Choice of Law And Waiver of Jury Trial Provisions: California Law Prevails

In general, under the California Constitution, individuals and businesses in San Diego and California have an inviolable right to a jury trial. The right is so strong that, in 2005, the California Supreme Court held that individuals and businesses cannot waive their right to a jury trial via contractual provisions. See Grafton Partners v. Superior Court, 32 Cal.Rptr.3d 5 (Cal. Supreme Court 2005). In Grafton, the court invalidated — refused to enforce — the following waiver of jury trial provision:

“In the unlikely event that differences concerning [ACCOUNTANT’S] services or fees should arise that are not resolved by mutual agreement, to facilitate judicial resolution and save time and expense of both parties, [CLIENT AND ACCOUNTANTS] agree not to demand a trial by jury in any action, proceeding or counterclaim arising out of or relating to [ACCOUNTANT’S] services and fees for this engagement.”

The Grafton case caused a bit of a legal storm since waiver of jury trial provisions are very common, particularly with respect to financial and commercial transactions. The Grafton waiver language is an example of how such a waiver might be written. Such waiver provisions are enforceable in most jurisdictions in the United States.

To avoid the Grafton decision, a great many contracts began inserting choice of law provisions designating the laws of other states to be controlling. See here and here for our previous discussions of choice of law clauses. However, California courts are refusing to enforce choice of law provisions that deny California residents their rights to jury trials. See RINCON EV REALTY LLC v. CP III Rincon Towers, Inc., 8 Cal. App. 5th 1 (Cal. App. 1st Dist. 2017). As can be seen by Rincon, drafting solid and enforceable contracts requires skill and experience. You need a good corporate lawyer to ensure your business contracts are done right. Here is a quick discussion of Rincon.

San Diego Corporate Law: Facts of Rincon

Rincon involved a loan and mortgages related to Rincon Towers, a large apartment complex in San Francisco. Various California corporate entities borrowed $110 million in 2007 from Bear Stearns Commercial Mortgage (“Bear Stearns”) to purchase the Towers. However, the borrowers fell behind in their payments and eventually Bear Stearns sued and foreclosed on the mortgage documents. Among the various provisions in the financing and mortgage documents were:

• A choice of law provisions making the laws of the State of New York the applicable law governing interpretation of the documents
• A waiver of jury trial provision

Under New York laws, waiver of jury trial provisions are allowable and enforceable. But, as discussed, under Grafton, such provisions are not enforceable in California. At the trial level, the judge applied New York law and rendered a decision without a jury. On appeal, the borrowers argued that their demand for a jury should have been allowed. The Court of Appeals agreed and reversed the trial judge. A new trial — a jury trial — was ordered on various causes of action.

In so ruling, the Court of Appeals restated the general rule with respect to enforcing choice of law provisions: If the other state chosen does not have “a substantial relationship to the parties or their transaction” or if there is no “reasonable basis for the parties’ choice of law,” then California courts will decline to enforce the choice of law provision. On the other hand, if the chosen state DOES have a “substantial relationship,” then California courts will enforce the parties’ choice of law UNLESS the choice is contrary to a fundamental policy of California.

In Rincon, the court agreed that the State of New York had a substantial interest in the transaction and in the parties to the contract since the lender was based in New York. However, the court also held that California’s law with respect to jury trial waiver clause was a fundamental policy given that the right to a jury trial is based in the California Constitution and has existed for more than a century and a half. As such, the court concluded that California’s public policy outweighed the choice of law decision made by the contracting parties. That is, California had a “materially greater interest” in providing jury trials than New York had in allowing waivers, particularly given that the apartment complex was located in California. Importantly, the court was narrow in its decision. It did not invalidate the choice of law provision for the WHOLE financial transaction, just with respect to the waiver of jury trial provision.

Contact San Diego Corporate Law Today

For more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard provides a complete array of legal services for businesses here in San Diego and surrounding communities, including reviewing and drafting business contracts and all services related to business formations. Mr. Leonard can be reached at (858) 483-9200 or via email.

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