Predispute Contractual Waivers of Jury Trial

The Supreme Court based its decision on Article 1, section 16, of the California Constitution, which guarantees the right to a jury trial in civil cases and states that the right to a jury trial 'may be waived by the consent of the parties expressed as prescribed by statute [emphasis added].' California Code of Civil Procedure Section 631(d) prescribes six methods by which jury trials may be waived, including by written consent filed with the clerk or judge. The Supreme Court concluded that, based on the wording of section 631, any such written consent filed with the clerk or judge must actually be given subsequent to the commencement of the lawsuit. The Supreme Court did, however, recognize two major exceptions to the general rule that predispute waivers of jury trial are unenforceable: 1) agreements to arbitrate disputes pursuant to California Code of Civil Procedure Section 1280 through 1296 and 2) agreements to have disputes resolved by judicial reference pursuant to California Code of Civil Procedure Sections 638 through 645.2.

Arbitration and Judicial Reference

The first exception allowing for a predispute waiver of a jury trial is an agreement to arbitrate disputes. California Code of Civil Procedure Section 1281 provides that a 'written agreement to submit to arbitration an existing controversy or a controversy thereafter arising is valid, enforceable and irrevocable, save upon such grounds as exist for the revocation of any contract.' In Grafton, the Supreme Court distinguished predispute agreements to arbitrate from unenforceable jury trial waivers in two ways. First, these waivers are expressly prescribed by statute. Second, arbitration agreements 'represent an agreement to avoid the judicial forum altogether' as opposed to other predispute waivers of jury trial.

The determination of whether arbitration is the ideal choice for a given contract must be made on a deal by deal basis, taking into account a party's role in the transaction (e.g., lender or borrower, landlord or tenant, purchaser or seller, etc.) and the relative circumstances of each party in the particular transaction. If it is determined that arbitration is the preferred method of dispute resolution, careful thought must go into drafting the provision and picking the correct rules and procedures governing the arbitration (e.g., which organization will conduct the arbitration, how the specific arbitrator(s) will be selected, under which rules the arbitration will be conducted, etc.). Attorneys must also keep in mind that such provisions are still subject to attack as being unenforceable on 'such grounds as exist for the revocation of any contract,' most commonly on grounds of unconscionability. For instance, a recent California case, Higgins v. Superior Court, 140 Cal. App. 4^th 1238 (Cal. Ct. App., 2006), found that an arbitration provision was unconscionable for, among other things, being one-sided, because it compelled only one party to utilize binding arbitration in the event of a dispute. In any event, practitioners should be aware that, pursuant to California Code of Civil Procedure Section 1298, if the contract is in connection with the conveyance of real property (not including powers of sale contained in deeds of trust or mortgages) or with a listing agreement or other agreement between an owner and its agent in connection with a real property sales transaction, the provision providing for binding arbitration must be clearly titled 'ARBITRATION OF DISPUTES' and must conform to the other requirements of California Code of Civil Procedure Section 1298.

The other major, but less common, exception to the general rule that predispute waivers of jury trials are unenforceable are predispute agreements to settle disputes by judicial reference in accordance with California Code of Civil Procedure Sections 638 through 645.2. The recent case of Woodside Homes of California Inc. v. Superior Court, 142 Cal. App. 4^th 99 (Cal. Ct. App., 2006), confirmed that a judicial reference provision in a purchase contract is valid in light of the decision in Grafton. However, judicial reference is not very common in California real estate contracts ' arbitration is the chosen method of alternative dispute resolution in most real estate contracts.

Basically, in a judicial reference proceeding, the dispute is brought before a California state court, and the court appoints a 'referee,' who is typically a retired judge. The referee hears the case and then reports his or her decision to the trial court. The decision of the referee is subject to judicial review and can be appealed; in this way, it is unlike arbitration, which is usually binding except in certain limited circumstances.

As with arbitration, the decision to opt for judicial reference in a contract must be made on a transaction-by-transaction basis. Since judicial reference is a court-related proceeding, the parties will have less ability than in arbitration to tailor in their agreement the manner in which the dispute is resolved. Therefore, practitioners must be very careful not to include rules governing the judicial reference in their agreements that are not enforceable. Finally, like arbitration provisions, agreements to settle disputes by judicial reference are subject to attack based on unconscionability of the particular provision (see Pardee Construction Co. v. Superior Court, 100 Cal. App. 4^th 1081 (Cal. Ct. App., 2003).

