California law provides that parties to a contract may agree to use alternative dispute resolution methods, such as arbitration and judicial reference, to resolve contract disputes. A recent California appellate court decision confirmed that an agreement providing for judicial reference may be enforced even if the provision does not explicitly state that the right to a jury trial will be waived.
In O'Donoghue v. Superior Court (— Cal.Rptr.3d —-, 219 Cal.App.4th 245, Cal.App. 1 Dist., August 29, 2013), members of a limited liability company took out a $20 million construction loan in 2007 from United Commercial Bank (“UCB”) to develop a multi-unit condominium project in San Francisco. UCB required each of the members, Paraic O’Donoghue, Tony Manning, Enda G. Quigley, Sean Murphy, Daniel Walsh, and Christopher Flood (collectively, “Defendants”) to sign a continuing personal guaranty in favor of the lender. The guaranty agreements provided that disputes would be resolved through judicial reference rather than court litigation. Like arbitration, judicial reference is a form of alternative dispute resolution. In a matter decided by judicial reference, a pending court case is sent to an independent dispute resolution specialist, often a former judge, for a hearing, decision, and report back to the court.
The Defendants defaulted on the loan. A few months thereafter, UCB assigned the promissory note to Performing Arts, LLC (“Plaintiff”). The Plaintiff sued the Defendants for breach of the guaranty, claiming $14 million in damages, plus interest. Serving the Defendants took longer than normal because all but one of them lived in Ireland. After about two years of discovery in the case and all parties had been served, the Plaintiff moved for appointment of a referee under the judicial reference provision in the guaranty agreements. The Defendants argued that the agreements should not be enforced because they did not specifically state jury trial was being waived. The trial court granted the Plaintiff’s motion and appointed a referee. The Defendants appealed.
In affirming the trial court decision, the First District Court of Appeal found that the judicial reference provision in the agreements waived the Defendants’ right to a jury trial even though the provision did not specifically state that the right would be waived. The court noted that the California law that provides for judicial reference does not require an explicit jury waiver, nor does case law. The court explained that the purpose of a judicial reference clause is to provide for an alternative dispute process, and therefore a specific mention of jury waiver is unnecessary as long as the agreement “clearly and unambiguously” shows that a the signer “ has agreed to resolve disputes in a forum other than the judicial one.”
The appellate court rejected the Defendants’ argument that the judicial reference clause was unconscionable and therefore unenforceable. The court explained that for the clause to be found unconscionable, the Defendants would have to show that they were unaware of the nature of the provision or that the provision was buried in an inconspicuous place in the contract. Instead, the provision appeared in an obvious place in a contract that was relatively short. Furthermore, the court noted that the Defendants were sophisticated, wealthy real estate investors who could be expected to understand what the clause meant.
The court also disagreed with the Defendants’ contention that the Plaintiff waived its right to judicial reference under the agreements due to its three year delay in raising the issue. The court observed that state policy favors alternative dispute resolution. Additionally, judicial reference allows parties greater scheduling flexibility while still retaining the procedural rights of a trial court, such as the right to appeal. Examining the circumstances of the case, the court noted that although the Plaintiff had delayed, the “litigation machinery” had not reached an advanced stage and that the parties were not “well into preparation of a lawsuit” when the Plaintiff moved for judicial reference. Furthermore, the Plaintiff’s delay was partly explained by the difficulty in serving some of the Defendants in Ireland. Finally, the court concluded that it would not be appropriate to find that Plaintiff had waived judicial reference because the Defendants had not demonstrated that their case was prejudiced by the delay, or that the Plaintiff had taken advantage of the discovery process to gain information that would not have been available otherwise.
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