Georgia Court of Appeals Affirms Superior Court’s Confirmation of Arbitration Award, Finding That Arbitrator Did Not Manifestly Disregard Law Governing the “Modified Total Cost” Approach to Damages

Gainesville Mech., Inc. v. Air Data, Inc., No. A19A0518., 2019 BL 229069 (Ga. Ct. App. June 19, 2019)

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Michelle J. Cuozzo

The First Division of the Georgia Court of Appeals affirmed a superior court’s decision to confirm an arbitration award against Appellant Gainesville Mechanical, Inc. (“Gainesville”) because Gainesville failed to show that the arbitrator manifestly disregarded the law governing the “modified total cost” approach to damages.

The underlying dispute between Gainesville and Air Data, Inc. (“Air Data”) arose from a construction project, for which Gainesville hired Air Data to perform certain construction services. Gainesville also directed Air Data to work 7 days a week for 10 hours a day for an extended period of time. Gainesville ultimately fired Air Data and hired another contractor to perform the remaining work. In total, Gainesville paid Air Data less than half of its contract price.

In his Final Award, the arbitrator found that a “cardinal change” of the contract occurred, because Air Data’s work was so drastically altered that the it effectively performed duties that were materially different from those which it originally bargained for. Based on that finding, the arbitrator assigned damages using the “modified total cost” approach, which Air Data supported.

The arbitrator noted that many courts disfavor modified total cost claims unless four conditions are present, and went on to say that Air Data did not meet all four conditions. Therefore, the arbitrator did not award Air Data all of its claimed losses, but did award a substantial portion of them. Air Data confirmed its arbitration award against Gainesville in a Georgia superior court, and Gainesville appealed.

The Court of Appeals will not reverse an order confirming an arbitration award unless the appellant demonstrates that a statutory ground exists. Here, the only statutory ground relevant was whether Gainesville’s rights were prejudiced by the arbitrator’s manifest disregard of the law.

In its appeal to this Court, Gainesville argues that the arbitrator manifestly disregarded the law governing the “modified total cost” approach to damages. “[M]anifest disregard of the law requires (1) that the governing law alleged to have been disregarded is well defined, explicit and clearly applicable and (2) proof that the arbitrator was aware of the law but decided to ignore it.”

The Georgia Court of Appeals could find no Georgia decisions adopting jurisprudence regarding the “modified total cost method” of proving damages. Therefore, the Court found that Gainesville failed to show well defined, explicit and clearly applicable law that the arbitrator allegedly disregarded. Further, the Court could not find that the arbitrator was aware of the law but decided to ignore it.  An ambiguous arbitration award, or even an error by the arbitrator in interpreting the availability of compensatory damages under Georgia law, was not manifest disregard of the law.

For those reasons, the Court of Appeals affirmed the superior court’s decision to grant Air Data’s petition to confirm the arbitration award and its denial of Gainesville’s cross-petition to vacate the award.

To view the full text of the court’s decision, courtesy of Bloomberg Law, click here.