Loan Documentation Clauses to Avoid Lender Liability
| Publication year | 1990 |
| Pages | 2225 |
1990, November, Pg. 2225. Loan Documentation Clauses to Avoid Lender Liability
In recent years, theories of lender liability have emerged which have subjected lenders to legal claims for relief by their borrowers.(fn1) This article identifies provisions which the lender can include in loan documents to ameliorate and lessen the risk of lender liability claims, such as jury waivers, arbitration clauses, limitations on forum and choice of law governing disputes.
The use of jury waivers to lessen the risk of lender liability claims has increased among lenders. The right to a jury trial in Colorado is not a constitutional right. However, in federal courts, the right to a jury trial is a constitutional right, and any jury waiver must be knowing and voluntary.(fn2) Factors that Colorado courts have considered, and likely would consider, in determining whether the jury waiver is valid include:
1) whether the waiver clause was buried in the contract or was clearly visible;(fn3)
2) whether the waiver was a bargained-for term of the contract;(fn4)
3) the relative bargaining positions of the parties;(fn5)
4) whether consideration was paid;(fn6) and
5) whether the party seeking to avoid the waiver was the drafter of the contract.(fn7)
The courts are sharply divided as to which party should bear the burden of proving that the waiver was unequivocal, mutual, informed and voluntary. Some courts have held that the party objecting to a jury waiver should have the burden of demonstrating that the waiver was not knowing and voluntary in the "interest of liberty of contract."(fn8) Where the borrower has the burden of proof, he or she will not be bound by substantive contract law, such as the parol evidence rule in proving lack of consent, because of the constitutionally protected nature of the right being waived.(fn9)
Other courts have indulged in every reasonable presumption against the waiver because the right to a jury trial is so fundamental a constitutional guarantee. These other courts have held that the party claiming the waiver bears the burden of proof.(fn10)
The lender should take into consideration that there are disadvantages to using jury waivers. First, the use of jury waivers does not decrease legal fees because the case is still tried before the court. Second, if the jury waiver subsequently is voided, it may be used as evidence of the lender's bad faith,(fn11) providing the borrower's counsel a powerful emotional argument that the lender attempted to keep the dispute away from the jury.(fn12) Moreover, the use of jury waivers may be only partially effective to eliminate large awards because several large awards have been entered by a judge sitting without a jury.(fn13)
However, if the lender is determined to use the jury waiver, actions should be taken to ensure that the waiver clause (1) is conspicuous,(fn14) (2) was part of the bargain for which consideration was paid,(fn15) (3) is called to the attention of the borrower and borrower's counsel for their review and acknowledgement(fn16) and (4) was the result of free choice, as opposed to inequality in bargaining power.(fn17) Finally, the lender should ask a corporate borrower for a certified resolution specifically authorizing the loan and the jury waiver.(fn18)
To enhance the likelihood of enforcing the jury waiver and to explain to the jury in what cases the waiver would be void, language should be included in loan documents stating the reasons for the waiver. Such reasons might include the desire to avoid delays, minimization of trial expense and streamlining the proceeding.(fn19)
The enforceability of a jury waiver also may be strengthened by including a provision in the borrower's counsel's opinion concerning the waiver or by having the borrower execute a written acknowledgement of the waiver.(fn20) In cases where the borrower requests concessions concerning a loan's rate of interest or payment
Lenders increasingly have turned to the use of arbitration clauses as a form of dispute resolution because arbitration is viewed as being more likely to produce a quick, responsive decision by individuals who are less likely to base their verdict on emotional arguments. The Federal Deposit Insurance Corporation has adopted arbitration as an avenue to resolve commercial loan and supervisory disputes.(fn21) The securities industry commonly uses arbitration clauses in customer and employee agreements.(fn22) Therefore, it would not be uncommon to use arbitration clauses in transactions between a lender and a borrower to arbitrate a claim of lender misconduct.(fn23)
The Federal Arbitration Act ("Act") states that arbitration agreements "shall be valid, irrevocable, and enforceable," except where voidable for fraud, duress, lack of capacity or mistake.(fn24) The Act establishes federal law governing all interstate contract transactions. Therefore, it has limited a state's power to require judicial resolution of claims.
This limitation is consistent with Colorado law, which holds that valid arbitration clauses deprive the court of subject matter jurisdiction until arbitration has concluded.(fn25) The Act preempts contrary state law that would preclude enforcement of a contractual provision to arbitrate particular future claims.(fn26) In Colorado, arbitration is favored by law.(fn27) Ordinary contract principles govern whether parties are bound by an arbitration agreement.(fn28) Therefore, the courts will determine if the arbitration clause resulted from mutual consent, is supported by consideration and has been entered into knowingly and voluntarily.(fn29)
Two exceptions to the enforcement of arbitration clauses have been established by some courts. The first is that, in a bankruptcy proceeding, arbitration clauses are enforceable only at the discretion of the judge.(fn30) Second, arbitration clauses will not be enforced to permit a lender to change a usurious interest rate.(fn31)
Parties to an agreement containing an arbitration clause can waive the right to arbitration. Colorado courts will find a waiver of the right of arbitration when a party to the...
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