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Arbitration: Georgia Appeals Court, Applying Federal Law, Reverses Jury Verdict (Web)

In Langfitt, et al. v. Jackson, et al., 644 S.E. 2d 460 (Ga. App. March 28, 2007), the Georgia Court of Appeals reversed a trial court decision refusing to compel arbitration under a home purchase agreement mandatory arbitration clause.

In 1995, Edwin and Regina Jackson executed a building contract with Terry Langfitt and John Daniel. The building was entered into a “Home Buyer's Warranty” program, or “HBW,” and insured by National Home Insurance Co.(“NHIC”). The application, signed by the Jacksons, made explicit reference to an arbitration clause in an accompanying warranty booklet.

The applicable parts of the warranty agreement said that: (1) “Any controversy or claim or complaint arising out of [sic] relating to the workmanship/systems . . . which you [the buyer] and your builder do not resolve by mutual agreement shall be resolved by final and binding arbitration,” and (2) “Any controversy or claim or complaint which you [the buyer] and NHIC (or HBW) do not resolve by mutual agreement . . . shall be settled by binding arbitration.”

Furthermore, the contract said that the arbitration would be administered according to the Federal Arbitration Act, 9 U.S.C. §§ 1-16, “‘to the exclusion of any provisions of state law,’ and the questions of whether issues are arbitrable would be determined by the arbitrators.”

There was an acknowledgment in the contract that, while any warranty claims must be submitted to binding arbitration, the buyer “may be able to sue . . . [the] Builder in court for other causes.”
The Jacksons filed suit in a Georgia state court against on June 7, 2000, alleging breach of contract, breach of the HBW warranty contract, and fraud, among other claims. Langfitt raised the defense of arbitration, saying that the Jacksons were obligated to enter binding arbitration for their warranty claims. Court-ordered mediation was unsuccessful.

The trial court denied the defendants' motions to stay the proceedings and compel arbitration.
The trial court judge seemed skeptical of mandatory contractual arbitration and felt that such arbitration clauses violated the federal and Georgia state Constitutions.

A jury awarded the Jacksons $70,000 in damages. The defendants filed for a judgment notwithstanding the verdict, which was denied. They appealed.

The appellate court identified three issues encompassing Langfitt and Daniel's appeal.
First, the Jacksons argued that the defendants waived their arbitration rights by acting inconsistently with such rights. The Jacksons claimed that the defendants waited too long, almost one year, after the failed mediation to proceed with arbitration. Furthermore, the defendants did not file an interlocutory appeal prior to the time when their arbitration motions were denied.

But the Court of Appeals stated that since Langfitt initially raised the arbitration defense, he preserved the right to go to arbitration for himself, and also for Daniel, because their claims were identical. The appeals court expressly held that engaging in mediation was not inconsistent with arbitration.

The appellate court then looked at whether the FAA or Georgia state laws governed the dispute. If the state rules applied, the defendants would have waived the right to arbitration because they failed to initial the house contract’s specific arbitration clause. Since the contract specifically stated that the FAA would govern disputes “to the exclusion of any provisions of state law,” the federal rule applied. The FAA doesn’t require that the parties specifically initial the arbitration provision, as the Georgia state law mandates. The FAA would be applicable in any event because interstate commerce was involved.

Finally, the appellate court had to determine whether all of the claims were contained within the scope of the arbitration agreement. While the court acknowledged that at least one claim was outside the clause, its application to the other claims was unclear. Accordingly, the court remanded the case for an arbitrability determination in accordance with the arbitration clause. 

--Robert A. Irwin, CPR Intern