Enforcement of Judicial Reference Clauses Discretionary in Multi-Party Cases
The California Supreme Court has taken another step toward eliminating the ability of contracting parties to waive the right to a jury trial in advance of a dispute. In 2005, the Court held that jury waivers were unenforceable in Grafton Partners LP v. Superior Court, 36 Cal. 4th 944 (2005). According to the Court, the only two enforceable pre-dispute jury waiver provisions are an agreement to arbitrate and an agreement to submit the dispute for judicial reference under Code of Civil Procedure Section 638.
Since Grafton, parties have routinely included judicial reference procedures in their contracts as a means of alternative dispute resolution that provides for the application of regular court rules and judicial review, and perhaps a speedier time to trial with less associated cost than arbitration. Section 638 provides that "[a] referee may be appointed . . . upon the motion of a party to a written contract . . . that provides that any controversy arising therefrom shall be heard by a referee."
On February 10, 2011, however, the California Supreme Court held that a trial court has discretion to refuse to enforce a pre-dispute judicial reference provision, even if the parties' contract provides that the controversy "will be subject to and referred on motion by any party or the court for hearing and determination by a referee." In Tarrant Bell Prop., LLC v. Super. Ct., 2011 WL 446984, at *1 (Feb. 10, 2011), 120 current and former lessees and residents of a mobilehome park sued the park's current and former owners alleging that the owners had failed to maintain the premises. Most, but not all, of the plaintiffs' lease agreements contained that judicial reference provision. The trial court exercised its discretion and denied defendants' motion to try the matter to a referee. It reasoned that ordering two groups of plaintiffs to try their cases in separate but parallel proceedings would increase the burden on the parties and the courts. The court of appeal affirmed, and the California Supreme Court granted review.
Looking both to the plain language and the legislative history of section 638, the Court in Tarrant Bell, found that "section 638 does not require a court to appoint a referee simply because the parties have entered into an otherwise valid predispute reference agreement." 2011 WL 446984, at *3 (emphasis in original). The statute's use of the permissive "may" makes appointment of a referee discretionary, the Court held. In this particular case, the Court held, the trial court was "well within its discretion" in refusing to appoint a referee because the inability to compel all of the plaintiffs to submit their claims to a referee meant parallel proceedings, duplication of efforts, and the risk of inconsistent judgments. Id. The Court stopped short, however, of articulating specific factors that should guide a trial court's exercise of its discretion.
One might think that after Tarrant Bell, parties should be more inclined to provide for arbitration as their alternative dispute resolution method instead of judicial reference. After all, the law surrounding the enforceability of arbitration agreements is more robust than that surrounding judicial reference provisions. We do not believe that is necessarily true, however. Tarrant Bell involved a multi-plaintiff case, where not all plaintiffs had the judicial reference provision in their contracts. The trial court's refusal to enforce the judicial reference provision was expressly based on the avoidance of duplicative cases, excessive costs and waste of judicial resources. The issue of multi-plaintiff cases could also implicate an arbitration clause, however, where some, but not all, of the plaintiffs have an arbitration clause in their contracts. Indeed, in Tarrant Bell, some of the plaintiffs' contracts also had an arbitration provision. The trial court refused to enforce the arbitration provision under Code of Civil Procedure section 1281.2(c), which vests the trial court with discretion to deny a motion to compel arbitration where ordering arbitration would create parallel proceedings and the possibility of conflicting rulings on common issues of law or fact.
Tarrant Bell, and cases reaching similar conclusions about arbitration provisions under section 1281.2(c) provide plaintiffs a simple strategy for staying out of judicial reference and arbitration - join multiple plaintiffs, including some who cannot be compelled to ADR. For prospective defendants - particularly those who routinely face consolidated or class complaints - the challenge is to ensure that there is an ADR provision in the defendant's standard contracts. Most companies have revised their standard contracts over time, and many did not include ADR provisions in earlier versions. The best way to avoid the Tarrant Bell trap is to eliminate that variation. It is almost never practical to have all customers, employees and business partners sign new contracts containing ADR provisions, however. The only other option is to send the customer/employee/business partner a notice that the company is amending its agreement to include an ADR provision. The notice must be clear and conspicuous and call the recipient's attention to the changes. It should also, to the extent possible, provide the recipient a realistic exit strategy if s/he does not agree to the new terms. Though the company can expect a challenge to the validity of this amendment, there is case authority for it and there are few practical alternatives. And Tarrant Bell makes predictable the outcome if the company fails to eliminate variation in its contracts.