February 14, 2017

Recent California Court of Appeal Decision Invalidates Jury Trial Waiver Made Under New York Law

A recent California Court of Appeal decision may have a major impact on the enforceability of jury trial waivers in loan agreements and other documents governed by New York law. In Rincon EV Realty LLC v. CP III Rincon Towers, Inc. et. al., published January 31, 2017, the First District of the California Court of Appeal ruled that predispute jury trial waivers made under agreements expressly governed by New York law and involving California real property were unenforceable in a California court.[1]

In Grafton Partners v. Superior Court, the California Supreme Court in a 2005 decision held that predispute jury trial waivers are unenforceable in California courts under California law.[2] However, California courts had not applied this rule to agreements expressly governed by New York law. For reasons which may only partially include the desire to obtain an enforceable waiver of the right to a jury trial, parties often choose New York law to govern their agreements, including loan documents.

In Rincon, the Loan Agreement and Cash Management Agreement both included not uncommon New York choice-of-law provisions which specifically stated that the borrower “‘WAIVE[D] ANY CLAIM TO ASSERT THAT THE LAW OF ANY OTHER JURISDICTION GOVERNS THIS AGREEMENT.’”[3] The subject agreements also expressly waived both the borrower’s and the lender’s right to a jury trial.[4] Further, both original parties to the Loan Agreement were “‘sophisticated commercial or business entities’” domiciled in New York, the subject contracts were negotiated and executed in New York, and the loan disbursement occurred in New York.[5]

Nevertheless, applying California’s conflict of laws principles,[6] the Court of Appeal found that although New York had a substantial relationship to the parties and their transaction[7] applying New York law allowing predispute jury trial waivers “would be contrary to fundamental California policy.”[8] Further finding that California had a “materially greater interest than New York in determining the enforceability of the jury waivers,”[9] the Court held the predispute jury trial waivers were unenforceable in California courts. 

Note, however, the Court only addressed the enforceability of the jury trial waiver provisions; it did not address the applicability of New York law otherwise to the subject agreements. The Court also stated that had the venue been changed to New York—which no party had requested—the California jury trial right “would not [have] travel[ed]” with the plaintiffs (and so presumably a New York court would have enforced the waiver).

Rincon’s Impact On Real Estate Transactions

Impact on Loan Agreements (and other Agreements) choosing New York law

With this Court of Appeal’s holding that predispute jury trial waivers in agreements governed by New York law are unenforceable in California courts, we can expect to see parties seeking to void their jury trial waivers when disputes arise, under existing agreements and under future agreements as well, including by filing litigation in California, rather than New York, courts. We also can expect to see attempts to bolster loan documents and other agreements to make jury trial waiver provisions enforceable. These efforts may include strengthening venue provisions and greater use of judicial reference provisions to avoid jury trials. 

  1. Venue Provisions

    Venue provisions (also referred to as forum-selection clauses) are contractual provisions by which the parties expressly decide the court and location where any dispute is to be resolved.[10] As opposed to choice-of-law provisions, which provide which state’s law applies, forum-selection provisions establish the forum for the dispute itself.[11] The United States Supreme Court has noted that valid forum-selection clauses should receive “controlling weight in all but the most exceptional cases.”[12]

    The Court in Rincon did not address, or even note, whether the parties had agreed to have New York, rather than California, courts decide the case. Including, and thereafter enforcing, venue provisions designating New York as the exclusive venue for disputes may also serve to preserve the parties’ intent to waive the right to a jury trial and avoid the effect of the decision in Rincon.

    There are limitations to this, however. For example, New York courts would not have jurisdiction to foreclose on real property located in California, so lenders must craft venue provisions which preserve their ability to foreclose on their security interest(s) in California on California property.

