By Daven G. Lowhurst
Thelen Reid & Priest LLP

October 3, 2005

The Issue

The California Supreme Court has single-handedly altered the contractual expectations of parties to thousands of contracts governed by California law. For many years, parties to a wide variety of contracts – such as leases and construction contracts – have knowingly agreed to give up their right to have their disputes resolved by jury trial. Indeed, these contracting parties likely continue to assume that any dispute that arises in the future will be subject to the jury waiver clause in their contracts. Confidence in the enforceability of contractual jury waivers could only have been increased beginning in 1991 when a California appellate court expressly validated such jury waivers.

That confidence was been shattered by the California Supreme Court recently in Grafton Partners L.P. v. Superior Court, 36 Cal.4th 944 (2005). The court ruled that contractual pre-dispute waivers of the right to trial by jury are unenforceable. Further, the Court elected to treat its ruling as retroactive, meaning that jury waivers are invalidated in existing contracts.

A brief trek through the Court’s analysis is helpful to understanding how the Court reached its decision and what alternatives remain available to parties who wish to avoid the expense and uncertainty of entrusting their contractual disputes to juries.

The Decision

In Grafton, a partnership hired PriceWaterhouseCoopers (PWC) to audit accounts. Under the retention agreement, the parties agreed not to demand a trial by jury in any action arising out of PWC’s services. The partnership sued PWC for negligence and misrepresentation arising out of the audit and demanded a jury trial. PWC, after unsuccessfully asking the trial court to strike the jury demand, obtained relief from the Court of Appeal. The Supreme Court reversed.

The court ruled that under California law, jury trials can be waived only when one of the six situations set out in Code of Civil Procedure §631 had occurred. Section 631 allows jury waivers when, for example, a party consents to waive jury in open court, fails to timely demand a jury trial or fails to pay jury fees. A contractual pre-dispute jury waiver is not one of those situations. Thus, the court found that such waivers violate the California Constitution’s right to trial by jury.

In so ruling, the Court disapproved of the Court of Appeal decision in Trizec Properties, Inc. v. Superior Court, 229 Cal.App.3d 1616 (1991), which had validated pre-dispute contractual jury waivers by analogizing them to arbitration clauses. Trizec reasoned that if parties can contractually do away with trials altogether, they certainly can do away with trials by jury.

The Supreme Court found that analogy unpersuasive. First, the court explained that unlike jury waivers, arbitration clauses are expressly authorized by statute and advance a strong public policy in favor of arbitration. Second, arbitrations conserve judicial resources to a much greater extent than court trials by avoiding the judicial forum altogether. By contrast, court trials unquestionably tax the court system, even if to a lesser degree than jury trials.

The Supreme Court then ruled that its decision applies retroactively, i.e., to pre-existing contracts. PWC argued that pre-dispute jury waivers are commonplace and that retroactive application of the court’s decision would upset long-established contractual expectations. The court was not persuaded that an exception to the normal rule of retroactive application should be found because Trizec did not constitute a uniform body of law that could reasonably have been relied on in forming expectations.

A concurring opinion pleaded for the California Legislature to authorize pre-dispute jury waivers because they offer an “attractive middle ground” between jury trials and arbitration. Specifically, court trials calm contracting parties’ fears of runaway jury awards while providing greater procedural and evidentiary safeguards than arbitration. Court trials also provide the additional safeguard of a full right to appeal rather than the very limited right to seek to vacate arbitration awards. Finally, court trials reduce the expense and delay associated with jury trials.

The Impact

Grafton broadly invalidates pre-dispute contractual jury waivers. What’s more, it invalidates jury-waiver clauses in existing contracts, thereby shattering the contractual expectations of thousands of parties who have entered into contracts governed by California law.

Unless and until the California Legislature authorizes pre-dispute jury waivers, contracting parties seeking to avoid the expense and risk associated with jury trials may be limited to having their disputes resolved by arbitrators or by referees (usually retired trial court judges). The pros and cons of arbitration versus reference versus jury trial should be examined with legal counsel. Likewise, given that Grafton is retroactive, parties to existing contracts with jury waivers should consult legal counsel to determine whether to attempt to modify the contract to provide for arbitration or reference or whether to leave the invalid jury waiver as it is.

Whether in an existing contract or in a contract to be negotiated, if arbitration is preferred to having the dispute resolved by a referee, care must be taken to ensure that the arbitration clause satisfies California law, as different rules of arbitral enforceability govern different types of contracts. Further, when arbitration or reference is sought to resolve contractual disputes, care must be taken to ensure that the clause is not later invalidated as unconscionable. A pro-active approach to reviewing existing contracts with an eye toward dispute resolution will help ensure that any dispute is resolved in a manner consistent with the parties’ expectations.

About the Author:  This article is written by Daven G. Lowhurst, an attorney in the San Francisco office of Thelen Reid & Priest, LLP.  The article was originally published in the firm’s newsletter and on the website:  Mr. Lowhurst may be contacted at 415-369-7270 or at Report, Vol. 7, No. 8 (Dec 2005)

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