Los Angeles Real Estate Litigation Update: California Court of Appeal Strikes Down a Lease Forum Selection Clause Which Includes a Waiver of Jury Trial Clause
California leases often include a clause which states that, insofar as permitted by law, the parties waive a trial by jury.
There are a lot of good reasons for this. A jury trial can cost three or four times what a court trial can. A jury trial can put twelve random people in charge of hearing your sophisticated real estate dispute. In cases which are largely contract driven, juries may not understand the intricacies of a property lease or a real estate purchase and sale agreement. While individual judges are also unpredictable, a court trial at least proceeds quickly and more efficiently than a long drawn out jury trial.
Jury Trial Waivers Are Not Enforceable In California
An experienced Los Angeles real estate litigation attorney, however, know that a waiver of jury trial is not enforceable in California courts. In a case called Grafton Partners v. Superior Court (2005) 36 Cal.4th 944, the California Supreme Court forbade predispute jury trial waivers. In other words, a party may waive a jury trial at the time of trial but may not waive it in a contract prior to a dispute. So California does not allow jury trial waivers in leases, purchase and sale agreements, partnership agreements or other contracts.
In California the right to a jury trial is a fundamental right that may only be waived as prescribed by the Legislature. This is another way of saying that even in a contract between two sophisticated and well-represented parties, California will not allow them to make this decision themselves.
So what happens when the parties instead enter into a contract in which the parties agree to a forum selection clause that mandates that any disputes be heard in a different jurisdiction that does allow the waiver of jury trials?
Forum Selection Clauses: Can You Choose a Forum That Allows a Waiver of Jury Trial?
That was the issue in Handoush v. Lease Finance Group, LLC (2019) 41 Cal.App.5th 729, a California case that went to the Court of Appeal. Handoush entered into a lease finance agreement for credit card processing equipment with Lease Finance Group, LLC. The lease stated that any disputes would be heard in New York (where LFG is located), shall be governed by New York laws, and the parties waive any right to trial by jury. Handoush sued LFG in California alleging fraud, rescission, injunctive relief and violation of Business and Professions Code section 17200.
LFG moved to dismiss the case based upon the forum selection clause. Handoush opposed the motion, arguing that the clause is unenforceable because it would deprive him of his substantive right to a jury trial. In New York the courts allow parties to waive the right to a jury trial.
The trial court granted LFG’s motion to dismiss the case, finding that Handoush did not meet his heavy burden of demonstrating that the forum selection clause is unreasonable.
The California Court of Appeal noted that California favors contractual forum selection clauses so long as they are entered into freely and voluntarily, and their enforcement would not be unreasonable. The court (with a straight face) stated that “This favorable treatment is attributed to our law’s devotion to the concept of one’s free right to contract, and flows from the important practical effect such contractual rights have on commerce generally.” The Court then added its “…but”: “But California courts will refuse to defer to the selected forum if to do so would substantially diminish the rights of California residents in a way that violates our state’s public policy.”
The Court of Appeal then held that it finds that enforcing the forum selection clause here would be contrary to California’s fundamental public policy protecting the jury trial right and prohibiting courts from enforcing predispute jury trial waivers.
How Does This Affect You?
I have never been a fan of the Grafton case. Parties can choose arbitration, which acts as a predispute waiver of a parties right to a jury trial. So why can’t parties choose a court trial in the same way that they choose arbitration?
More importantly, why can’t parties contract as they wish without the California Legislature telling them what is allowable?
As an experienced real estate litigation attorney in Los Angeles, however, I would point out that many attorneys are unaware of the limitations of Grafton and the unenforceability of predispute jury trial waivers.
This case does not prevent forum selection clauses but parties who use a forum selection clause combined with a jury trial waiver clause should review their contracts going forward to determine how to resolve this issue. If you are still determined to avoid a jury trial, you can still use an arbitration provision in your contract.
For California parties, this is a new “out” that allows the litigation to proceed in California rather than a far-away jurisdiction if your contract includes both clauses. For national vendors, on the other hand, they now face having to litigate in California courts even if they are not located anywhere near California.
Laine Wagenseller is an experienced real estate trial attorney. He is the founder of Wagenseller Law Firm in downtown Los Angeles. The attorneys at Wagenseller Law Firm specialize in real estate litigation.