Nearly two decades ago, the California Supreme Court ruled that pre-dispute contractual jury waivers are not enforceable. However, the Court emphasized that parties to a contract could avail themselves of two options to avoid the requirement of a jury trial – arbitration and judicial reference. (See Grafton Partners L.P. v. Superior Court (2005) 36 Cal.4th 944, 964.) In short, California law permits parties to proactively avoid the possible expense and uncertainty of trial by jury by contractually electing to resolve disputes by arbitration or judicial reference. While arbitration is generally a more familiar option – probably because of its widespread use in employment agreements and real estate transactional documents – judicial reference has many attributes that may render it a better choice as an Alternative Dispute Resolution option, compared to a civil trial.
Judicial reference is governed by California Code of Civil Procedure (“CCP”) section 638, which provides for the appointment of a referee to “hear and determine any or all of the issues in an action or proceeding, whether of fact or law, and to report a statement of decision.” Section 638 states that a contract or agreement entered into before a dispute can require that any lawsuit arising out of that agreement shall be heard by a referee. Notably, the parties to a civil lawsuit are also permitted to agree to stipulate to use of a referee after litigation is initiated.
In terms of the judicial reference process, a case must be filed in Superior Court than then by stipulation or by motion, the matter will be referred to a referee, oftentimes a retired judge. If the parties cannot agree on the referee, the Superior Court judge will make its own appointment, unless there is a valid legal objection to the court’s nominee. As a general proposition, in terms of the judicial reference proceeding, all the rules of evidence and the rule of civil procedure in California courts apply to the judicial reference. However, as is the case with arbitration, the rules governing judicial reference permits the parties to place limitations on discovery, as is often done in arbitration agreements. Similar to arbitration, judicial reference offers several advantages over civil trials, including speed, convenience and, as stated above, avoiding costly (and oftentimes risky) jury trials. An obvious downside of judicial reference is that the parties will need to share in paying the referee’s hourly rates and administrative fees, as in arbitration.
Comparing the overall comparative benefits however, judicial reference has a few significant advantages over arbitration. For one, while arbitration is – except in very limited cases of egregious instances of fraud or arbitrator misconduct – binding on the parties, while judicial reference affords the parties complete appellate rights. That right of appeal, tied to the referee’s obligation to follow the rules of evidence (as opposed to an arbitrator’s limited obligation to do the same and the arbitrator’s proclivity to consider almost any evidence presented at the arbitration) renders a judicial reference a more secure and predictable dispute resolution option than arbitration. These factors alone may warrant the inclusion of a judicial reference clause as the alternative dispute provision in a contract of any consequence.
The only clear disadvantage to a judicial referee compared to an arbitration proceeding is that judicial reference proceedings must be public, while arbitration is usually a private affair, taking place at a private facility not open to the public with and, oftentimes, with no public record. Arbitration awards, even if confirmed by the Superior Court, are much more likely to be sealed and kept private which is often an important consideration in employment or intellectual property disputes.
In short, for many substantial real estate and business dispute contexts, judicial reference is a better alternative dispute resolution alternative than arbitration. And like arbitration, it will likely result in a more efficient and predictable outcome than a civil court jury trial. For these reasons, when approaching a real estate or business deal and evaluating the desirability of including an alternative dispute resolution provision, one should consult with an attorney who can advise whether judicial reference is, as it is in many instances, the best choice over arbitration.