Runaway Jury Waivers: Pre-dispute Waivers May No Longer Be Enforceable Under California Law

For many years, the real estate industry has taken for granted that pre-dispute jury waivers negotiated in leases, purchase and sale agreements and loan documents will be enforced in California. These waivers have been widely used to resolve disputes by the court, while avoiding many of the potential perils of a trial by jury, such as excessive or inadequate damage awards, jury nullification, bias or prejudice against corporations, delay, inconsistent fact finding, misunderstanding of the law and outright juror misconduct.

The logic of jury waivers was illustrated in a recent Los Angeles jury trial. In this case, an institutional commercial property owner was the victim of a massive punitive damage award with little supporting evidence. Fortunately, the trial judge overturned the award, finding that not only was there insufficient evidence to support the verdict, but also that the jury's award was the result of "passion and prejudice." According to some of the jurors in that case, there were a number of instances of outright juror misconduct during the trial and deliberations.

This case is but one example of the many instances in California in which institutional and corporate clients, including lenders, investors, property owners and developers, can suffer at the hands of juries. Juries have become notorious for determining the guilt or innocence of the parties based on a perceived disparity of power or money. This predisposition colors jurors' decisions, as does forming a preference for one side over the other for a variety of reasons unrelated to the merits of the case. Real estate participants who do not want to risk such a result understandably opt for jury waivers in their agreements.

The Grafton Decision

However, after the First District Court of Appeal decided Grafton Partners, LP v. Superior Court, 2004 WL 226192 (Cal.App.1st Dist.), parties can no longer be certain that jury waivers will be enforceable. On February 6, 2004, the First District held that contractual pre-dispute jury waivers in civil actions are unenforceable under California law.

Until Grafton, the courts have enforced such waivers under Trizec Properties, Inc. v. Superior Court, 229 Cal.App.3d 1616 (Cal.App.2d Dist.) (1991). In Trizec, a landlord and tenant entered into a commercial lease agreement with a provision for both parties to waive their right to a jury trial. The landlord later filed a breach of contract action, alleging that the tenant defaulted and failed to pay basic monthly rent. The tenant cross-complained, alleging constructive eviction and breach of the express and implied covenants of quiet enjoyment. Despite the jury waiver in the lease, the tenant requested a jury trial and the landlord made a motion to strike this request. The trial court denied the landlord's motion to strike on the ground that trial by jury is a constitutional right and that a contractual waiver of that right is void as against public policy. The landlord then appealed the trial court's decision. The Second District concluded that the California Constitution does not prevent individuals from waiving the right to trial by jury in a civil case in advance of any pending action, and, therefore, the contractual pre-dispute jury waiver was enforceable.

The Grafton court found that Trizec was wrongly decided based on the California Constitution and California Code of Civil Procedure Section 631, which provides only six methods by which a civil litigant can waive (or be deemed to waive) a jury trial. Two of the six ways to waive a jury in the statute are failing to post jury fees in the time required and failing to request a jury at the appropriate stage of the litigation. The statute applies only after a lawsuit is filed in a pending case. The First District reasoned that Article I, Section 16 of the California Constitution requires that the California Legislature dictate the manner in which a jury may be waived, and, to date, it has not articulated any valid forms of waiver other than those listed in Code of Civil Procedure Section 631. While the Grafton court relied on decisions dating back to 1855, none discussed pre-dispute jury waivers. Nevertheless, the court concluded that any method of waiving a jury other than those set forth in Section 631, including contractual pre-dispute jury waivers, are unenforceable.

The Grafton decision is important because the Trizec holding has been relied on in enforcing jury waivers all over the State of California. While the Trizec holding continues to be the precedent in the Second District, Grafton is now the precedent for courts in the First District. Moreover, courts outside of the First and Second Districts can choose which decision to adopt or make an independent decision based on their own reasoning. The direct conflict between the two appellate districts will require that the California Supreme Court, following its own reasoning, resolve this issue on a statewide basis. The California Supreme Court review process could take more than a year. In the meantime, those doing business in California who desire a sense of certainty in avoiding a jury must take immediate measures to protect themselves.

Implications of Grafton

The Grafton decision not only renders existing contractual jury waivers potentially unenforceable, but it also dramatically changes the legal landscape for future commercial real estate contracts and related disputes.

Parties to an existing agreement that contains a pre-dispute jury waiver should reassess their rights under the contract and reevaluate their relationship with the other contracting party or parties. For example, in the past, a party may have chosen to commit a knowing breach of such a contract if the profits were expected to exceed the cost of the breach. The potential cost of the breach would include a relatively fast and inexpensive trial without a jury. In a post-Grafton environment, the cost of a breach may now be significantly greater. Even plaintiffs do not escape the reach of the Grafton decision, as the cost of litigation in general may be much higher than previously anticipated once a jury is involved.

Parties to an existing contract engaged in a dispute that has not yet reached the stage of litigation should also reexamine their strategy for resolution in the face of Grafton. If the agreement would be litigated in California and in the First District, the parties may wish to amend their agreement to provide another venue to avoid the imposition of Grafton. As experienced practitioners know, it is nearly impossible to amend an agreement in dispute unless all parties perceive a similar risk in not amending the agreement. In the absence of that mutual perception, the amendment process will become expensive to the party who must persuade the other to amend the agreement before litigation. If the agreement is not amended, once a dispute arises, settlement may present a more appealing option than the alternative of a jury trial, with its potentially higher costs to defend and higher damage awards for a sympathetic plaintiff.

For real estate participants commencing a transaction in a post-Grafton environment, parties to a transaction may have to live with either arbitration or a jury trial if a dispute arises, which changes the implications of both contractual commitments and the litigation of contractual disputes. Before entering into an agreement, parties may now have to include provisions previously considered unnecessary to protect their interests in the event of a breach, such as provisions to limit or eliminate certain kinds of claims or damages or to define terms such that liability may be based on the actual knowledge of particular individuals. The more limited options for dispute resolution may force parties to consider promising less ambitious performances under contracts if there is uncertainty about the parties' ability to fulfill the terms. When deciding whether to seek arbitration, pursue litigation aggressively or settle a case, the potential for large jury awards should be considered.

Post-Grafton Options

Grafton will impact parties to real estate contracts for some time to come by changing the options available for risk management and dispute resolution. For instance, parties may choose to opt out of the court system entirely and choose binding arbitration, which, so far, represents an enforceable pre-dispute agreement. The California Supreme Court, in a case on which the Trizec court relied, has held that arbitration agreements do not violate either the constitutional or the statutory protections of the right to a jury trial. Madden v. Kaiser Found. Hospitals, 17 Cal.3d 699, 713 (1976). Parties can therefore reasonably rely on enforcing their arbitration agreements under federal and California arbitration statutes. This is the case only if they limit the involvement of the court system to confirming the arbitration award and reducing it to a judgment.

If parties opt out of the court system entirely using a binding arbitration clause, they must carefully tailor the arbitration clause to their needs. Many in the real estate industry have horror stories of arbitration experiences or results. Some of the problems can be eliminated if the parties know what to expect and draft their agreements accordingly. Parties should specify, at a minimum, the forum, rules, time requirements, procedural requirements and enforcement.

Another dispute resolution alternative is reference and the use of a referee pursuant to California Code of Civil Procedure Section 638. Reference is a relatively simple process which is an intermediate step between arbitration and litigation. Typically, a lawsuit is filed and the court determines that there is a valid agreement to submit to a referee, usually a retired judge or real estate practitioner and usually preselected by the parties in their agreement. Unlike binding arbitration, the reference system allows the parties to utilize the court system and the litigation process fully, including appeal. Continued use of this procedure, even after Grafton, should be safe, because the parties are using a specific statutory scheme.

Although the alternatives to a bench trial are not perfect, arbitration and reference proceedings offer some level of control and protection to parties when they need to resolve disputes. Parties can present their evidence, obtain a ruling on the merits and, in most cases, appeal the final decision. Additionally, even considering the sometimes-scant civil background of judges and arbitrators, parties are more likely to achieve a result founded in law and fact, rather than a decision based on a predisposition and bias.

Boilerplate No More

Prior to Grafton, parties to real estate transactions structured their agreements with the certainty of jury waivers, often relegating dispute resolution provisions to boilerplate. With the Grafton decision, and the possible change in the scope of potential damages, parties to agreements under California law now must consider the relative merits of various dispute resolution options. In addition, until the matter is resolved by the California Supreme Court, the venue for dispute resolution takes on greater importance. While contracting parties can tailor a dispute resolution clause to suit their respective needs, they cannot provide with any confidence for a process which includes a jury waiver.

*article courtesy of Christene A. Scheuneman and Jim Rishwain of Pillsbury Winthrop LLP, /