In an opinion delivered on Dec. 7, the Arkansas Supreme Court determined, for the first time, that pre-dispute contractual waivers of the right to a jury trial are unenforceable under the Arkansas Constitution. This opinion could have a significant impact on the method of the dispute resolution among parties to commercial contracts, including loan agreements between Arkansas banks and their customers.
The case involved a loan by Malvern National Bank (MNB) to Kenneth Tilley in July 2010. The loan agreement included a provision waiving the right to trial before a jury with respect to any disputes. Following default, MNB filed a complaint to foreclose on the property in November 2011. Tilley filed a counterclaim against MNB alleging breach of contract, violation of the Arkansas Deceptive Trade Practices Act, tortious interference, negligence and fraud and requested a jury trial.
MNB subsequently filed a motion to strike Tilley’s jury trial demand arguing that, in executing the loan agreement, Tilley had agreed to waive his right to a trial by jury. Tilley responded by asserting that the Arkansas Constitution provided that a right to a jury trial ‘shall remain inviolate” and was not subject to waiver. The contract clause in question provided that “[e]ach party to this Agreement hereby expressly waives any right to trial by jury of any claim, demand, action or clause of action” arising under the loan agreement.
The trial court ruled in favor of MNB and granted its motion to strike the jury trial demand as to all causes of action. Tilley appealed this determination to the Arkansas Court of Appeals. Following a hearing, the Court of Appeals affirmed the trial court’s decision, ruling that the jury waiver clause in the loan agreement was enforceable and that Tilley had effectively waived his right to a jury trial. Tilley then requested a review by the Arkansas Supreme Court, asserting that pre-dispute contractual waivers of the right to a jury trial are unenforceable under the Arkansas Constitution.
In response to Tilley’s arguments, MNB asserted that Arkansas law allows parties to a contract to control the manner in which their disputes are resolved, including a decision to have disputes resolved by arbitration under the Arkansas Arbitration Act.
The Supreme Court turned to the language of the Arkansas Constitution noting that “the right of trial by jury shall remain inviolate, and shall extend to all cases at law, without regard to the amount in controversy; but a jury trial may be waived by the parties in all cases in a manner prescribed by law.”
The court focused its analysis on the phrase “in a manner prescribed by law.” The court has consistently interpreted this phrase as referencing Arkansas statutes and the Arkansas Rules of Civil Procedure as being the governing “law” for this purpose. With that in mind, the court was not persuaded by MNB’s arguments comparing a jury waiver clause and an arbitration clause. The court noted that Arkansas law, pursuant to the Arkansas Arbitration Act, unquestionably provided a manner in which the parties could choose arbitration in lieu of a jury trial. Thus, parties contractually choosing to arbitrate disputes are waiving their right to jury trial “in a manner prescribed by law.” The court stated that no Arkansas statute or Rule of Civil Procedure expressly provided for pre-dispute waivers of the right to a jury trial.
In reviewing the Arkansas Rules of Civil Procedure, the court noted that Rule 38 and Rule 39 provide the method for demand of a jury trial, and that the failure to demand a jury trial within the established time period constitutes an effective waiver. The Rules of Civil Procedure clearly provide a method for waiving a jury trial, however, that right exists only after a dispute has arisen.
The court held that the right to jury trial is a fundamental, constitutional right that is protected by the Arkansas Constitution and procedural rules would not be applied to diminish that right. Given that the state had not previously adopted a method for waiving the right to trial by jury prior to a dispute, the court held that contractual jury waivers are unenforceable under the Arkansas Constitution.
This ruling can have a significant impact on dispute resolution procedures among parties to commercial and noncommercial contracts. It is common to include jury trial waiver provisions in loan agreements and mortgages documenting loans in both commercial and personal contexts. In addition, many general commercial contracts contain jury trial waiver provisions, particularly in acquisition transactions.
Lenders should note that judicial foreclosure proceedings are equitable remedies and the court held that the constitutional right to a jury trial does not extend to a foreclosure proceeding.
However, most common counterclaims asserted against lenders (negligence, fraud, etc.) do give rise to the right to a jury trial. As the law currently stands, the only time a jury trial can be waived is by agreement of the parties after a jury demand has been made under Rule 39 of the Arkansas Rules of Civil Procedure.
A legislative “fix” to the waiver issue would presumably take a form similar to the Arkansas Arbitration Act, setting forth a statutory method of an alternative dispute resolution procedure. This step may, however, run afoul of restrictions on legislative actions that encroach upon the Supreme Court’s rulemaking authority.
For the time being, we are encouraging clients to continue to include a standard jury trial waiver provision, in addition to considering arbitration as an alternative to be required by the terms of the contract. This alternative may not, however, be appropriate in all cases.
Robert T. Smith is a partner at Little Rock-based law firm Friday, Eldredge & Clark. His practice focuses on banking and corporate matters. The opinions expressed are those of the author.