Last week, the California Court of Appeal ruled that a property owner was entitled to a jury trial in a dispute with a lender despite the fact that the loan agreement contained a jury waiver provision and a New York choice-of-law provision.
The case involved the San Francisco apartment complex known as the Rincon Towers. In 2007, the plaintiffs borrowed $110 million on a two-year loan to finance the acquisition. In 2009, the plaintiffs failed to repay the loan. The plaintiffs claimed that under the terms of the loan agreement they were entitled to a one-year extension of the maturity date. The lender disagreed and instead completed a nonjudicial foreclosure sale.
When a contract contains a choice-of-law provision, a lawsuit can be brought in any state court with personal jurisdiction over the parties. Generally, the court then applies the law from the state identified in the choice-of-venue provision. Sometimes, the parties will take it one step further and include a choice-of-venue clause, which specifies the specific location where the dispute can be heard. The above-referenced loan agreement included a choice-of-law provision but did not include a choice-of-venue provision. The lawsuit was filed in California.
Article I, section 16 of the California Constitution states the right to trial by jury is “an inviolate right,” and in “a civil cause,” any waiver of that right must occur by the consent of the parties “expressed as prescribed by statute.” Section 631 of the Code of Civil Procedure, which implements the constitutional provision, states the right to trial by jury is “inviolate,” and may be waived only after a lawsuit has been filed.
At trial, the court rejected the plaintiffs’ request for a jury trial, citing the jury waiver provision and the New York choice-of-law provision. Under New York law, pre-dispute jury waivers generally are enforceable. Under California law, on the other hand, pre-dispute jury waivers are not enforceable unless coupled with a valid arbitration clause.
On appeal the court stated that in determining whether to enforce contractual choice-of-law provisions the court must determine “whether the chosen state’s law is contrary to a fundamental policy of California.” The court held that “application of New York law to permit enforcement of the pre-dispute contractual jury waivers at issue in this case (i.e., permitting waiver by a method not expressly authorized by the Legislature) would be contrary to fundamental California policy.” Indeed, the court concluded that “California, as the forum for adjudication of this dispute, has the paramount interest here” and “each party to this case is entitled to rely upon California’s commitment to protection of fundamental rights within the civil justice system as a whole.”
As this case illustrates, parties to a contract cannot escape California’s prohibition on pre-dispute jury waivers by using a choice-of-law provision to evoke the laws of another jurisdiction that recognizes pre-dispute jury waivers.