It is clear that the parties to a contract may by prior written agreement waive the right to jury trial. However, the question of right to jury trial is governed by federal and not state law. The constitutional right to jury trial may only be waived if done knowingly, voluntarily and intentionally, and whether this standard was met in a given case is a constitutional question separate and distinct from the operation of rules of substantive contract law like the parol evidence rule.
In 1979, Irving Trust Company (Irving) and K.M.C. entered into a financing agreement, whereby Irving held a security interest in all of K.M.C.'s accounts receivable and inventory and provided K.M.C. a line of credit to a maximum of $3.0 million, increased one year later to $3.5 million at a lower rate of interest, subject to a formula based on a percentage of the value of the inventory plus eligible receivables. On March 1, 1982, Irving refused to advance $800,000 requested by K.M.C. This amount would have increased the loan balance to just under the $3.5 million limit. K.M.C. contends that Irving's refusal without prior notice to advance the requested funds breached a duty of good faith performance implied in the agreement and ultimately resulted in the collapse of the company as a viable business entity. Irving's defense is that on March 1, 1982, K.M.C. was already collapsing, and that Irving's decision not to advance funds was made in good faith and in the reasonable exercise of its discretion under the agreement. Trial was conducted by a Magistrate on consent of the parties pursuant to 28 U.S.C. § 636(c). Although the financing agreement contained a jury trial waiver clause, the Magistrate ordered a jury trial over Irving’s objections. The jury found Irving liable for breach of contract and fixed damages at $7,500,000 plus pre-judgment interest. Irving’s motions to dismiss and for a directed verdict and post-trial motions for judgment n.o.v., or a new trial or a remittitur were denied. On appeal, Irving contended that permitting a Magistrate to conduct civil trials with the consent of the parties is unconstitutional. Furthermore, Irving asserted that it did not breach the financing agreement with K.M.C. Irving also asserted that the Magistrate erred in admitting incompetent expert testimony on the question of damages.
Was it proper for the court to grant a jury trial?
The Court affirmed the district court's judgment, holding that the magistrate properly granted a jury trial despite a contractual waiver. Specifying, the Court held that the contract's clause waiving a jury trial must have been knowing, voluntary, and intentional; and that evidence that Irving told K.M.C. that the clause would not be enforced was admissible and sufficient ground to grant a jury trial. Furthermore, the Court held that Irving breached the implied duty of good faith when a reasonable creditor would have given notice that the funds would be denied and when the evidence showed that there was nothing extraordinary about K.M.C.’s financial condition. Finally, the Court held that the expert testimony K.M.C.’s value was properly admitted when, although speculative, it was derived from financial data and based on personal experience and knowledge.