Commercial lenders typically prefer to avoid jury trials whenever possible. Because jury trial waivers are unenforceable in California courts, lenders often include either an arbitration provision or a judicial reference provision in a loan agreement to avoid the possibility of dispute being resolved by a jury. California courts have uniformly held that such provisions are an enforceable alternative to a jury.
Over the past several years, commercial lenders have moved away from binding arbitration in favor of judicial reference, largely because of the substantial restrictions on the ability to appeal an unfavorable decision by an arbitrator. Judicial reference allows commercial lenders to avoid a jury trial, while also preserving the ability to appeal the judicial referee’s ultimate decision in the event that it is unfavorable, just as if the decision were entered by a trial judge.
A recent California case, J.H. Boyd Enterprises, Inc. v. Boyd (2019), presents a new risk for lenders opting for judicial reference provisions. The Court in that case held that while trial court orders granting or denying motions to compel arbitration are immediately appealable, the same is not true for judicial reference. The result is that in the event a trial court were to deny a motion to compel judicial reference at the outset of a dispute, the lender may not immediately appeal that decision. Instead, the lender may be forced to endure litigation and an unpredictable jury trial. Only after the jury issues a decision on the merits resulting in a judgment would the lender have the right to appeal, including whether the earlier order denying judicial reference was improper. At that very late stage, it may be very difficult for a lender to establish that the decision denying judicial reference should serve as a basis to overturn the jury’s decision after trial.
While we surmise that most California commercial lenders will continue to favor the benefits of judicial reference provisions rather than arbitration provisions, they should be aware of the new risk posed by the J.H. Boyd Enterprises case when making that selection.