The Addition of the "manifest Disregard of the Law" Defense to Georgia's Arbitration Code and Potential Conflicts With Federal Law

• Publication year: 2010

The Addition of the "Manifest Disregard of the Law" Defense to Georgia's Arbitration Code and Potential Conflicts With Federal Law

David Boohaker

Introduction

In recent years, parties have increasingly resorted to arbitration to settle commercial disputes.[1] The importance of arbitration has continued to grow as parties have utilized this alternative method of dispute resolution to settle their differences.[2] As the frequency of arbitration's use increases, courts must resolve questions crucial to the smooth functioning of the entire arbitration system.[3] This Note analyzes the role and nature of the codified defense of "manifest disregard of the law" within the context of commercial arbitration in the State of Georgia. It argues that federal law preempts the manifest disregard of the law provision in the Georgia Arbitration Code.[4] Additionally, this Note argues that practical implementation of the standard will be too unwieldy and will yield a result contrary to the interests of arbitration. Finally, it argues that characterizing the defense as a procedural rule so as to escape the reach of federal law leads to a counter-intuitive result.

Part I of this Note will give a brief overview of the form and function of commercial arbitration in the United States. Part II contains an analysis of both the case law and statutes on arbitration in Georgia. Part III analyzes the manifest disregard of the law standard in federal courts. This discussion begins with the origin of the manifest disregard of the law defense, followed by a model that will be useful in understanding the standard. Part IV will consider the potential problems for the standard in Georgia, particularly whether federal law has preempted the Georgia Arbitration Code and, if it has not, whether the standard can escape the reach of federal law and still remain useful for its intended purpose.

I. Arbitration Defined

Commercial arbitration is one of the primary means of alternative dispute resolution in the business arena.[5] Arbitration occurs when two parties submit their dispute to an impartial third party decision maker for a binding, out-of-court resolution that local courts may enforce.[6] An arbitration proceeding often does not involve an elected or appointed judge.[7] Little involvement with formal judicial procedures is an important aspect in commercial arbitration since court dockets are extremely full and litigation takes ever-increasing periods of time.[8] Parties value arbitration as a means to resolve disputes because it can be quick, cheap, confidential, and binding, all of which are important qualities in the business world.[9] In contrast to judges, commercial arbitrators often possess a background similar to the parties whose dispute is at issue.[10] Thus, arbitration can lead to a more appropriate result, and both parties are more likely to follow it.[11]

Commercial arbitration often begins with a clause in a contract signed by two parties. The parties agree prior to a dispute to have an independent third party conclusively resolve some or all issues of law and fact arising out of a dispute over their contract.[12] However, the end result of arbitration can result in an inaccurate interpretation of the law.[13] Yet, parties agree to accept these uncertainties and imprecise interpretations.[14] In exchange, they receive the "simplicity, informality, and expedition" that an arbitral tribunal has but that a court of law might lack.[15]

Commercial arbitrations appeal to savvy businessmen or corporations who are seeking a quick way to resolve disputes and maintain business relationships.[16] Contracts between these parties are usually negotiated at arms length; the relatively equal bargaining power and skills of both sides ensure that both parties consent to and freely negotiate the many contract provisions, which often contain arbitration clauses.[17]

Parties to a commercial arbitration should expect results consistent with their bargain.[18] The losing party cannot take an appeal simply because of his dissatisfaction with the arbitral result.[19] Parties cannot seek "vacation" (non-enforcement) of the award simply because they are unhappy with the result.[20]

Often the rules for commercial arbitrations do not require arbitrators to set out the reasons or key facts for their decisions in the written award.[21] In the United States, commercial arbitration awards do not identify the facts, contract provisions, and relevant law central to the resolution of the dispute, and they do not demonstrate how the arbitrator applied the law to the facts to resolve the dispute.[22] The award usually contains only the name of the winning party and the amount of the award.[23] Without written awards that detail how the arbitrator arrived at his decision, there is a presumption that the neutral third party arbitrator made this decision in a legitimate way.[24]

The Federal Arbitration Act[25] ("FAA") is the body of legislation that governs commercial arbitration in the United States.[26] The public policy behind the FAA presumes that the arbitrator arrived at his result legitimately.[27] Section 10(a) of the FAA—the relevant section on vacatur, or non-enforcement of arbitral awards—sets out the relevant grounds for defending against the enforcement of arbitral awards:

(a) In any of the following cases the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration—

Where the award was procured by corruption, fraud, or undue means.

