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Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 

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PUBLISH 

FILED 

United States Court of Appeals 

Tenth Circuit 

UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT 

OCT 1 41988 

ROBERT L. HOECKER 

Clerk 

TELUM, INC., a Nebraska Corporation, 

EARL K. COOK and CARL R. KING, 

Plaintiffs-Appellees 

and Cross-Appellants, 

vs. 

E.F. HUTTON CREDIT CORPORATION, a 

corporation, 

Defendant-Appellant 

and Cross-Appellee. 

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Nos. 86-1375 

86-1496 

APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF UTAH 

(D.C. No, C-83-0187J) 

Rex E. Madsen (Reed L. Martineau, Michael R. Carlston and Stephen 

J. Hill with him on the brief), of Snow, Christensen & Martineau, 

Salt Lake City, Utah, for Plaintiffs-Appellees. 

Francis M. Wikstrom (T. Patrick Casey with him on the brief), of 

Parsons, Behle & Latimer, Salt Lake City, Utah~ for DefendantAppellant. 

Before MOORE and BALDOCK, Circuit Judges, and BOHANON, District 

Judge*. 

BALDOCK, Circuit Judge 

* The Honorable Luther L. Bohanon, United States District Judge 

for the Western District of Oklahoma, sitting by designation. 

Appellate Case: 86-1375 Document: 010110025031 Date Filed: 10/14/1988 Page: 1 
This is an appeal from a final judgment in favor of 

plaintiff-appellee Telum, Inc. (Telum) and from an order denying 

the motion by defendant-appellant E.F. Hutton Credit Corp. 

(Hutton) for a new trial or a judgment notwithstanding the 

verdict. Telum brought an action to rescind both the lease of an 

oil drilling rig and the personal guaranties of Telum's owners, 

Carl King and Earl Cook, with Hutton on the grounds of fraud, 

breach of contract, failure of consideration, negligent 

misrepresentation, mutual mistake, unilateral mistake and 

constructive fraud. Telum also sought special damages on the 

fraud claim. Hutton counterclaimed to enforce the lease and 

guaranties. 

I. 

The parties to this dispute entered an agreement whereby 

Hutton would purchase from J.P. Exploration, Inc., represented by 

Robert Pinder, an oil rig which would then be leased to Telum. 

Telum would then take the appropriate investment tax credit and 

sublease the rig back to J.P. Exploration. The parties signed the 

relevant agreements in July 1980, and Telum and J.P. Exploration 

began making their respective lease and sublease payments. 

These payments continued for approximately two years until 

J.P. Exploration was sold to a third party who discontinued the 

sublease payments. Telum then sought to repossess the rig and, in 

the meantime, signed an extension agreement with Hutton which 

deferred Telum's monthly lease payments for a period of three 

months. Thereafter, in January 1983, Telum claims it discovered 

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Appellate Case: 86-1375 Document: 010110025031 Date Filed: 10/14/1988 Page: 2 
for the first time that the rig was not complete as described in a 

schedule attached to the lease at the time of the July 1980, 

closing. Thereupon, Telum sued to rescind the lease and recover 

restitution consisting of lease payments made and special damages 

for expenses incurred in retrieving the rig after the sale of J.P. 

Exploration. 

At trial, Telum sought rescission, contending that Ray 

Welling, an employee of Hutton, made a number of 

misrepresentations which wrongfully induced Telum to enter the 

lease. Hutton counterclaimed to enforce the lease, arguing that 

Telum's reliance upon Welling was unreasonable. Hutton also 

claimed that Telum knew of the discrepancies between the lease 

equipment schedule and the actual rig at the time the extension 

agreement was signed, thereby waiving any claim for fraudulent 

.inducement. Hutton further asserted that the facts showed the 

existence of a joint venture between Telum and Pinder. According 

to Hutton, if there were a joint venture, Finder's knowledge that 

the rig was incomplete could be attributed to Telum. 

The issues were tried before a jury which answered special 

interrogatories, finding that (1) Hutton had not proved by a 

preponderance of the evidence that Telum, Cook and King, at the 

time that Telum signed the extension agreement, knew about the 

fraud, and that (2) Telum, Cook and King proved with clear and 

convincing evidence that they were induced by Hutton's 

misrepresentations of material fact to enter the lease agreement. 

Based upon the jury verdict, the trial court entered judgment 

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Appellate Case: 86-1375 Document: 010110025031 Date Filed: 10/14/1988 Page: 3 
rescinding the lease and the personal guaranties and dismissed 

Hutton's counterclaim. The court also denied Hutton's motion for 

a new trial or judgment notwithstanding the verdict. 

Hutton appeals on four grounds. First, it claims that Telum 

did not prove by clear and convincing evidence that its reliance 

on Hutton was justifiable and reasonable. Second, Hutton 

maintains that the undisputed evidence at trial was that Telum 

expressly waived its claim for fraudulent inducement by signing 

the extension agreement with knowledge that the rig was 

incomplete. Third, Hutton alleges that the district court erred 

by not allowing the jury to determine whether Telum and Pinder had 

formed a joint venture. Finally, Hutton argues that the trial 

court erred in failing to enforce a jury waiver provision of the 

contract~ 

On cross-appeal, Telum urges that the trial court erred by 

denying its request for special damages. Second, Telum alleges 

error in the court's failure to present its alternative theories 

to the jury, including negligent misrepresentation, failure of 

consideration, mutual mistake and unilateral mistake. Finally, 

Telum claims that the trial court wrongly excluded evidence 

purporting to show that Welling had embezzled $40,000 from Hutton 

in connection with the Telum lease. Because of its dispositive 

effect, we will deal first with the jury-waiver issue. We· reverse 

and remand. 

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Appellate Case: 86-1375 Document: 010110025031 Date Filed: 10/14/1988 Page: 4 
II. 

After Hutton counterclaimed, Telum demanded a jury trial. 

Hutton opposed this demand, relying on ,116(b) of the master lease 

agreement between the parties which provided in part that the 

"[l]essee waives all right to trial by jury in any litigation 

arising herefrom or in relation hereto." Exhibit 1. The trial 

court granted Telum's request for a jury trial, rec. vol. IV at 

26, and denied Hutton's motion to reconsider that ruling, rec. 

vol. XII at 9. In answers to special interrogatories, the jury 

found that Telum, without knowledge of the relevant facts, was 

induced to enter the lease agreement as a result of Hutton's 

material misrepresentations. Upon the jury's finding of fact, the 

trial court entered judgment in favor of Telum, dismissing 

Hutton's counterclaim, or~ering rescission of the lease agreement 

and awarding Telum restitution with interest and costs. 

On appeal, Hutton argues that the trial court erred in 

failing to enforce the jury waiver provision of the contract 

without proof that the waiver provision was itself fraudulently 

induced. We agree. 

The right to a jury trial in the federal courts is governed 

by federal law. Simler v. Conner, 372 U.S. 221, 221-22 (1963)(per 

curiam) (jury trial right controlled by federal law to insure 

uniformity in exercise required by seventh amendment). Agreements 

waiving the right to trial by jury are neither illegal nor 

contrary to public policy. McCarthy v. Wynne, 126 F.2d 620, 623 

(10th Cir.), cert. denied, 317 U.S. 640 (1942); see Leasing Serv. 

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Appellate Case: 86-1375 Document: 010110025031 Date Filed: 10/14/1988 Page: 5 
Corp. v. Crane, 804 F.2d 828, 832 (4th Cir. 1986) (right to jury 

trial, although fundamental, may be knowingly and intentionally 

waived by contract); K.M.C. Co. v. Irving Trust Co., 757 F.2d 752, 

755 (6th Cir. 1985) (considering it "clear that the parties to a 

contract may by prior written agreement waive the right to jury 

trial"). 

Appellees acknowledge the possibility of waiver but rely on 

several cases where courts have refused to uphold contractual jury 

waiver provisions. See National Equip. Rental v. Hendrix, 565 

F.2d 255 (2d Cir. 1977); Dreiling v. Peugeot Motors of America, 

539 F. Supp. 402 (D. Colo. 1982). These decisions relied on facts 

such as inconspicuous fine print or a gross disparity in 

bargaining power to invalidate jury waiver provisions. Telum and 

Hutton, on the other hand, were both sophisticated parties, and 

the provision here was in the normal print size of the contract. 

Moreover, the trial judge did not invalidate the waiver based on 

such findings, but rather seemed to conclude that Telum's 

allegations of fraud in the inducement relating to the contract as 

a whole were sufficient to vitiate the provision. Rec. vol. IV at 

16-17; id. vol. XII at 8-9. 

The parties have not cited any federal cases dealing 

specifically with this issue, and we have found none. Appellants· 

urge us to accept by analogy the federal cases dealing with the 

effect of fraud in the inducement upon the enforceability of 

contract arbitration clauses. Both the United States Supreme 

Court and this court have held that allegations of fraud in the 

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inducement relating specifically to an arbitration provision may 

suspend application of such a provision. Allegations of fraud in 

the inducement going to the contract generally, however, have been 

held not to affect the agreement to arbitrate. 1 See Prima Paint 

Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-04 (1967); 

Meyer v. Dans un Jardin, S.A., 816 F.2d 533, 538 (10th Cir. 1987). 

This analogy is especially appropriate here because submission of 

a case to arbitration involves a greater compromise of procedural 

protections than does the waiver of the right to trial by jury. 

See Hart v. Orion Ins. Co., 453 F.2d 1358, 1361 (10th Cir. 1971) 

("[a]rbitration differs radically from litigation, and one who 

chooses it must be content with its informalities and looser 

approximations"). 2 For these reasons, we hold that the trial 

judge erre_d in ruling that general allegations of fraud are 

sufficient to invalidate a jury waiver provision. Appellees were 

not entitled to a jury trial as a matter of law. Accordingly, we 

vacate the judgment entered by the trial court and remand for a 

new trial without a jury. 

1 Although this result was based on language found in§ 4 of the 

United States Arbitration Act of 1925, the Court noted that "the 

purpose of Congress in 1925 was to make arbitration agreements as 

enforceable as other contracts, but not more so." Prima Paint Co. 

v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404 n.12 (1967). Thus, 

according to the Court, to make enforceability of arbitration 

clauses consistent with other contracts, arbitration could be 

suspended if fraud were specifically alleged to have induced the 

making of the arbi t.ration agreement. Id. 

2 This reasoning is not inconsistent with the strong federal 

policy favoring arbitration. See Perry v. Thomas, 107 S. Ct. 

2520, 2525 (1987); ·Peterson v. Shearson/American Express, 849 F.2d 

464, 465-66 (10th Cir. 1988) ("[w]hen a contract mandates 

arbitration, courts generally will enforce the arbitration clause 

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III. 

We now address evidentiary issues raised on appeal and crossappeal. First, Hutton argues that the trial judge erred by 

failing to admit a financial statement for the purpose of showing 

the existence of a joint venture between Telum and Pinder. 

Hutton offered a financial statement containing an account 

receivable referring to the "Telum joint venture." Rec. vol. IX 

at 895-96. Pinder testified that the receivable reflected an 

amount owed to J.P. Exploration Co. by himself or a related 

company for construction of the rig. Id. at 896. Counsel for 

Telum objected on the grounds of materiality, asserting that the 

statement showed a debt owed only by Pinder and not by Telum. The 

trial judge sustained the objection. Id. 

Materiality of an item of evidence refers to whether or not 

that evidence relates to a fact of consequence to the 

determination of an action. 1 J. Weinstein and M. Berger, 

Weinstein's Evidence§ 401[3] (1986). Although the objection was 

made and sustained on the basis of materiality, the concept of 

materiality is now embodied within the broader notion of relevance 

as defined in the federal rules: "'Relevant evidence' means 

evidence having any tendency to make the existence of any fact 

that is of consequence to the determination of the action more 

probable or less probable than it would be without the evidence." 

absent a waiver"). Given that arbitration involves less 

procedural protection than a full judicial proceeding, the policy 

favoring enforcement of contract arbitration clauses strengthens 

our analogy. 

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Fed. R. Evid. 401 (emphasis added). A trial court has broad 

discretion to determine whether evidence is relevant, and its 

decision will not be reversed on appeal absent a showing of clear 

abuse of that discretion. Hill v. Bache Halsey Stuart Shields 

Inc., 790 F.2d 817, 825 (10th Cir. 1986). 

Substantive law, in this case Utah law, determines which 

facts are of consequence in a given action. 1 J. Weinstein and M. 

Berger, Weinstein's Evidence§ 401(3] (1986). Under Utah law, the 

knowledge of a joint venturer with regard to the subject of the 

venture is imputed to the other joint venturers. Utah Code Ann. § 

48-1-9 (1981) (knowledge of partner charged to partnership); 

Hammer v. Gibbons & Reed Co., 510 P.2d 1104, 1105 (Utah 1973) 

(joint ventures bear partnership relation to each other). If, as 

joint venturers, Finder's knowledge that the rig was not complete 

at the time of closing could be attributed to Telum, then the 

joint venture issue would clearly relate to whether Telum in fact 

relied upon Welling's misrepresentations. As the evidence in 

· question referred specifically to the alleged joint venture, we 

hold that the trial court abused its discretion in refusing to 

admit the financial statement. 

IV. 

On cross-appeal, Telum argues that the trial court erred in 

refusing to permit Telum to introduce evidence showing that 

Welling, as Hutton's agent, embezzled $40.,000 in connection with 

the Telum lease. Upon Hutton's objection, the trial judge 

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excluded the evidence as both irrelevant and inflammatory. Rec. 

vol. X at 1075. 

Telum argues that the proffered testimony was relevant 1) to 

impeach Welling, 2) to show Welling's intent and motive in making 

misrepresentations to Telum and 3) to show that Telum should not 

be responsible for the $40,000 which was included as part of the 

equipment cost owed on the lease to Hutton. 

The trial court's decision to exclude evidence as irrelevant 

is within its sound discretion and will not be reversed absent an 

abuse of discretion. Hill, 790 F.2d at 825. First, Telum fails 

to show why Welling's purported embezzlement from Hutton would 

affect the amount that Telum owes Hutton under the lease, assuming 

the lease were held valid. Further, during pretrial discussions, 

counsel for Telum acknowledged that there was no dispute ~s to 

what payments were agreed to under the lease and which of those 

payments were made. Rec. vol.Vat 31. Thus, the trial judge did 

not abuse his discretion by considering the alleged embeizlement 

irrelevant when offered to mitigate Telum's obligation to Hutton. 

Evidence of the alleged embezzlement had some relevance to 

Welling's motive in making the misrepresentations charged by 

Telum, and for impeachment. 3 Even if relevant, however, the trial 

judge may properly exclude evidence ''if its probative value jg 

3 Hutton argues that the application of Rule 608(b), regarding 

the admissibility of specific instances of conduct other than 

convictions for attacking credibility, would preclude the use of 

this evidence to impeach Welling. Appellant's Reply Brief at 27-

28. However, the terms of Rule 608(b} would not preclude any 

testimony on the subject but instead would forbid the resort to 

the use of extrinsic evidence. Fed. R. Evid. 608(b). 

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substantially outweighed by the danger of prejudice." Fed. R. 

Evid. 403; Weir v. Federal Ins. Co., 811 F.2d 1387, 1395 (10th 

Cir. 1987). A determination to exclude evidence under this rule 

is similarly within the sound discretion of the trial court and 

will not be disturbed absent a clear abuse of discretion. Id. at 

1396. 

In making the Rule 403 determination, the district judge must 

balance the relevance of the evidence with its potentially 

prejudicial effect. Id. Further, this balancing task "is one for 

which the trial judge, because of his familiarity with the full 

array of evidence in the case, is particularly suited." Rigby v. 

Beech Aircraft Co., 548 F.2d 288, 293 (10th Cir. 1977). We cannot 

say that the trial judge abused his discretion. In light of the 

inflammatpry nature of the evidence regarding the alleged 

embezzlement, it was within the discretion of the trial judge to 

exclude that evidence, and we sustain his ruling. 

v. 

On cross-appeal, Telum argues that the trial court erred by 

denying Telum's request for special damages or reimbursement. As 

part of its restitution claim, Telum sought reimbursement for 

money expended in trying to repossess the rig and collect 

insurance proceeds after the sale to a third party of J.P. 

Exploration. Following a post-trial hearing on the matter, the 

trial court denied Telum's motion for reimbursement. Rec. vol. I 

at 123-24. Because the order of the trial court contains no 

findings of fact or conclusions of law, we decline to review it on 

appeal~ Instead, we vacate the order denying reimbursement and 

remand the issue for consideration upon retrial. 

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VI. 

The district court judgment based on the jury verdict and the 

order denying reimbursement are VACATED, and the case is REMANDED 

to the district court for a new trial consistent with this 

opinion. 

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