Judicial Reference Provision in Loan Guaranty Held Enforceable

Many of the loan documents we draft or seek to enforce contain an alternative dispute resolution provision requiring that borrower or guarantor disputes be tried by a judicial referee appointed by the Superior Court. This provision is intended to avoid the risk of having such cases heard by a jury, while preserving the right to appellate review which is generally not available in arbitrations.

In September 2013, a California Court of Appeal published its final decision in O’Donoghue v Superior Court, upholding the enforceability of a judicial reference in a loan guaranty over various legal objections raised by the guarantors. The court held that even though the provision did not state expressly that the guarantors waived their right to a jury trial, the court concluded that the provision effectively waived that fundamental right. In addition, the court held that the provision was not unconscionable. Lastly, under the circumstances of the case, the court found that the lender did not waive its right to enforce the provision despite its delay in filing a motion seeking to appoint the referee.

The decision is an important affirmation of the enforceability of judicial reference provisions. The case does raise, however, the risk that a lender could be held to waive its right to enforce the provision by delaying moving to appoint the referee.  The decision implies that in some circumstances, delay may result in waiver but determined that under the particular facts of the case, there was no waiver.  In this instance, the court found that the guarantors were not prejudiced by the delay. To avoid a waiver argument, a lender should therefore consider with its counsel at what point during litigation to move for appointment of a referee. Our attorneys are active in drafting and enforcing judicial reference provisions and are available to provide guidance as needed.

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