Vacated Award is Final Decision for Purposes of Challenge to Authority to Arbitrate Rather than Litigate

Guest Contributor: John Allgood

The parties in this action entered into agreement for the sale of two UPS Store franchises.  SCSJ Enterprises and Shandton Williams [“SCSJ”] purchased the franchises from Hansen & Hansen Enterprises, Inc and Juden Enterprises Inc. [“Hansen”]. The parties executed a sales agreement, two promissory notes and Williams executed a personal guaranty for each note. The Sales Agreement included an arbitration clause that stated that if there were no final decision within thirty days of the hearing, the arbitration could be terminated and the parties could then proceed to litigation.

A series of disputes arose. SCSJ filed a claim against Hansen asserting fraud in the value of the two stores. Hansen counterclaimed for enforcement of each promissory notes and guaranty. The matter was arbitrated and the arbitrator found for Hansen. SCSJ filed a motion to vacate the Award. The trial court in the first instance granted the motion. On appeal the trial court’s decision was affirmed in part and reversed and remanded in part. The Appellate Court ruled the arbitrator had properly applied the Georgia law related to fraud and that the trial court had improperly decided there was manifest disregard of the law.  Further the Appellate Court ruled  that the arbitrator had not overstepped his authority by awarding attorney fees. Finally the Appellate Court agreed with the trial court that the arbitrator had failed to consider the counterclaim and remanded the case directing that there be a rehearing before the same arbitrator on the counterclaim.

On remand, however, the trial court confirmed the arbitrator’s award on SCSJ’s claim but vacated the portion of the award dismissing Hansen’s counterclaim.  SCSJ appealed and the Court of Appeals again reversed. The Appellate Court said the issue was whether the trial court properly vacated a portion of the arbitrator’s award. The Appellate Court ruled it had not. “We found that the trial court erred because an arbitration award may only be vacated in its entirety.” The Appellate Court went on, however, to rule that under OCGA §9-9-13 (e) the rehearing could be limited to the specific issue necessitating the vacatur.  The case was remanded with the direction the arbitrator consider Hansen’s counterclaim.

The arbitrator issued a new award finding for Hansen on the promissory notes claim and also finding Williams liable under the personal guaranties and finally requiring SCSJ and Williams to pay Hansen for fees and expenses of arbitration. The trial court confirmed the award against SCSJ “jointly and severally.” SCSJ appealed. SCSJ Enters. Inc. v. Hansen & Hansen Enters. Inc. A12A1185 (11/13/2012)

The appeal raised several errors: (1) Based on the vactur of the award, there was no final decision within 30 days and SCSJ had a right to terminate the arbitration under the language of the sales agreement and therefore the trial court should not have remanded the case to arbitration; (2) the award should not have been confirmed since the arbitrator exceeded his authority by awarding against a non-party, Williams; issuing an award the deviated from the liquidated damages language in the promissory note; and misinterpreting default provisions; (3) failure to consider SCSJ’s defenses on failure of consideration and/or recoupment were manifest disregard of the law; (4) the trial court order did not conform to the arbitrator’s language in the award.

The Court of Appeals affirmed the decision of the trial court and rejected each of SCSJ’s assertions of error.

Under the contract language there was a provision that if a final arbitration decision was not rendered within 30 days of the conclusion of the arbitration hearing then either party could terminate the arbitration and proceed to litigation. SCSJ claimed that since the award had been vacated, there was no final decision and it had the right then to litigate. To this claim the appellate court ruled:

Here it is undisputed that the arbitrator rendered a final decision…[T]he mere fact that an award is vacated is not synonymous with the award never having been made…Accordingly, this argument lacks merit.

On the claims that the arbitrator’s award was in excess of his authority when the arbitrator found against Williams under the guaranty, because the guaranty contained no arbitration agreement, the appellate court also rejected this reasoning:

A court may not vacate an arbitrator’s award on the basis of overstepping authority unless the arbitrator determines matters beyond the scope of the case and addresses issues not before him.

Here, Williams signed two guaranties, which obligated him to repay specific notes.  The notes …were made “subject to the terms and conditions of [the] Memorandum of Sale,” which included an arbitration clause… Under these circumstances, equitable estoppel may be applied to require Williams participation in arbitration…

Similarly, the appellate court rejected claims that the arbitration award did not conform to the language in the promissory notes and that there was insufficient evidence to support the arbitrator’s decision:

Pretermitting whether the arbitrator departed from the terms of the underlying agreement, SCSJ has presented no basis for this Court to reverse the trial court’s judgment.

and

But an appellate court will not consider the sufficiency of the evidence underlying the arbitrator’s award.

Similarly the appellate court rejected the claim the arbitrator had misinterpreted the default provisions of the agreement.

The appellate court again rejected SCSJ’s claim of the arbitrator’s manifest disregard of the law.

We first consider whether the governing law alleged to have been ignored by the arbitrator was well defined, explicit and clearly applicable. We then look to the knowledge actually possessed by the arbitrator. The arbitrator must appreciate the existence of a clearly governing legal principle but decide to ignore or pay no attention to it. Both of these prongs must be met…. The fact that the arbitrator rejected SCSJ’s legal argument does not mean he ignored the arguments.

The challenge to the form of judgment was similarly rejected.

[W]e fail to see how the trial court’s order improperly assumes an indivisible character… [G]iven the fact that Williams’ individual liability arises solely from his role as a guarantor, it cannot reasonably be argued that his obligations would be in addition to the obligations of the principal… To the extent the arbitrator’s award was  vague or confusing, the trial court clarified in its judgment that Williams’ liability was joint and several with SCSJ.

The court also noted that the form and content of the trial court’s order did not have to tract the exact language of the arbitrator’s ruling, and in fact the trial court could modify the language in its order so long as it was substantively supported in the arbitration award.

As long as a trial court’s judgment does not affects the merits of the arbitrator’s ruling, reversal is not required… Further more, a trial court may interpret and enforce an ambiguous arbitration award as long as the ambiguity can be resolved from the record.

CONCLUSION FOR GEORGIA ARBITRATORS: In addition to the finding that courts are not going to review arbitral awards that are based on challenges to sufficiency of evidence or interpretation of contract terms, this decision reinforces several key points related to finality of  arbitration awards.

First, the appellate court found that the arbitrator’s award, while later vacated, was nonetheless a final award for purposes of enforcing the parties’ agreement to arbitrate. Arbitrators can look to similar Georgia decisions where the parties by their conduct have waived litigation options. Here the participation in a full blown arbitration process and award was consistent with the contract language by the parties electing arbitration rather than litigation as the means for dispute resolution.

Second, the court reconfirms the high standards required in order to vacate an award based on the manifest disregard of the law standard. The grounds for supporting the statute for vacating based on manifest disregard of the law requires proof of the two prongs set out by the court in this decision – the arbitrator must appreciate the clear and controlling aspect of the law and the arbitrator must ignore the law.

Finally, the decision points to the fact that court orders do not have to literally track the language of the arbitrator’s award but will be enforced so long as the order does not affect the merits of the arbitrator’s award and the court in its order may resolve any ambiguity between the award and the order issued where supported by the record.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: