Contract Waivers of Jury Trail invalidated by California Supreme Court
By Richard C. Macias

The jury, ... May in the sworn twelve have a thief or two Guiltier than him they try. William Shakespeare, "Measure for Measure".

The right to a jury trial is viewed by most Americans as a cornerstone of our judicial system. It is a right conferred absolutely in criminal cases but it is a right also preserved by the U.S. Constitution for civil cases. Still, some measure of skepticism has often been expressed, like the sentiments voiced by Shakespeare, about an inexplicable randomness that occasionally skews jury decisions in civil cases.

Business lawyers have not always found the jury trial a very practical means for resolving business and contract disputes. Business cases frequently are extremely time consuming and have a level of factual and legal complexity not easily understood by lay persons.

In response to the perceived problems associated with jury trails involving business disputes, business lawyers drafted contracts and standard forms of purchase orders and invoices that included a provision waiving jury trial. In such instances, the potential pitfalls of a jury trial are avoided by having any legal dispute decided solely by a judge. Most state and federal courts, strained by the burden of mustering enough jurors for the overcrowded docket of criminal cases, viewed such contractual waivers of jury trial as a practical and efficient means of getting business cases resolved.

As a result, up to now nearly all courts have enforced these waivers. So the recent case of Grafton Partners LP v. Superior Court (PriceWatehouseCoopers LLP, Real Party in Interest) decided by the California Supreme Court raises interesting issues for business creditors and their counsel.

Facts of the Case: Grafton hired PriceWatehouseCoopers ("PWC") to do various audit projects. Grafton signed PWCís form engagement agreement letter that contained a provision stating that "to facilitate judicial resolution and save time and expense of both parties" each side agreed "not to demand a trial by jury" in the event of litigation between them arising out of the engagement. Unfortunately, a dispute did arise and Grafton sued PWC for negligence and other claims. In its case, Grafton demanded a jury trial. The Superior Court, relying on the waiver in the engagement letter, granted PWC's motion to strike the jury demand. PWC appealed.

Positions of the Parties on Appeal

Grafton argued that Californiaís state constitution requires that ìthe right to a trial by jury is an inviolate right and shall be secured to all..." Given this constitutional mandate the only valid waivers of that right would be a very limited number of permissible reasons allowed by the state law. Contractual jury trial waivers are not included among the narrow list of grounds allowing waiver so the waiver provisions of the engagement agreement were unenforceable and invalid.

PWC relied on a 1991 decision by a lower California appellate court that held such waivers did not violate the California Constitution. PWC supported its argument by pointing to the overwhelming number of state and federal courts throughout the United States that have found such waivers to be enforceable based on the notion that the right of "freedom of contract" allows a party to contractually waive certain rights and that the public policy favoring efficient and economic judicial processes supported enforcing such waivers.

The California Supreme Court's Ruling

The Court ruled that the California Constitution and statutory law should be interpreted strictly to preserve the right to a jury trial. Because neither the state Constitution nor any state statutes authorized contractual waivers of the right to a jury trial, such waivers could not be enforced by the California Courts.

Lessons

The Grafton case raises more questions than it answers. The foremost question for businesses that have included waivers in their contracts and forms is what to do with the old forms? Despite the ruling of the California Supreme Court, contractual waivers are effective and enforced in most other state and federal courts, so there is no reason to run throw out the old form documents.

The real problem is what to do if you have a dispute with a California debtor and want to enforce the waivers in your form agreement to avoid a jury trial? This may require a very careful and technical analysis by counsel about where to sue. For example, if you are located outside of California, would you better served if you sue in your home state where the waiver will be enforced and then take a judgment to California to enforce?

A related question is if you sue in a federal court in California, where such waivers have been approved, will the federal court apply Grafton or the holdings of federal court decisions that enforce such contract based waivers?

Another problem arises if you have both a jury waiver and a clause in your forms that says California law is applied to the interpretation of the contract. This choice of law clause may control to make the waiver unenforceable even if you sue in another state or federal court that allows these waivers. Conversely, the Grafton decision gives no hint about whether a California court should apply the law of a state that allows waivers if the contract specifically makes the law of that state controlling. Most rules on choice of law suggest that should be the case.

The holding in Grafton implies that a creditor doing business with form agreements and contracts in California that prefers to avoid jury trails might be better off to opt for modifying the form agreement to substitute a clause requiring binding arbitration. The California court clearly noted that because such contractual choices for arbitration were approved by statue, these would be enforced. The Court also inferred that creditors could incorporate in their form contracts an agreement to use the statutory procedure that allow all issues in a litigation to be resolved by a court appointed referee.

Many commentators will say the California judges got the legal interpretation in the Grafton decision wrong. Nevertheless, the court very specifically stated that at this point the ball had been tossed to the state legislature to amend California law to unquestionably authorize contractual jury trial waivers. In the meantime, business litigation in California is re-opened to the elements of Shakespeare's cynical uncertainties.*
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Richard Macias is a partner of the Los Angeles creditors' rights law firm of Creim Macias Koenig & Frey LLP. He may be reached by telephone at 213-614-1944 and by email at rmacias@cmkllp.com

* This article first appeared in Credit Today, December, 2005 edition.