I live in California, which (among many other things) is a state known for having some unusual laws. One oddity that comes up from time to time when negotiating loans is the fact that jury trial waivers – which are standard in most corporate loan agreements – are generally unenforceable in California.
This is old news to several of you, I know, but I received some questions about this recently, so I thought it might be helpful to offer up an explanation. In a nutshell, what this means for you is that if your borrower is located in California, if California law is the governing law for your loan agreement, or, if neither of those things is true, but there is nonetheless some possibility that you could end up in a California court, you may want to choose an alternative to a straight-up jury trial waiver provision (unless, of course, you actually want a jury . . . ).
Back when this became law in California (because of the decision in Grafton Partners v. Superior Court (pdf), where the California Supreme Court determined that pre-dispute jury trial waivers violate the state’s constitution) there was initially some confusion as to how best to get around the prohibition on these kinds of waivers. But now, there are well-established practices for what to do.
Many lenders in California have chosen to use judicial reference provisions in their loan agreements. Judicial reference is generally accepted as a valid alternative to jury trial waivers, using the Grafton case analysis (as is arbitration, under many circumstances). Judicial reference is a special process established in the California Code of Civil Procedure (Section 638, et seq.), and, as a practical matter, it can be rather similar to arbitration. It gets you out of the regular courtroom and into separate proceedings that don’t involve a jury, where the case can be decided by a referee chosen by the parties. The general rules for judicial reference are provided for directly in the California statute.
Here’s one example of how some lenders have added judicial reference to the waiver provisions in a loan agreement (there are certainly more complicated ways to do this too):
To the extent the foregoing waiver of a jury trial is held to be unenforceable under applicable California law, the parties hereby agree to refer, for a complete and final adjudication, any and all issues of fact or law involved in any litigation or proceeding (including but not limited to all discovery and law and motion matters, pretrial motions, trial matters and post-trial motions), brought to resolve any dispute between the parties hereto (whether based on contract, tort or otherwise) arising out of or otherwise related to this Agreement or any other Loan Document to a judicial referee who shall be appointed under a general reference pursuant to California Code of Civil Procedure Section 638, which referee’s decision will stand as the decision of the court. Such judgment will be entered on the referee’s statement of judgment in the same manner as if the action had been tried by the court. The parties shall select a single neutral referee, [who shall be a retired state or federal judge] [with at least five years of judicial experience in civil matters]; provided that in the event the parties cannot agree upon a referee, the referee will be appointed by the court.