California Supreme Court Strikes Down Jury Waiver Clauses

The dispute between PricewaterhouseCoopers and the two plaintiffs, Grafton Partners L.P. and Allied Capital Partners, arose out of an audit done by PricewaterhouseCoopers for the two partnerships. Under the terms of the audit engagement letter, PricewaterhouseCoopers and the two partnerships agreed not to demand a trial by jury in any action arising out of PricewaterhouseCoopers' services or fees. The partnerships later sued PricewaterhouseCoopers in California state court for negligence, misrepresentation and other claims and demanded a jury trial. Upon a motion by PricewaterhouseCoopers, the trial court struck the jury demand on the basis of the waiver contained in the engagement letter. The California Court of Appeal later reversed the trial court, and the California Supreme Court affirmed the Court of Appeal's decision.

The California Supreme Court's rationale in interpreting the California Constitution and the existing legislation regarding jury waivers was sound, but the result is clearly undesirable for the business community or for anyone who seeks to avoid having a California jury adjudicate their disputes. This dissatisfaction is evidenced in one Supreme Court justice's reluctant concurrence to the Grafton Partners opinion. After acknowledging that nearly every other state that has considered the issue has upheld a party's right to waive civil jury trial, Associate Justice Ming W. Chin urged the California Legislature in his concurring opinion to enact legislation expressly authorizing pre-dispute jury waivers. Given the political clout of the various groups backing PricewaterhouseCoopers on this issue, it is likely that such legislation will soon be in the works. It is hoped that such legislation would not only validate jury waivers in all future contracts, but also those in existing contracts, noting that the California Legislature does have the authority to validate such waivers retroactively. Whether such legislation gets passed is another story. The organizations that submitted amicus briefs to the California Supreme Court in support of the partnerships' position, including the American Board of Trial Advocates, the Consumer Attorneys of California and the Association of Trial Lawyers of America, are likely to weigh in with the California Legislature as well.

Generally, parties to lease and finance transactions do all that they can to avoid the risk of having any related disputes determined by a jury for two reasons. The first being the added cost of a jury trial over a judge trial, and the second being the uncertainty inherent in having juries deciding matters in complex financial transactions. Given the amounts spent on discovery and other pre-trial matters, the additional costs of having a jury trial instead of a traditional judge trial may not be significant. Concerns about the ability of juries to understand complex transactions without undue prejudice are, however, justified and provide a valid basis for wanting to avoid juries. Thus, financiers, lessors, lessees, advisers, service providers and others running the risk of being involved in a California lawsuit (or who are currently involved in a California lawsuit), need to understand how the court's holding in Grafton Partners affects their rights.

The Grafton Partners holding would most likely apply only to matters pending before a California state court. Procedural matters, such as the right to a jury trial, are generally determined by the law of the court hearing the matter. Thus, a federal court in California would apply federal law in determining whether a pre-dispute contractual jury waiver is enforceable, regardless of the residency of the parties or whether California law governed the contract. Such waivers are generally enforceable under federal law. Similarly, a court in a state other than California should look to its own procedural law to determine whether jury waivers are enforceable, again, regardless of the residency of the parties or the law governing the contract.

Unfortunately, the same should hold true when California state courts preside over matters where the governing law of the contract is other than the law of California. California's internal laws will determine whether a jury waiver is effective, regardless of the governing law of the contract or the location of the parties. Thus, parties that wind up in California courts cannot escape the affects of the Grafton Partners opinion by merely choosing the law of a different jurisdiction to govern their financing, leasing and other agreements.

With one exception, the only present way to avoid having a pre-dispute jury waiver invalidated under Grafton Partners is to avoid being in a California state court. This can be done through arbitration clauses and, to the extent permitted by federal and state law, by commencing an action in a state court outside of California, by filing an action in a federal court or, if an action is commenced in a California state court, by removing it to the appropriate federal court. The parties can also avoid being in front of a California state court by agreeing in their contract to some other court having exclusive jurisdiction over any dispute. Equipment lessees, owners and financiers, however, should be very careful in doing so to make sure that such a clause would be enforceable and that in agreeing to such, they are not foregoing any necessary or desirable rights or remedies by not being able to commence an action anywhere else.