  2. Judicial Reference Provisions
  3. Agreements governed by California law in which the parties seek to agree to avoid a jury trial typically include “judicial reference provisions.” These provisions provide for the appointment of a judicial referee, specifically appointed by the court to resolve disputes. Judicial reference provisions also avoid the limitations on appellate review that affect binding arbitration.[13]

    Although a California court has discretion to deny enforcement of a judicial reference provision if it has concerns about judicial economy or potential for conflicting rulings based on common issue or fact,[14] judicial reference provisions generally are enforceable in California courts provided they meet the general rules applicable to all contracts.[15] In Woodside Homes of Cal. Inc.. v. Superior Court, the California Court of Appeal enforced a judicial reference provision despite the plaintiffs’ arguments of unconscionability and unenforceability, noting that judicial reference provisions are “substantially similar to nonjudicial arbitration” provisions, another alternative dispute resolution method toward which “California has historically had a ‘friendly policy[.]’”[16]

    Adding a California judicial reference provision to an agreement otherwise stated to be governed by New York law could be used to “hedge” against the possibility of being in a California court and having a jury trial waiver under New York law invalidated (as occurred in Rincon), with wording to the effect that inclusion of such a provision does not vitiate the parties’ intent to have New York law govern otherwise.

If you would like additional information about the issues addressed in this client alert, please contact Chauncey Swalwell.

[1] Rincon EV Realty LLC v. CP III Rincon Towers, Inc., 2017 WL 429267 (2017) (“Rincon”).

[2] Grafton Partners L.P. v. Superior Court, 36 Cal.4th 944 (2005). Note that jury trial waivers agreed to after a dispute has arisen may be validly enforced under Grafton and in accordance with California Code of Civil Procedure Section 631.

[3] Rincon, p. 3

[4] Rincon, p. 3

[5] Rincon, p. 7

[6] Rincon, p. 4 citing Nedlloyd Lines B.V. v. Superior Court, 3 Cal.4th 459, 464-65 (1992). In Nedlloyd, the California Supreme Court stated that the court “must first determine ‘whether the chosen state has (1) a substantial relationship to the parties or their transaction, or (2) whether there is any other reasonable basis for the parties’ choice of law. If neither of these tests is met, that is the end of the inquiry, and the court need not enforce the parties’ choice of law. If, however, either test is met, the court must next determine whether the chosen state’s law is contrary to a fundamental policy of California. If there is no such conflict, the court shall enforce the parties’ choice of law. If, however, there is a fundamental conflict with California law, the court must then determine whether California has a ‘materially greater interest than the chosen state in the determination of the particular issue…’ (Rest., § 187, subd. (2).)  If California has a materially greater interest than the chosen state, the choice of law shall not be enforced, for the obvious reason that in such circumstance we will decline to enforce a law contrary to this state’s fundamental policy.’”

[7] Rincon, p. 4

[8] Rincon, p. 6

[9] Rincon, p. 9

[10] FORUM-SELECTION CLAUSE, Black’s Law Dictionary (10th ed. 2014)

[11] § 11:84.Forum selection provisions, 4Pt1 Bruner & O’Connor Construction Law § 11:84

[12] § 11:84.Forum selection provisions, 4Pt1 Bruner & O’Connor Construction Law § 11:84 citing Stewart Org., Inc. v. Ricoh Corp., 487 U.S. 22, 22, 108 S. Ct. 2239, 2239, 101 L. Ed. 2d 22 (1988)

[13] § 45:5.Judicial reference—Contract provisions and enforceability, 12 Cal. Real Est. § 45:5 (4th ed.)

[14] See Tarrant Bell Property, LLC v. Superior Court (2011) 121 Cal.Rptr.3d 312, 51 Cal.4th 538, 247 P.3d 542.

[15] Cal. Civ. Proc. Code § 638 (West), § 45:5.Judicial reference—Contract provisions and enforceability, 12 Cal. Real Est. § 45:5 (4th ed.)

[16] See Woodside Homes of Cal., Inc. v. Superior Court, 107 Cal. App. 4th 723, 725-27 (2003). In Woodside, homebuyers brought an action against developer; based off a judicial reference provision in the sales contracts, developer moved to compel a reference. The Court of Appeal “recognize[d] that a binding judicial reference is substantially similar to nonjudicial arbitration” and therefore analyzed the judicial reference provision using a “similar approach.” The Court of Appeal found that the provision was not procedurally nor substantively unconscionable and upheld enforcement of the judicial reference provision. Citing Cal. Civ. Proc. Code § 1281, the Court noted that arbitration provisions “are ‘valid, enforceable and irrevocable, save upon such grounds as exist for the revocation of any contract.’”