Mark Mengelberg Published in The Recorder
"Getting Around 'Grafton' "

Mark's article "Getting Around 'Grafton' " in the March 26, 2007 issue of The Recorder highlights that "Predispute waivers of jury trials are unenforceable under California law, subject to certain limited exceptions. While the recent California Supreme Court case of Grafton Partners v. Supreme Court, 36 Cal. 4th 944 (2005) invalidated such waivers, there remain two ways that parties can agree, predispute, to avoid a jury trial in commercial real property-related transactions.  On Aug. 4, 2005, the California Supreme Court held in Grafton that predispute agreements to waive jury trials are unenforceable. The holding in Grafton is retroactive, applying to contracts entered into before and after the date of decision. Because the Supreme Court's decision in Grafton was not based on the unconscionability of jury trial waivers, these waivers are unenforceable even in commercial settings where both parties are represented by sophisticated counsel. The Grafton holding sent shockwaves through the California real estate legal community, as most real estate-related contracts (e.g., leases, loan documents, purchase and sale agreements) contain waivers of jury trial.  Most real estate-related contracts in California still have provisions whereby the parties waive any right to trial by jury, primarily because real estate practitioners are hoping that the California legislature will amend the California Code of Civil Procedure to expressly allow for predispute waivers of jury trials. The Supreme Court indicated in Grafton that it would not seek to overturn such an express waiver, stating "after considering the history of California's constitutional and statutory provisions governing waiver of the right to jury trial, we conclude that it is for the Legislature, not this court, to determine whether, and under what circumstances, a predispute waiver of jury trial will be enforceable in this state." In fact, bills introduced in both the California Senate and Assembly during the 2006 session sought to allow for predispute waivers of jury trials in civil cases. However, that legislation was not successful and the Grafton case is still valid law in California.

Because of the possibility that Grafton may be overturned in the future, and the fact that a waiver of jury trial may still be enforceable in the context of litigation in a federal court (e.g., a bankruptcy proceeding) or a state court other than California, the standard waiver of jury trial provision should not necessarily be removed from form real estate documents. However, in light of Grafton, certain modifications should be made to those provisions.   First, the provisions should begin with a phrase to the effect of "to the extent now or hereafter permitted by applicable law." Although most form contracts contain a severability clause that would keep an unenforceable jury trial waiver from invalidating the entire contract, such a lead-in clause is still recommended as "belts and suspenders."   Second, assuming that, given a choice, the client would prefer to revert back to the waiver of jury trial language if it is enforceable rather than proceeding to judicial reference or arbitration (if one of these alternatives is provided in the contract), the judicial reference or arbitration provision should be drafted so that it applies only in the event the waiver of jury trial provision is unenforceable. Therefore, the arbitration provision should begin with a phrase along these lines: "To the extent a predispute waiver of the right to trial by jury is not enforceable under applicable law … "   Finally, because it is likely that any prospective legislation allowing for predispute jury trial waiver will require that the waiver be conspicuous — as is required for waivers of other crucial rights — the provisions should be drafted with all capitalized letters so as to minimize any argument of unconscionability based on a claim that the provision is inconspicuous. This same general rule also applies to arbitration provisions and judicial reference provisions, as making them conspicuous in the document reduces grounds on which a party may allege such provisions are unconscionable (i.e., that the provision was inconspicuous)."