt as to the intention of the parties.” Id. at 1619. The California Constitution permits waiver of a jury trial “by the consent of the parties expressed as prescribed by statute,” (Cal. Const. art. I, ' 16). Trizec found that the only statute addressing the issue, California Code of Civil Procedure ' 631 (' 631), only applies to jury waivers made after a civil action was commenced, and thus was inapplicable to the case before it. (California Code of Civil Procedure ' 631(d) provides that a jury trial may be waived by: 1) failing to appear at the trial; 2) written consent filed with the clerk or judge; 3) oral consent, in open court, entered in the minutes; 4) failure to announce that a jury is required, at the time the case is first set for trial, if it is set upon notice or stipulation, or within 5 days after notice of setting if it is set without notice or stipulation; or 5) failure to deposit jury fees.) The court reasoned, however, that “article I, section 16, of the California Constitution cannot be read to prohibit individuals from waiving, in advance of any pending action, the right to trial by jury in a civil case.” Id. at 1618. The court noted the policy grounds for approving predispute jury waivers, stating, “[I]n many commercial transactions advance assurance that any disputes that may arise will be subject to expeditious resolution in a court trial would best serve the needs of the contracting parties as well that of our overburdened judicial system.” Id. at 1619.

In the Grafton case, Grafton Partners LP retained PricewaterhouseCoopers (PwC) to perform an independent audit of the limited partnership and Allied Capital Partners LP. The engagement letter contained a predispute jury waiver clause. A dispute arose, and PwC sued Grafton and Allied in the California state courts. Defendants demanded a jury trial and PwC moved to strike the demand based on the jury waiver clause. The trial court, relying on Trizec, struck the jury demand.

The decision was reversed on appeal. The appellate court held that under the California Constitution, jury waivers are permitted only when they are “prescribed by statute.” The only statute on point was ' 631; according to the court, all of the methods set out in the statute involve waivers executed in the midst of an ongoing lawsuit. Reasoning that the right to a jury trial “may be waived only as the Legislature prescribes, even in the face of concerns that the interests of the parties and the courts would benefit from a relaxation of this requirement” (9 Cal.Rptr.3d at 516), the court “decline[d] to read into section 631 … an authorization for predispute jury waivers that the Legislature has not provided.” Id. at 518.

Grafton was appealed to the California Supreme Court. The Supreme Court's ruling will be binding in the California state courts and could influence the courts in other jurisdictions with similar statutes. If the Supreme Court holds that the appellate court's interpretation of ' 631 is correct, it could have a disruptive effect on the business community and discourage companies from doing business in California.

Benefits of Pre-Dispute Jury Waivers

While it declined to follow the holding of Trizec, the Grafton court acknowledged that it had “no quarrel with the policy behind Trizec's rule permitting parties to a commercial contract to knowingly and voluntarily enter into a contractual predispute jury waiver.” Id. at 516. Throughout the United States, parties have used predispute jury waiver clauses to limit the potential expense and uncertainty of jury trials and verdicts. Enforcing these clauses allows parties to contract around such variables, to control risk, and limit costs.

There are a number of reasons to choose a bench trial (ie, a trial heard by a judge without a jury) over other forms of dispute resolution. As the Grafton court noted, bench trials are “an attractive middle ground between jury trials, on the one hand, and arbitration on the other.” Id. at 519, n. 10. Bench trials possess some of the benefits of increased efficiency found in arbitration, while maintaining many of the procedural safeguards provided by statute and the California Constitution.

Lessors and commercial lenders often feel a judge, as an experienced and professional trier of fact, is the most reliable and consistent decision maker in dealing with sophisticated commercial matters and disputes involving lengthy or complex documents. A judge has more experience in commercial transactions, and a better understanding of the law. In addition, a judge may review transactional documents in advance and has tools, such as pre-trial and post-trial briefs, to assist him or her. Juries typically only see the transactional documents when introduced into evidence, and may have neither the chance to study the documents nor the expertise to understand them.

Bench trials are also generally more efficient, shorter, and less expensive than jury trials. This is partly due to greater scheduling flexibility in bench trials, which can be interrupted if necessary; interruption of a jury trial can be disruptive and threaten the conduct of a fair trial. More testimony can be taken per day in a bench trial, as there is no need to consider jurors' schedules or to engage in lengthy conferences to address evidentiary issues outside the presence of the jury, and judges can take submission of written deposition testimony, rather than having long sessions where testimony is read into the record.

Further, a bench trial affords the opportunity for the court to issue findings of fact and conclusions of law, which may form a better record on appeal than a judgment entered on a jury award. This also gives the parties greater information as to the basis for the ruling, which may help guide future conduct and reduce future litigation.

The Impact of Grafton Outside California

Many states outside of California have upheld predispute jury waivers in agreements between commercial parties. Sustaining a contractual predispute jury waiver, the Texas Supreme Court recently stated: “[N]early every state court that has considered the issue has held that parties may agree to waive their right to trial by jury in certain future disputes … The same is true in federal courts.” In re Prudential Ins. Co., 2004 Tex. LEXIS 789, 16 (Tex. Sept 3, 2004). State courts in New York, Florida, Missouri, Connecticut, Nevada and Louisiana have approved predispute jury waivers. In addition, in diversity actions commenced in federal courts sitting in California, federal courts routinely enforce predispute jury waivers as a matter of federal law.

As the allowance of predispute jury waivers in other states and the federal courts is based on interpretation of state and federal law and constitutional provisions, the impact of an affirmance of the Grafton case on the law outside California is difficult to gauge at this time. Such an analysis is outside the scope of this article. (In a number of states, the courts have enforced predispute jury waivers on the grounds that state law does not specifically prohibit such waivers, which may be enforced like any contract provision. This rationale is similar to that of Trizec. In Grafton, the court found predispute jury waivers are permitted only if expressly authorized by statute. If Grafton is upheld and other states find its reasoning persuasive, it could significantly impact jury waivers in those jurisdictions. However, if Grafton is upheld by the California Supreme Court, equipment lessors both in California and in other states may well wish to consider choice of law and venue provisions in their lease agreements providing that disputes be adjudicated in states that are more friendly to predispute waivers.)

Jury Trial Waivers and Other Methods of Alternative Dispute Resolution

Justification for upholding predispute jury waivers is not only rooted in the certainty and economic benefit they provide to contracting parties, but also in the fact that California and federal courts enforce predispute arbitration clauses that completely waive a party's right to trial. Grafton recognized that the California Arbitration Act (Cal. Civ.Proc. Code, ' 1280, et seq.) “effectively permits parties to waive a jury trial by agreeing to arbitrate, and these agreements may be entered into before any dispute has arisen.” Grafton, 9 Cal.Rptr.3d at 519. While contractual arbitration is an alternative to trial, it has disadvantages. Under California law, absent fraud or a mathematical error in the calculation of damages, it is almost impossible to appeal or overturn an arbitration award. Further, arbitrators often make an award that is a compromise between the two parties, rather than finding entirely for one side or the other based on the facts and the law.

Conclusion

Throughout the United States, equipment lessors and commercial lenders use predispute jury waiver clauses to limit the expense and uncertainty associated with jury trials. By enforcing these clauses, courts not only benefit the parties, but reduce the burdens on the judicial system. If the California Supreme Court upholds Grafton and disallows these waivers, the ruling could upset current contractual relationships and discourage companies from doing business California. It is possible that the California state legislature, faced with the possible disruption of business, could amend the law to specifically allow predispute jury waivers. Unless and until the legislature takes action, however, the upcoming ruling in Grafton will be binding law in California, and may affect the law in other states as well.