Right to Jury Trial Preempts Valid Forum Selection Clause in California
by By: Andrew K. Alper Mar/Apr 2020
Pre-dispute jury trial waivers and forum selection clauses are commonly included in lease agreements. Andrew K. Alper examines the developments and cross-state implications pertaining to these items in Handoush v. Lease Finance Group.
Pursuant to the case of Grafton-Partners v. Superior Court,1 the California Supreme Court held that a contractual pre-dispute jury trial waiver was invalid under California law. Article I, Section 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 consent through the parties “expressed as prescribed by statute.” Jury trials can be waived in California but only after a lawsuit is filed and must be based on one of the criteria in the California Code of Civil Procedure §631. Pre-dispute jury trial waivers are not one of the criteria.
The Grafton-Partners case was not a conflict of laws case as all parties were in California, so California attorneys have been 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 will enforce a pre-dispute jury trial waiver contrary to California. In Grafton-Partners, the court held that the exceptions to the fundamental right of a party to a jury were exclusive and a pre-dispute jury trial waiver in a contract was not among the exemptions from having a jury trial.
With the foregoing as background, this brings us to the most recent case of Handoush v. Lease Finance Group.2 In Handoush, the lessee sued LFG Finance Group (LFG) in connection with the leasing of credit card processing equipment pursuant to a lease. LFG was the assignee of Americorp Leasing, the lessor under the lease. The complaint alleged causes of action for fraud, rescission, injunction relief and violation of Business and Professions Code, Section 17200. The lease agreement stated in relevant part:
“Governing law; choice of forum; waiver of jury trial; limitation of action. You and we agree that our acceptance and execution of the Lease at our executive office in the City and State of New York shall be the final act necessary for the formation of this Lease. This Lease, and any other actions, proceedings and matters in dispute between you and us, whether arising from or relating to the Lease itself, or arising from alleged extra — contractual facts prior to, during or subsequent to the Lease (all collectively referred to hereafter as a “dispute”) shall be governed by the laws of the State of New York, without regard to the conflict of law, rules or principals thereof. All disputes shall be instituted and prosecuted exclusively in the Federal or State Courts located in the State and County of New York notwithstanding that other Courts may have jurisdiction over the parties on the subject matter. You and we waive, insofar as permitted by law, trial by jury in any dispute …”
On November 11, 2016, LFG moved to dismiss the Complaint under Code of Civil Procedure § 410.30(a) (forum non conveniens) based upon the New York forum selection clause in the lease.Without any evidence, Handoush argued that he was unaware of the forum selection clause and that the clause is unenforceable because it would deprive him of his substantive right to a jury trial. According to Handoush, because the forum selection clause deprives him of the right to a jury trial, the burden is shifted to LFG to show that litigating in the contractually designated forum will not diminish Handoush’s substantive rights afforded under California law. Unlike California, pre-dispute jury trial waivers are enforceable in the state of New York. LFG argued that the forum selection clause is presumptively valid and that there was no evidence which in any way diminishes the forum selection clause. The trial court found that Handoush did not meet his heavy burden of demonstrating that the forum selection clause was unreasonable.The trial court also stated that there was nothing in the Grafton-Partners case that precludes parties from entering into a pre-dispute agreement that New York law applies to the dispute and therefore the pre-dispute waiver of jury trial is enforceable.
California favors contractual forum selection clauses so long as they are entered into freely and voluntarily and their enforcement would not be unreasonable.34 Forum selection clauses are presumed to be valid.5 Given the importance of forum selection clauses, both the United States Supreme Court and the California Supreme Court have placed a heavy burden on the party seeking to defeat such a clause, requiring it to demonstrate that the enforcement of the clause would be unreasonable under the circumstances of the case.6 With respect to a mandatory forum selection clause like the one at issue in the Handoush case, “mere inconvenience or additional expense is not the test of unreasonableness.” Such a clause is reasonable if it has a logical connection with at least one of the parties or their transaction. Moreover, a court would usually honor a mandatory forum selection clause without extensive analysis of factors relating to convenience.78 Thus, both courts in California and throughout the United States regularly enforce forum selection clauses.9
The appellate court did not agree with the trial court’s ruling to dismiss the complaint based on the forum selection clause, instead holding that if the case were transferred to New York, the New York Court would apply New York law and the pre-dispute jury trial waiver would be enforceable. This would deprive the California borrower of his right to a jury trial which he would have in California. In essence, the appellate court nullified the valid forum selection clause by its ruling. No other court has done so. Grafton-Partners did not involve a forum selection clause or any dispute about the forum when it held the pre-dispute jury trial waiver in a contract was not enforceable. Grafton-Partners was a case about parties willingly litigating their disputes in California. Additionally, in Grafton-Partners, California law governed the contract and all disputes at issue, whereas New York law governed the disputes in Handoush. In contrast to Grafton-Partners, Handoush involved an interstate contract between parties of different states in which the parties voluntarily and freely selected New York as the dispute resolution forum; voluntarily and freely agreed to the application of New York law to their contract and disputes; and voluntarily and freely agreed to waive their jury trial rights, which is permitted under the laws of New York, the chosen forum. Moreover, the lease was conceded to have been formed in New York. Nothing in the Grafton-Partners decision indicates that it was intended to apply California pre-dispute jury trial waiver laws involving a contract formed in another state, governed by that state’s laws and to be adjudicated in that state under the laws of that state. As a result of the appellate court’s ruling, LFG now has to litigate this matter in California before a California jury.
Another interesting part of this case is that a jury is only applicable to the fraud cause of action. Juries only hear matters involving matters at law but not matters in equity. Equitable claims such as rescission, injunctive relief, and the violation of Business and Professions Code §17200 constitute equitable relief and will be tired by a judge, not a jury. Therefore, the contest here was only about the fraud cause of action being tried before a jury.
There are other issues arising out of the opinion as well, such as placing the burden on the party trying to enforce a forum selection clause to show that the forum selection clause was reasonable rather than the party who opposes the forum selection clause having to show that the forum selection clause was unreasonable as the Supreme Court held in Smith more than 40 years ago.
The California Supreme Court has accepted review of the court of appeal decision in Handoush. It will be interesting to see what happens when the California Supreme Court is faced with such a novel extension of a pre-dispute jury trial waiver which resulted in nullifying a valid forum selection clause negotiated by the parties.
Forum selection clauses are important to interstate commerce to protect the legitimate expectations of the parties when they enter into a contract. Businesses across the United States routinely include pre-dispute jury trial waivers with forum selection clauses in their interstate contracts. This helps them manage risks and costs and ensures consistency and predictability in the interpretation and enforcement of their contracts. Tens of thousands of leases, loans and other contracts have forum selection clauses and pre-dispute jury trial waivers and the pre-dispute jury trial waivers are enforceable in 48 of the 50 states. If a lender, lessor or other contracting party is deprived of their bargained for protections in a business contract, it may change the way they do business in California or the party who will be deprived of its forum selection clause and choice of law may simply elect not to do business in California at all in the future, resulting in a negative economic impact in the state of California.