Where there was evident partiality or corruption in the arbitrators, or either of them.

Where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced.

Where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.[28]

The public policy behind the FAA is the idea of holding the parties to their agreement by enforcing their agreement to arbitrate.[29] In addition, the FAA makes it hard to vacate arbitral awards simply because one party is dissatisfied with the award.[30] The business community envisions the arbitral forum as the first and last stop on the road to enforcement, not as a makeshift trial court with many levels of review.[31] In recent years, however, federal courts have become increasingly willing to vacate arbitral awards for grounds other than the four enumerated above.[32] One of those grounds is the manifest disregard of the law standard, which the federal judiciary created and the Georgia Legislature added to the Georgia Arbitration Code in 2003.[33]

II. Arbitration and "Manifest Disregard of the Law" in Georgia

Until recently, the Georgia Arbitration Code's section on vacatur did not differ significantly from its federal counterpart.[34] However, in the 2003 legislative session, Representative Mary Margaret Oliver of the Georgia House of Representatives introduced a bill that would add another defense to the Georgia Arbitration Code's section on vacatur.[35] This defense was the manifest disregard of the law standard.[36] The introduction and eventual adoption of this additional defense ran counter to previous Georgia case law on the subject.[37] In her remarks on the floor of the Georgia House of Representatives in support of her bill, Representative Oliver made it clear that she intended the addition of the provision to be a consumer protection measure.[38] As a result, the legislature adopted the manifest disregard of the law standard via House Bill 792 to protect the consumer public in Georgia and to prevent the enforcement of any arbitral award contrary to the new defense that a proponent seeks to enforce in the State of Georgia, not just consumer arbitral awards.[39]

A. The State of the Common Law Prior to the Passage of HB 792

The concept of manifest disregard of the law was not new to the judiciary of the State of Georgia.[40] The most authoritative and recent pronouncement of the law on this subject prior to the amendment of O.C.G.A. Sec. 9-9-13(b) was Progressive Data Systems, Inc. v. Jefferson Randolph Corp.[41] This case involved a computer equipment and software vendor, Progressive Data Systems ("PDS"), and an unsatisfied customer, Jefferson Randolph Corp. ("JRC").[42] JRC sued PDS for fraud and rescission of a sales agreement after delivery of the purchased equipment.[43] In return, PDS sought arbitration and counterclaimed for unpaid software licensing fees and future fees.[44] The arbitrator awarded PDS compensatory damages, and the trial court confirmed the award.[45] JRC appealed, and the Georgia Court of Appeals reversed, holding that the arbitrator manifestly disregarded the law because he awarded damages even though he recognized that he should treat damages for future license fees as liquidated damages and therefore as an unenforceable penalty.[46]

The Georgia Supreme Court held that the "four statutory grounds for vacating an arbitration award [were] exclusive."[47] A court may vacate an award only when one of the four statutory grounds is present because the "Georgia Arbitration Code is in derogation of the common law and must be strictly construed."[48] This interpretation suggests that non-statutory grounds are outright invalid.[49] Since manifest disregard of the law was not an enumerated defense, JRC could not use it as a defense to enforcement of the award.[50] In addition, manifest disregard of the law did not fit into the third statutory ground since overstepping the arbitrator's authority "only comes into play when an arbitrator determines matters beyond the scope of the case."[51] Thus, "[i]t is not applicable where, as here, the issue to be decided, i.e., damages...