The one exception noted above would arise from an agreement in a contract to have any controversy thereunder referred pursuant to California Code of Civil Procedure section 638 to a referee who would determine all of the issues, whether of fact or of law, and whose statement of decision would be treated as the decision of the court. Upon the commencement of a lawsuit, if the parties could not agree on a referee, the California trial court would appoint one (most likely a retired judge). Unlike an arbitration, any such proceeding would be governed by the same rules applicable to a California state court, including the rules of civil procedure, pre-trial discovery and evidence. Like an arbitration, but unlike a court trial, the parties must pay the referee's fees.

Since there is a chance that the California Legislature will validate existing and future pre-dispute jury waivers, parties seeking to avoid California jury trials should continue to include jury waivers in their agreements, but they should also, in the meantime, consider including in new agreements or amending existing agreements to include an arbitration clause or an election to subject their disputes to a section 638 referee if at the time of any trial pending in California, pre-dispute, contractual jury waivers are still unenforceable in California.

The California Supreme Court has thrown a wrench into the California trial courts' long-accepted practice of enforcing contractual jury waivers by holding that such pre-dispute waivers do not effectively supersede a party's constitutional right to a jury trial. The court's conclusion is not surprising given the express provisions of the California Constitution, but it nonetheless sent a shockwave through the finance and leasing community.

In a unanimous opinion, the California high court held in Grafton Partners v. Superior Court (PricewaterhouseCoopers), [2005 DJDAR 9387 (Cal. Aug. 4, 2005)] that in the absence of any legislation expressly permitting parties to waive their constitutional right to a jury trial prior to the commencement of a lawsuit, pre-dispute jury waivers contained in contracts cannot be enforced by California trial courts. When parties to a contract have their disputes resolved in the courts of California, the California Constitution accords them the right to a jury trial, which can only be waived “by consent of the parties expressed as prescribed by statute.” (Cal. Const. art. I '16.) After considering the arguments of defendant PricewaterhouseCoopers, as well as the arguments presented in amicus briefs filed by 11 different organizations in favor of jury waivers, that California Code of Civil Procedure section 631 permits pre-dispute contractual jury waivers, the high court, applying established rules of statutory interpretation, found section 631 applies only to jury waivers made after a dispute arises between the parties and does not prescribe a method or right to waive a jury trial prior to a dispute arising between the parties.

PricewaterhouseCoopers was not alone in its position. It had relied on a 1991 California Court of Appeal opinion upholding a pre-dispute jury waiver under Section 631 and was supported in the California Supreme Court review by numerous organizations, including the Commercial Finance Association, the California Bankers Association, the California Mortgage Bankers Association, the Chamber of Commerce of the United States of America, the California Chamber of Commerce and the American Institute of Certified Public Accountants.

The dispute between PricewaterhouseCoopers and the two plaintiffs, Grafton Partners L.P. and Allied Capital Partners, arose out of an audit done by PricewaterhouseCoopers for the two partnerships. Under the terms of the audit engagement letter, PricewaterhouseCoopers and the two partnerships agreed not to demand a trial by jury in any action arising out of PricewaterhouseCoopers' services or fees. The partnerships later sued PricewaterhouseCoopers in California state court for negligence, misrepresentation and other claims and demanded a jury trial. Upon a motion by PricewaterhouseCoopers, the trial court struck the jury demand on the basis of the waiver contained in the engagement letter. The California Court of Appeal later reversed the trial court, and the California Supreme Court affirmed the Court of Appeal's decision.

