The Arkansas Supreme Court ruled earlier this month that contractual waivers of the right to a jury trial are not enforceable, triggering concerns from attorneys and business leaders because just about every commercial contract has a provision that contains that waiver.
The 4-to-3 decision, written by Associate Justice Karen R. Baker, “caught most people off guard,” said Robert T. Smith, a partner with Friday Eldredge & Clark, whose practice area focuses on banking and corporate matters.
He said nearly all residential mortgages and commercial loan contracts have the jury waiver clauses in them.
“So those are ineffective, as of that opinion under Arkansas law,” Smith said.
Smith, who handles mergers and acquisitions, said those contracts contain language that includes a waiver of a jury trial if a dispute arises. “So those are no longer effective either, at least based on that case,” he said.
Business interests are already working to introduce legislation that would allow the contractual waivers of the right to a jury trial, said Randy Zook is the president and CEO of the Arkansas State Chamber of Commerce and the Associated Industries of Arkansas.
“We’re going to try to address it at the first opportunity,” said Zook, who said the ruling took him by surprise.
The high court’s ruling stemmed from a 2011 lawsuit in Garland County Circuit Court between Malvern National Bank and Kenneth W. Tilley, individually and as trustee of his family’s trust.
In 2010, Tilley borrowed $221,000 from the bank and used property in Garland County to secure the loan. The loan agreement included a jury waiver clause, according to Baker’s opinion.
Tilley allegedly defaulted on the loan, and the bank sued to foreclose on his property. Tilley first filed an answer and asked for a jury trial. He later filed a counterclaim and third-party complaint against Stephen Moore, the bank’s former vice president of commercial lending. Tilley raised several claims, including violation of the Arkansas Deceptive Trade Practices Act and negligence.
The bank and Moore argued that Tilley wasn’t allowed to a jury trial on his claims because they were tied to the bank’s foreclosure lawsuit. In addition, MNB and Moore said the loan document that Tilley signed contained a jury waiver. Tilley argued that his claims must be tried before a jury.
The Garland County Circuit Court judge sided with Malvern National Bank and Moore and ruled that Tilley couldn’t have a jury trial. After a bench trial in 2015, the judge ruled in favor of the bank and against Tilley.
Tilley appealed, and in March the Arkansas Court of Appeals agreed with the circuit court’s decision. Tilley then appealed to the state Supreme Court. The Supreme Court found that arbitration agreements are “clearly enforceable under the Arkansas Constitution,” Baker wrote. “However, the same cannot be said for predispute jury-waiver clauses because no Arkansas statute or Arkansas rule of civil procedure expressly provides for predispute waivers of the right to a jury trial.”
The court found that predispute contractual jury waivers are unenforceable under the Arkansas Constitution.
Joshua M. Allen, an attorney at the Little Rock firm Eichenbaum Liles, represented Tilley along with James Penick III, who died in November. Allen said the opinion calls for the case to return to Garland County for a jury trial on Tilley’s counterclaims.
Allen said that Arkansas is one of only a few states where predispute jury-waiver clauses have been ruled unenforceable.
Some attorneys fear that borrowers in a foreclosure lawsuit will assert a claim that will entitle them to a jury trial, causing foreclosure lawsuits to drag on. Attorneys fear that the delay would allow borrowers to stay on the property without making a payment while the case is pending.
Smith, with the Friday firm, said he thinks circuit courts in Arkansas could become clogged with borrowers demanding jury trials.
“I think most commercial contract participants will tell you they would prefer to not have a jury trial just because a bench trial, generally, is seen as more efficient and hopefully better for both parties,” Smith said.