Arkansas Supreme Court Rules Pre-Dispute Contractual Jury-Trial Waivers UnenforceablePublications - Client Alert | January 3, 2018
On December 7, 2017, the Arkansas Supreme Court in Tilley v. Malvern National Bank, 2017 Ark. 343, held that pre-dispute contractual jury-trial waivers are unenforceable under Arkansas law. Justice Karen R. Baker, joined by Justices Josephine L. Hart and Robin F. Wynne and Special Justice Jonathan Q. Warren, wrote the 4-3 majority opinion. While commentators and courts have noted that most jurisdictions allow such pre-dispute jury waivers, the Arkansas court joins Georgia and California courts in striking down waivers on state constitutional grounds when pre-dispute waiver is not explicitly allowed by state statute or court rule.
While clients should be aware of this significant limitation on contracting parties’ ability to control resolution of future disputes, creative options can be considered and the Tilley majority’s narrow margin of victory and persuasive arguments from dissenting justices leaves the case vulnerable to future legal challenges.
Malvern National Bank (“MNB”) and Kenneth Tilley, individually and as trustee for the Kenneth Tilley Family Trust (“Tilley”), entered into a loan agreement and promissory note. As security for the loan, Tilley granted MNB a mortgage interest in real property in Garland County. In the loan agreement, each party expressly waived its right to a jury trial in any related future dispute. When Tilley allegedly defaulted under the loan agreement, MNB sued for replevin and foreclosure. In his answer to the complaint, Tilley demanded a trial by jury. He also brought a counterclaim against MNB and a third-party complaint against a former vice president of MNB related to allegations that MNB and its officer did not fulfill a promised antecedent loan to Tilley.
Before trial, MNB moved to strike Tilley’s jury-trial demand based in part on the waiver in the parties’ loan agreement. The circuit court granted MNB’s motion as to all claims, and after a bench trial, MNB prevailed on its foreclosure claim as well as Tilley’s counterclaim and third-party complaint. Tilley appealed. While the Arkansas Court of Appeals initially affirmed the judgment, the Arkansas Supreme Court took up the appeal after granting Tilley’s petition for review.
On appeal, Tilley argued that the circuit court erred by denying him his constitutional right to a jury trial on his legal claims under the loan agreement’s pre-dispute jury-waiver clause. The Supreme Court affirmed the judgement on MNB’s foreclosure claim but reversed and remanded all other claims, holding in part that pre-dispute contractual jury-trial waivers are unenforceable under the Arkansas Constitution.
The Tilley majority relied on the text of Article 2, Section 7 of the Arkansas Constitution, which states: “[t]he 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 the manner prescribed by law.” (emphasis added). The Court interpreted “in a manner prescribed by law” to mean that only a state statute or rule of procedure could change a party’s right to a jury trial. The Court found that, unlike pre-suit agreements to arbitrate, which are governed by the Arkansas Arbitration Act, there are no such statutes governing a party’s ability to waive its right to jury before suit. The Court also found that pre-suit waivers are not found in court rules, which permit waiver only when a party fails to make a timely demand (Ark. R. Civ. P. 38) or in circumstances after litigation has commenced and a demand is made (Ark. R. Civ. P. 39). Accordingly, the Court held “that predispute contractual jury waivers are unenforceable under the Arkansas Constitution.”
Justices Courtney Hudson Goodson, Rhonda K. Wood and Shawn A. Womack dissented. Justice Goodson argued that Tilley failed to preserve his constitutional argument for appeal. Justice Wood, joined by Justice Womack, contended that pre-dispute contractual jury-trial waivers are constitutionally permissible when entered into knowingly and voluntarily. Justice Wood reasoned that the majority improperly excluded common law as a source of limitations on the right to jury allowed by the language “as prescribed by law” in Article 2, Section 7. She stated that pre-suit waivers are supported by “decades of common-law jurisprudence” providing that parties are generally free to contract any terms not contrary to statute or public policy. Justice Wood further emphasized that a core principal of contract law permits parties to control the manner in which future and potential disputes are resolved, including choice of forum and controlling law.
Tilley is a significant limitation on contracting parties’ ability to control future disputes with pre-suit agreements. While parties should be aware of the current state of the law, it does not necessarily follow that these provisions should be stricken wholesale. If parties feel comfortable they obtain waivers voluntarily and knowingly, they should consider adding or maintaining these types of provisions while also ensuring those agreements contain a severability clause. This action is justifiable because Tilley is founded on shaky ground. Only three sitting justices comprised the majority. Further, Justice Wood persuasively explains why the Arkansas Constitution permits common law changes to the right to trial by jury with its broader “as prescribed by law” language. This language is distinguishable from the controlling law in California and Georgia, the other jurisdiction with pre-dispute contractual jury-trial waivers, which specifically state that only a state statute may affect a party’s right to a jury trial.
If you would like more information or to discuss the impact of this decision on your business, please contact any of our attorneys practicing in Little Rock, Fayetteville and Rogers, AR.