Although many commercial contracts contain pre-dispute choice of law clauses, they are not always enforced due to conflicts with public policy. Attorney Andrew Alper reviews several cases with different outcomes which address this issue.
A choice of law clause in a commercial contract chosen by the parties is generally enforced. In Nedlloyd Lines B.V. v. Superior Court,1 the California Supreme Court concluded that choice of law provisions in a parties contract were enforceable. This is consistent with section 187 of the Restatement Second of Conflict of Laws. In Nedlloyd, the California Supreme Court explained that, under the restatement approach, the court must first determine whether the chosen state has a substantial relationship to the parties or their transaction or 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’ contractual choice of law.
If, however, either test is met, the court next determines 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 policy which conflicts with the choice of law clause, the court must then determine whether California has a “materially greater interest than the chosen state in the determination of the particular issue.” If California law 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 the court will decline to enforce a law contrary to a state’s fundamental policy.
Brack v. Omni Loan Co.
In the consumer loan case of Brack v. Omni Loan Co., Ltd.,2 the court would not apply a Nevada choice of law clause when the residents were in the State of California. The loans at issue in Brack were in excess of the California usury limitation of 10%. Meanwhile, the lender was in Nevada and the contracts were entered into in Nevada. Nevertheless, the California court would not enforce a Nevada choice of law clause because the loans were usurious to the California borrower under California law but not usurious under Nevada law, so California could protect its consumer.
The rationale is that usury is a fundamental policy affecting the public which overrode traditional notions of enforcing the parties’ choice of law clause. However, there have been other courts in California which have upheld choice of law clauses dealing with potentially usurious transactions.3
Rincon EV Realty v. CP III Rincon Towers
With the foregoing as background, in the recent case of Rincon EV Realty LLC v. CP III Rincon Towers, Inc.,4 in the context of a pre-dispute jury trial waiver, the court held that the parties’ contractual jury trial waiver was not enforceable in California.
In Rincon, a $110 million loan agreement had been executed in New York by sophisticated New York parties. An investment group purchased the California apartment complex for approximately $143 million, using $110 million in borrowed money. The loan agreement was executed in New York between New York parties and contained an explicit New York choice of law provision and a jury trial waiver. This choice of law clause also appeared in other loan documents as well.
After the loan went into default and after the lender foreclosed on real property collateral, the parties became embroiled in litigation. The borrowers demanded a jury trial but the trial court granted the lender’s motion to strike the jury demand relying on the parties’ New York choice of law clause because in New York pre-dispute jury trial waivers are enforceable. Following a judge trial, the trial court ruled for the case only to be heard before a judge even when a jury trial is allowed and legal causes of action which have damages as their remedy are tried before a jury.
Grafton-Partners v. Superior Court
In Grafton-Partners v. Superior Court,5 the California Supreme Court held that a contractual pre-dispute jury waiver was invalid under California law. The Grafton-Partners case was not a conflict of laws case as all parties were in California, so California attorneys were wondering if the Grafton-Partners holding would be extended if there was a choice of law clause indicating another state’s laws would apply to a particular transaction and that state enforced pre-dispute jury trial waivers contrary to California.
Applying the first step of the choice of law tests set forth in Nedlloyd above, in Rincon the trial court found that New York had a substantial relationship to the parties and their transaction since the agreements were negotiated in New York, the loan made pursuant to the agreements were made and accepted in New York and the proceeds of the loan were disbursed in New York. However, the borrowers contended that application of New York law would be contrary to the fundamental policy of California and that California law has a materially greater interest than New York in determining the enforceability of the jury waiver provision.
The court held that Article 1 §16 of the California Constitution states that 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.” Jury trials can be waived in California but only after a lawsuit is filed pursuant to California Code of Civil Procedure, §631, and in Grafton the court held that the exceptions to the fundamental right of a jury were exclusive as set forth in that code section and pre-dispute jury trial waivers were not among the exemptions.
Turning back to the Nedlloyd analysis, because of the fundamental public policy right expressed by the legislature in not specifically allowing pre-dispute jury trial waivers, the court held that California had the materially greater interest than the chosen state (New York) in the determination of the particular interest citing restatement second, §187 subdivision 2.
The court also made a very interesting comment at the end of the ruling: “Were the venue to change in this lawsuit to New York — we note that no party ever sought to bring that about — the jury trial the parties enjoy in our court would not travel with them. Accordingly, for the reasons we have discussed, California as the forum state, has a materially greater interest than New York in determining the enforceability of the jury waivers at issue here, and under California law, the waivers are not enforceable.”
Thus the court was implying that if the case had been tried in New York maybe the ruling would be different. In making this ruling, the court ruled that the trial court erred by striking the plaintiff’s jury demand. However, that is not the end of the story. Since certain of the claims in the case were legal issues and certain claims were equitable issues, only those legal issues would be tried before a jury. That is because, with respect to the equitable causes of action for specific performance, constructive trust and injunction, there is no right to jury trial, and it was for the trial court to determine which causes of action that had both damages and equitable relief would be tried to a jury.
If a party that does not want a jury trial files a lawsuit in California then it can expect to be involved in a jury trial despite the pre-dispute jury trial waiver if the other party demands a jury. Therefore, the party that does not want the jury trial needs to file a lawsuit, if possible, in the state chosen in the contract other than California. If a plaintiff/borrower files a lawsuit in California, the defendant/lender should consider making a motion to transfer the case to New York assuming there is a pre-dispute jury trial waiver so that there may be no jury trial ordered. Whether the court would have allowed the case to be transferred to New York is another issue, but that motion should have been considered.
Avoiding Jury Trial in California
There are other potential methods of avoiding jury trials in California. Where appropriate, the parties can select arbitration in which there is no jury. Second, and more compelling, is the use of Code of Civil Procedure §638 et seq., which allows a referee to hear the dispute instead of a jury and states: “A referee may be appointed upon the agreement of the parties filed with the clerk, or judge, or entered in the minutes, or upon the motion of a party to a written contract or lease that provides any controversy arising therefrom shall be heard by a referee if the court finds a reference agreement exists between the parties…” For this reason, the law allows agreements as to mediation or judicial reference to avoid juries but not the pre-dispute jury trial waiver. If the jury trial waiver is so inviolate and against public policy then why are these contractual provisions upheld but jury trial waivers are not enforceable?
With an arbitration, the reason no jury is necessary is based on the supremacy clause of the Constitution because arbitrations are generally held under the rules of the Federal Arbitration Act and juries are not allowed. Also, there is a statutory scheme for arbitrations in California found of California Code of Civil Procedure §1281. Likewise, with respect to referees under §638, judicial reference is also based on a statutory scheme and, therefore because the legislature has spoken, courts will allow arbitrations and judicial reference despite there being no juries allowed in these proceedings. The obvious fix is for the legislature to amend Code of Civil Procedure §631 to allow pre-dispute jury trials to be enforced in California but such amendment has not happened despite an outcry for such an amendment after the Grafton Parties case was decided but now 12 years have passed and nothing has changed.
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