Global Hospitality Advisor: Ask The Hotel Lawyer: Jury Trial Waivers

New Business Uncertainty: Jury Trial Waivers Struck

“Ask the Hotel Lawyer”™ is a regular feature column of the Global Hospitality Advisor®, providing practical insight into timely legal issues. In this column, Jim Butler answers questions about jury trial waivers and the recent California Supreme Court decision on the issue.

Advisor: What’s all the recent furor about jury trial waivers?

Jim Butler: In the August 2005 Grafton Partners decision, the California Supreme Court invalidated a predispute contract agreement to waive jury trial. This decision affects every contract governed by California law that contains a jury trial waiver. The Supreme Court specifically rejected the Petitioner’s request that this interpretation be made prospective only in order to save all the jury trial waiver provisions that parties have adopted over the years, in reliance on an earlier Appellate Court decision in California and cases in other jurisdictions. And many worry that the sometimes influential California Supreme Court may be leading a new trend that could spread to other states, exposing business parties to many of the problems inherent in jury trials.

Advisor: So for now, the decision is limited to contracts governed by California law. But everyone is afraid the Grafton Partners decision will spread?

Jim Butler: That is correct. The implications for all contracts governed by California law are serious enough. But California has often been an indication of things to come on a broader scale. One Supreme Court justice concurred reluctantly in the decision, but entered a separate opinion for the stated purpose of urging the California legislature to enact legislation expressly authorizing predispute jury waivers. While the Grafton Partners case was based on an analysis of the California Constitution and California statutory structure, a number of other states have similar laws.

Advisor: What happened in Grafton Partners?

Jim Butler: Obviously, once a dispute has ripened and people are in a lawsuit, they can make a knowing and informed waiver of their right to a jury trial in open court. But up to now, a number of courts have held that long before a dispute arises—even at the outset of a business relationship in a written agreement—parties can contractually agree that they will waive a jury trial if a dispute should arise later on. In August 2005 the California Supreme Court invalidated all such predispute jury trial waivers governed by California law. Such provisions have been included in commercial agreements for many years by sophisticated business people who want to avoid the cost, unpredictability, lack of sophistication and potential for a runaway verdicts that have sometimes characterized jury trials. Even some of the greatest admirers of the jury system think that it is better suited for criminal trials than for complex business-oriented lawsuits.

Advisor: Does this case mean that every contracting party has to risk jury trial?

Jim Butler: No! That is a complete misconception. So let’s clarify this.

First, at least for every contract governed by California law, all jury trial waivers are invalid. To know that you will avoid a jury trial in California, by predispute agreement, you will have to look to other alternatives. Second, in California (and many other jurisdictions), there are alternatives to avoid the disadvantages of a jury trial in business matters. In California and many other states there are at least two alternatives.

Advisor: What are the enforceable alternatives to a jury trial?

Jim Butler: The two reliable alternatives to avoid a jury trial by predispute agreement in California—as reaffirmed by the Supreme Court in Grafton Partners—are (1) binding arbitration and (2) judicial reference. Everyone is pretty familiar with binding arbitration. It is fairly common in management agreements and other contracts used in the hospitality industry. It works well for certain disputes on budgets and other operating issues that need a quick decision and don’t involve “bet the company” kinds of issues. But for many disputes, where the parties want to preserve the protections that a court-supervised system provides, where the decision maker is governed by the actual applicable law, is applied by judges, and subject to review and appeals to avoid an erroneous result, there is only one good alternative — judicial reference.

Advisor: Many of us are not familiar with “Judicial Reference.” Is this new? How does it really work?

Jim Butler: Judicial Reference is a procedure specifically authorized by Section 638 of the California Code of Civil Procedure. Under this procedure, a court is empowered to transfer a dispute to a “referee” upon the agreement of the parties. Section 638 expressly provides that a contract made before a lawsuit has been filed (i.e., a predispute agreement) can require that any controversy arising out of that contract shall be heard by a referee. The reference procedure is similar to that of arbitration in that one party to a contract or lease files a lawsuit to compel the resolution of the matter by referral to a referee. The court then appoints the referee who acts as decision-maker. Typically, the contract requires the referee to be a former judge. The advantage of using the referral procedure is that the referee must follow the law and the decision rendered by the referee will become a judgment that can be enforced and appealed.

Advisor: Why do arbitration and Judicial Reference work to avoid juries if jury waivers don’t?

Jim Butler: The Supreme Court addressed that very issue in Grafton Partners. It said that all three approaches (arbitration, Judicial Reference and jury trial waivers) tried to use predispute contract provisions to avoid jury trial, but only arbitration and Judicial Reference are specifically authorized by the California legislature in the statutory scheme. That is the critical difference.

Advisor: Are there any tricks in developing good predispute arbitration or Judicial Reference clauses for
agreements?

Jim Butler: Of course there are, but that is a topic for another day and way beyond the scope of reviewing this latest Supreme Court decision. As hotel lawyers, the JMBM team members regularly work with clients to sort through all the options for dispute resolution, whether by way of arbitration, mediation, Judicial Reference, mini-trial or otherwise. If anything, the Grafton Partners decision serves as a wakeup call for everyone using jury trial waivers to review their approach and documentation and reconsider the best approach to accomplish their goals.