Modifying Real Estate Contracts After Grafton

Most real estate-related contracts in California still have provisions whereby the parties waive any right to trial by jury, primarily because real estate practitioners are hoping that the California legislature will amend the California Code of Civil Procedure to expressly allow for predispute waivers of jury trials. The Supreme Court indicated in Grafton that it would not seek to overturn such an express waiver, stating 'after considering the history of California's constitutional and statutory provisions governing waiver of the right to jury trial, we conclude that it is for the Legislature, not this court, to determine whether, and under what circumstances, a predispute waiver of jury trial will be enforceable in this state.' In fact, bills introduced in both the California senate and assembly during the 2006 session sought to allow for predispute waivers of jury trials in civil cases. However, that legislation was not successful and the Grafton case is still valid law in California.

Because of the possibility that Grafton may be overturned in the future, and the fact that a waiver of jury trial may still be enforceable in the context of litigation in a federal court (e.g., a bankruptcy proceeding) or a state court other than California, the standard waiver of jury trial provision should not necessarily be removed from form real estate documents. However, in light of Grafton, certain modifications should be made to those provisions.

First, the provisions should begin with a phrase to the effect of 'to the extent now or hereafter permitted by applicable law.' Although most form contracts contain a severability clause that would keep an unenforceable jury trial waiver from invalidating the entire contract, such a lead-in clause is still recommended as 'belts and suspenders.'

Second, assuming that, given a choice, the client would prefer to revert back to the waiver of jury trial language if it is enforceable rather than proceeding to judicial reference or arbitration (if one of these alternatives is provided in the contract), the judicial reference or arbitration provision should be drafted so that it applies only in the event the waiver of jury trial provision is unenforceable. Therefore, the arbitration provision should begin with a phrase along these lines: 'To the extent a predispute waiver of the right to trial by jury is not enforceable under applicable law ' '

Finally, because it is likely that any prospective legislation allowing for predispute jury trial waiver will require that the waiver be conspicuous ' as is required for waivers of other crucial rights ' the provisions should be drafted with all capitalized letters so as to minimize any argument of unconscionability based on a claim that the provision is inconspicuous. This same general rule also applies to arbitration provisions and judicial reference provisions, as making them conspicuous in the document reduces grounds on which a party may allege such provisions are unconscionable (i.e., that the provision was inconspicuous).

Predispute waivers of jury trials are unenforceable under California law, subject to certain limited exceptions. While the recent California Supreme Court case of Grafton Partners v. Supreme Court , 36 Cal. 4th 944 (2005), invalidated such waivers, there remain two ways that parties can agree, predispute, to avoid a jury trial in commercial real property related transactions.

The Grafton Case

On Aug. 4, 2005, the California Supreme Court held in Grafton that predispute agreements to waive jury trials are unenforceable. The holding in Grafton is retroactive, applying to contracts entered into before and after the date of decision. Because the Supreme Court's decision in Grafton was not based on the unconscionability of jury trial waivers, these waivers are unenforceable even in commercial settings where both parties are represented by sophisticated counsel. The Grafton holding sent shockwaves through the California real estate legal community, as most real estate-related contracts (e.g., leases, loan documents, purchase and sale agreements) contain waivers of jury trial.

The Supreme Court based its decision on Article 1, section 16, of the California Constitution, which guarantees the right to a jury trial in civil cases and states that the right to a jury trial 'may be waived by the consent of the parties expressed as prescribed by statute [emphasis added].' California Code of Civil Procedure Section 631(d) prescribes six methods by which jury trials may be waived, including by written consent filed with the clerk or judge. The Supreme Court concluded that, based on the wording of section 631, any such written consent filed with the clerk or judge must actually be given subsequent to the commencement of the lawsuit. The Supreme Court did, however, recognize two major exceptions to the general rule that predispute waivers of jury trial are unenforceable: 1) agreements to arbitrate disputes pursuant to California Code of Civil Procedure Section 1280 through 1296 and 2) agreements to have disputes resolved by judicial reference pursuant to California Code of Civil Procedure Sections 638 through 645.2.

Arbitration and Judicial Reference

The first exception allowing for a predispute waiver of a jury trial is an agreement to arbitrate disputes. California Code of Civil Procedure Section 1281 provides that a 'written agreement to submit to arbitration an existing controversy or a controversy thereafter arising is valid, enforceable and irrevocable, save upon such grounds as exist for the revocation of any contract.' In Grafton, the Supreme Court distinguished predispute agreements to arbitrate from unenforceable jury trial waivers in two ways. First, these waivers are expressly prescribed by statute. Second, arbitration agreements 'represent an agreement to avoid the judicial forum altogether' as opposed to other predispute waivers of jury trial.

