There is a whole world of automobile service contracts sold by car dealers that are sometimes “reinsured” by affiliated reinsurers. Many disputes have arisen out of these deals and many of these disputes are arbitrated.
In a recent case in Georgia, an arbitration award in an auto service contract dispute was issued and confirmed by the court. On appeal, the court of appeals vacated the arbitration award based on manifest disregard of the law. The Georgia Supreme Court took the case on certiorari and reversed the court of appeals and remanded the matter.
In Adventure Motorsports Reinsurance , Ltd. v. Interstate National Dealer Services, Nos. S21G0008, S21G0015 (Ga. Sup. Ct., Dec. 14, 2021), a dispute arose from the parties’ contractual relationship pursuant to which the dealer sold motorsports vehicle service contracts, which were underwritten and administered by the dealer services company, to dealer’s retail customers, and the reinsurer held funds in reserve to pay covered repair claims. The reinsurance agreement had a fairly common arbitration clause:
The arbitrators [chosen by the parties] and umpire [chosen by the two arbitrators] shall interpret this Agreement as an honorable engagement and not strictly as a legal obligation. They are relieved of all judicial formalities, may abstain from following the strict rules of law, and shall make their award with a view to affecting the general purpose of this Agreement in a reasonable manner rather than in accordance with its literal language.
The parties entered into an arbitration agreement that modified the arbitration clause by using a single arbitrator and, in a case management order, the following:
to proceed in accordance with the Commercial Arbitration Rules adopted by the American Arbitration Association and Supplementary Rules for the Resolution of Intra-Industry U.S. Reinsurance and Insurance Disputes.” [and] … that “[t]he Arbitrator may grant any remedy or relief that the Arbitrator deems just and equitable within the scope of the agreements of the Parties, including but not limited to monetary damages, statutory damages, and equitable, declaratory, or injunctive relief.”
After an arbitration award was issued, cross-motions were made to vacate and confirm. The trial court confirmed the award and an appeal ensued where the court of appeals vacated the award based on manifest disregard of the law by the arbitrator who the court said explicitly rejected the contract language. On appeal to the Georgia Supreme Court, the court reversed and remanded.
In reversing the court of appeals, the supreme court concluded that the court of appeals erred in reversing the confirmation of the award on the basis that the arbitrator manifestly disregarded the law in rendering the award. The court, however, remanded the decision back to the court of appeals for resolution of the argument that the arbitrator overstepped his authority in making the award and reconsideration of the trial court’s failure to enforce a delayed-payment penalty provided in the arbitration award.
The court analyzed the law on manifest disregard and commented that an arbitrator who incorrectly interprets the law has not manifestly disregarded it. The court found that the arbitrator never expressed, during the hearing or in the arbitration award, that the correct law should be ignored rather than followed. Ultimately, the court held that the arbitration award drew its essence from the contracts.
Here is some of the court’s analysis:
However imperfect the Court of Appeals may have judged the arbitrator’s understanding or application of the law to have been, such a failure by the arbitrator does not amount to concrete evidence of a deliberate decision not to apply the applicable law in making the arbitration award. . . . Because nothing in the record of the arbitration hearing or in the arbitrator’s written findings of fact and conclusions of law supports a determination that the arbitrator intended to purposefully disregard applicable law, the Court of Appeals’ decision to reverse the trial court’s confirmation of the arbitration award [ ] is reversed.
The key point here is that even in state court under state arbitration law, manifest disregard of the law is a very difficult standard to meet when seeking to vacate an arbitration award. Arbitrators have wide discretion and, just like in the federal courts, if the award draws its essence from the terms of the disputed contract, the award likely will be confirmed.