Common Business Contract Provision Voided by Supreme Court

The California Supreme Court has recently voided a common contractual provision that businesses have in the past used to avoid jury trials.

Parties to commercial contracts and other business contracts often agree to waive the right to a jury trial in the event of a legal dispute. Instead of trusting their fates to twelve random members of the public, the parties waive the right to a jury trial and instead agree that a judge will decide disputes. The California Supreme Court recently decided that the California Constitution prohibits contracts giving up the right to jury trial.

As discussed in detail below, the California Supreme Court has narrowed the rights of parties to contracts control the way that legal disputes are resolved. Consideration should be given to the remaining valid methods of litigation: arbitration and trial by reference. These alternatives are discussed below.

Summary of the Court’s Decision To Invalidate Jury Waivers

The Supreme Court issued its decision on August 4, 2005 in a case entitled Grafton Partners L.P. v. Superior Court. In that matter, Grafton Partners L.P. hired PriceWaterhouseCoopers L.L.P. to audit certain accounts. The businesses entered into a consulting agreement which contained the following clause: “In the unlikely event that differences concerning PriceWaterhouseCooper’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, the parties agree not to demand a trial by jury in any action . . .”

The “unlikely” did in fact happen; Grafton sued PriceWaterhouseCoopers for negligence for failing to disclose fraud discovered during the audit. Grafton demanded a jury trial, but the trial court rejected the demand because of the contractual waiver clause quoted above. Grafton appealed the ruling.

Ultimately the California Supreme Court determined that the trial court’s ruling was in error. In ruling that the jury waiver was unenforceable, the California Supreme Court relied on the California Constitution. Article I, Section 16 accords all civil litigants the right to trial by jury. The Constitution provides that the right to a jury may only be waived by consent of the parties “as provided by statute.” In other words, the Constitution permits the legislature to enact statutes providing for waiver of right to a jury trial.

The Court reviewed California statutes and found no provision allowing parties to waive their right to a jury trial before a lawsuit is filed. Although Section 631 of the Code of Civil Procedure allows parties to waive the right to a jury trial, this waiver may only be made after a lawsuit is filed. Unless and until the California legislature amends the statute to provide for pre-dispute waivers, such provisions in contracts are not enforceable.

The Court’s ruling overruled a 1991 appellate court case, Trizec Properties, Inc. v. Superior Court. That case authorized pre-dispute contractual jury waivers. In overruling Trizec, the Court recognized that in many cases a jury waiver might benefit the parties and the judicial system by saving costs and time. Nevertheless, that perceived benefit could not trump the strong public policy guaranteeing the right to a jury trial.

Effect of Ruling
Businesses frequently include a jury waiver in their contracts for a variety of reasons. One reason is that juries are not likely to understand complicated business transactions, and therefore their verdicts are unpredictable. In the context of consumer transactions, businesses commonly believe that juries tend to sympathize with the consumer rather than focus on the legal issues favoring the business. Worse yet, juries are often thought to be more likely to award inappropriately large verdicts. The higher cost and longer trials needed to present a case to a jury also leads businesses to prefer the more efficient bench (judge) trial.

Because many commercial contracts include a jury waiver, the Court’s ruling will dramatically affect the way business disputes are resolved in California. As a result of the Court’s ruling, pre-dispute provisions to waive the right to a jury trial will not be enforced. Instead, if one party objects to the waiver after a lawsuit is filed, the court must permit a jury trial. Of course, if both parties agree to voluntarily waive the jury trial after the lawsuit is filed, the court will allow this waiver under C.C.P. § 631.

The surest way to remedy the problem is to amend each agreement to provide for some other method of dispute resolution. However, it would be difficult, if not impossible to amend contracts that have already been performed. Moreover, for many businesses, the sheer number of contracts in existence will make it impractical to amend them all. Essentially, these contracts are ticking time bombs that cannot be defused until the four-year statute of limitations expires.

For new contracts to be signed after the date of the Court’s decision, jury waiver clauses should be immediately deleted or supplemented with alternate dispute resolution options.

The most likely reaction in the business community will be inaction. Many businesses will never hear about the Court’s decision unless they end up in a lawsuit. Then they are in for a nasty surprise. Other businesses may decide to wait and see if the legislature amends the Code of Civil Procedure to expressly allow pre-dispute jury

Of course, this approach requires ample trust that our politicians in Sacramento will actually “fix things.” Alternative Methods of Dispute Resolution Given that pre-dispute jury waivers are no longer enforceable, businesses must consider alternate means to avoid jury trials. Arbitration is the most common method alternative dispute resolution. Contracts containing arbitration clauses will not be affected by the Court’s ruling. The Court expressly stated that pre-dispute arbitration clauses are enforceable, because they are specifically authorized by C.C.P § 1281.

Businesses using contracts with jury waiver clauses may want to consider substituting those clauses with an arbitration clause. However, careful consideration should be given to the potential disadvantages. Contractual arbitration has its own drawbacks. Unlike court trials, arbitrations cannot be appealed absent extreme circumstances such as where the arbitrator had undisclosed conflicts of interest or engaged in other misconduct. Moreover, arbitrators do not have to follow the usual “rules” of procedure, evidence, or even substantive law. They can make decisions purely on what they perceive to be “fair.” Consequently, arbitrators are perceived to be more likely to render “compromise” decisions (i.e. “split the baby”). Also, summary judgment motions and other dispositive motions designed to cut the lawsuit short are rarely granted in the arbitration forum. Additionally, arbitration can be more expensive. Judges are government employees, paid by the public. By contrast, arbitrators are attorneys or retired judges who charge the parties for their work.

Another problem with arbitration agreements is that in recent years they have been increasingly difficult to enforce. Courts will now scrutinize the terms of arbitration agreements, and will refuse to enforce them when the terms are deemed too onerous for one party.

Nevertheless, many businesses will prefer to live with the drawbacks of arbitration when the alternative is a jury trial.

Another lesser-known option is “trial by reference.” Section 638 of the Code of Civil Procedure allows a court to send a matter to a “referee” for hearing. Typically, the referee is an attorney or retired judge. The judge may refer the case to a referee for a decision on a discrete question or issue (a “specific reference”), or for a decision on the entire case (a “general reference”). The general reference case goes forward as if it were a regular bench trial, except that the referee decides the case instead of the judge. If the reference is general, the referee’s decision becomes a court judgment, just as if the court had tried the action. Further, the decision may be appealed in the same manner as a regular court judgment.

The Code expressly allows parties to enter into pre-dispute agreements providing that a referee shall hear any controversy. Therefore, the California Supreme Court will not invalidate agreements calling for this manner of dispute resolution.

Trial by reference is a blend of arbitration and bench trial. It is like a bench trial because the right to appeal is preserved. Moreover, all the usual rules of procedure, evidence, and substantive law apply. It is like arbitration because the parties can choose their own retired judge and can control the timing of litigation and the trial date. Unfortunately, it is also like arbitration in that parties must pay the referee’s hourly fee. This can become expensive. Another problem is that like arbitration agreements, agreements calling for trial by reference are subject to judicial scrutiny for fairness. A court may refuse to enforce an agreement; if that happens, the matter goes to a jury trial.

Careful consideration of these options and prompt revision of contracts will help businesses avoid an unplanned visit to a jury trial.

The articles presented herein are intended as a brief overview of the law and is not intended to substitute as legal advice. Any questions or concerns regarding any statute or case law should be addressed to a licensed attorney. Copyright 2005 by Barker Law Group, A Professional Law Corporation. All rights reserved.