The determination of whether arbitration is the ideal choice for a given contract must be made on a deal by deal basis, taking into account a party's role in the transaction (e.g., lender or borrower, landlord or tenant, purchaser or seller, etc.) and the relative circumstances of each party in the particular transaction. If it is determined that arbitration is the preferred method of dispute resolution, careful thought must go into drafting the provision and picking the correct rules and procedures governing the arbitration (e.g., which organization will conduct the arbitration, how the specific arbitrator(s) will be selected, under which rules the arbitration will be conducted, etc.). Attorneys must also keep in mind that such provisions are still subject to attack as being unenforceable on 'such grounds as exist for the revocation of any contract,' most commonly on grounds of unconscionability. For instance, a recent California case, Higgins v. Superior Court, 140 Cal. App. 4^th 1238 (Cal. Ct. App., 2006), found that an arbitration provision was unconscionable for, among other things, being one-sided, because it compelled only one party to utilize binding arbitration in the event of a dispute. In any event, practitioners should be aware that, pursuant to California Code of Civil Procedure Section 1298, if the contract is in connection with the conveyance of real property (not including powers of sale contained in deeds of trust or mortgages) or with a listing agreement or other agreement between an owner and its agent in connection with a real property sales transaction, the provision providing for binding arbitration must be clearly titled 'ARBITRATION OF DISPUTES' and must conform to the other requirements of California Code of Civil Procedure Section 1298.

The other major, but less common, exception to the general rule that predispute waivers of jury trials are unenforceable are predispute agreements to settle disputes by judicial reference in accordance with California Code of Civil Procedure Sections 638 through 645.2. The recent case of Woodside Homes of California Inc. v. Superior Court , 142 Cal. App. 4^th 99 (Cal. Ct. App., 2006), confirmed that a judicial reference provision in a purchase contract is valid in light of the decision in Grafton. However, judicial reference is not very common in California real estate contracts ' arbitration is the chosen method of alternative dispute resolution in most real estate contracts.

Basically, in a judicial reference proceeding, the dispute is brought before a California state court, and the court appoints a 'referee,' who is typically a retired judge. The referee hears the case and then reports his or her decision to the trial court. The decision of the referee is subject to judicial review and can be appealed; in this way, it is unlike arbitration, which is usually binding except in certain limited circumstances.

As with arbitration, the decision to opt for judicial reference in a contract must be made on a transaction-by-transaction basis. Since judicial reference is a court-related proceeding, the parties will have less ability than in arbitration to tailor in their agreement the manner in which the dispute is resolved. Therefore, practitioners must be very careful not to include rules governing the judicial reference in their agreements that are not enforceable. Finally, like arbitration provisions, agreements to settle disputes by judicial reference are subject to attack based on unconscionability of the particular provision ( see Pardee Construction Co. v. Superior Court , 100 Cal. App. 4 th 1081 (Cal. Ct. App., 2003).

Modifying Real Estate Contracts After Grafton

Most real estate-related contracts in California still have provisions whereby the parties waive any right to trial by jury, primarily because real estate practitioners are hoping that the California legislature will amend the California Code of Civil Procedure to expressly allow for predispute waivers of jury trials. The Supreme Court indicated in Grafton that it would not seek to overturn such an express waiver, stating 'after considering the history of California's constitutional and statutory provisions governing waiver of the right to jury trial, we conclude that it is for the Legislature, not this court, to determine whether, and under what circumstances, a predispute waiver of jury trial will be enforceable in this state.' In fact, bills introduced in both the California senate and assembly during the 2006 session sought to allow for predispute waivers of jury trials in civil cases. However, that legislation was not successful and the Grafton case is still valid law in California.

Because of the possibility that Grafton may be overturned in the future, and the fact that a waiver of jury trial may still be enforceable in the context of litigation in a federal court (e.g., a bankruptcy proceeding) or a state court other than California, the standard waiver of jury trial provision should not necessarily be removed from form real estate documents. However, in light of Grafton, certain modifications should be made to those provisions.

First, the provisions should begin with a phrase to the effect of 'to the extent now or hereafter permitted by applicable law.' Although most form contracts contain a severability clause that would keep an unenforceable jury trial waiver from invalidating the entire contract, such a lead-in clause is still recommended as 'belts and suspenders.'

Second, assuming that, given a choice, the client would prefer to revert back to the waiver of jury trial language if it is enforceable rather than proceeding to judicial reference or arbitration (if one of these alternatives is provided in the contract), the judicial reference or arbitration provision should be drafted so that it applies only in the event the waiver of jury trial provision is unenforceable. Therefore, the arbitration provision should begin with a phrase along these lines: 'To the extent a predispute waiver of the right to trial by jury is not enforceable under applicable law ' '

Finally, because it is likely that any prospective legislation allowing for predispute jury trial waiver will require that the waiver be conspicuous ' as is required for waivers of other crucial rights ' the provisions should be drafted with all capitalized letters so as to minimize any argument of unconscionability based on a claim that the provision is inconspicuous. This same general rule also applies to arbitration provisions and judicial reference provisions, as making them conspicuous in the document reduces grounds on which a party may allege such provisions are unconscionable (i.e., that the provision was inconspicuous).