The California Supreme Court's rationale in interpreting the California Constitution and the existing legislation regarding jury waivers was sound, but the result is clearly undesirable for the business community or for anyone who seeks to avoid having a California jury adjudicate their disputes. This dissatisfaction is evidenced in one Supreme Court justice's reluctant concurrence to the Grafton Partners opinion. After acknowledging that nearly every other state that has considered the issue has upheld a party's right to waive civil jury trial, Associate Justice Ming W. Chin urged the California Legislature in his concurring opinion to enact legislation expressly authorizing pre-dispute jury waivers. Given the political clout of the various groups backing PricewaterhouseCoopers on this issue, it is likely that such legislation will soon be in the works. It is hoped that such legislation would not only validate jury waivers in all future contracts, but also those in existing contracts, noting that the California Legislature does have the authority to validate such waivers retroactively. Whether such legislation gets passed is another story. The organizations that submitted amicus briefs to the California Supreme Court in support of the partnerships' position, including the American Board of Trial Advocates, the Consumer Attorneys of California and the Association of Trial Lawyers of America, are likely to weigh in with the California Legislature as well.

Generally, parties to lease and finance transactions do all that they can to avoid the risk of having any related disputes determined by a jury for two reasons. The first being the added cost of a jury trial over a judge trial, and the second being the uncertainty inherent in having juries deciding matters in complex financial transactions. Given the amounts spent on discovery and other pre-trial matters, the additional costs of having a jury trial instead of a traditional judge trial may not be significant. Concerns about the ability of juries to understand complex transactions without undue prejudice are, however, justified and provide a valid basis for wanting to avoid juries. Thus, financiers, lessors, lessees, advisers, service providers and others running the risk of being involved in a California lawsuit (or who are currently involved in a California lawsuit), need to understand how the court's holding in Grafton Partners affects their rights.

The Grafton Partners holding would most likely apply only to matters pending before a California state court. Procedural matters, such as the right to a jury trial, are generally determined by the law of the court hearing the matter. Thus, a federal court in California would apply federal law in determining whether a pre-dispute contractual jury waiver is enforceable, regardless of the residency of the parties or whether California law governed the contract. Such waivers are generally enforceable under federal law. Similarly, a court in a state other than California should look to its own procedural law to determine whether jury waivers are enforceable, again, regardless of the residency of the parties or the law governing the contract.

Unfortunately, the same should hold true when California state courts preside over matters where the governing law of the contract is other than the law of California. California's internal laws will determine whether a jury waiver is effective, regardless of the governing law of the contract or the location of the parties. Thus, parties that wind up in California courts cannot escape the affects of the Grafton Partners opinion by merely choosing the law of a different jurisdiction to govern their financing, leasing and other agreements.

With one exception, the only present way to avoid having a pre-dispute jury waiver invalidated under Grafton Partners is to avoid being in a California state court. This can be done through arbitration clauses and, to the extent permitted by federal and state law, by commencing an action in a state court outside of California, by filing an action in a federal court or, if an action is commenced in a California state court, by removing it to the appropriate federal court. The parties can also avoid being in front of a California state court by agreeing in their contract to some other court having exclusive jurisdiction over any dispute. Equipment lessees, owners and financiers, however, should be very careful in doing so to make sure that such a clause would be enforceable and that in agreeing to such, they are not foregoing any necessary or desirable rights or remedies by not being able to commence an action anywhere else.

The one exception noted above would arise from an agreement in a contract to have any controversy thereunder referred pursuant to California Code of Civil Procedure section 638 to a referee who would determine all of the issues, whether of fact or of law, and whose statement of decision would be treated as the decision of the court. Upon the commencement of a lawsuit, if the parties could not agree on a referee, the California trial court would appoint one (most likely a retired judge). Unlike an arbitration, any such proceeding would be governed by the same rules applicable to a California state court, including the rules of civil procedure, pre-trial discovery and evidence. Like an arbitration, but unlike a court trial, the parties must pay the referee's fees.

Since there is a chance that the California Legislature will validate existing and future pre-dispute jury waivers, parties seeking to avoid California jury trials should continue to include jury waivers in their agreements, but they should also, in the meantime, consider including in new agreements or amending existing agreements to include an arbitration clause or an election to subject their disputes to a section 638 referee if at the time of any trial pending in California, pre-dispute, contractual jury waivers are still unenforceable in California.