In Gainesville Mechanical, Inc. v. Air Data, Inc., --- S.E.2d ---- (June 19, 2019), the Georgia Court of Appeals affirmed an arbitration award of modified total cost damages under a theory of cardinal change. Subcontractor Gainesville Mechanical installed a mechanical system at a Georgia State University project, and hired Air Data to test, adjust, and balance the HVAC system. Based upon the general contractor’s directive, Gainesville Mechanical instructed Air Data to work seven days a week for ten hours a day for an extended period of time, and required Air Data to conduct additional testing under more difficult circumstances than originally contemplated. A payment dispute arose between Gainesville Mechanical and Air Data, Gainesville Mechanical terminated Air Data, and the parties pursued their claims in arbitration.

The arbitrator concluded that “the facts of this case call for the application of the legal doctrine of cardinal change.” The arbitrator reasoned that “the cardinal change doctrine serves to provide a breach remedy for contractors who are directed to perform work which is not within the general scope of the contract and which is not redressable under the contract. Thus a cardinal change occurs when the work is so drastically altered that the contractor effectively performs duties that are materially different from those which the contractor originally bargained.” The arbitrator found that the directive, pushed down from the general contractor, to work seven days a week for ten hours a day and to perform additional testing, constituted a cardinal change.

The arbitrator awarded damages calculated on a modified total cost basis. The arbitrator recognized that total costs claims are disfavored by courts. The arbitrator cited a 1980 federal Miller Act case from Southern District of Georgia for the four factors that courts consider in deciding whether to award total cost (or modified total cost) damages: (1) the nature of the loss makes it impossible or highly impractical to determine damages with a reasonable degree of accuracy; (2) the plaintiff’s bid or estimate was realistic; (3) its actual costs were reasonable; and (4) it was not responsible for the added expenses. Delta Metals, Inc. v. RM Wells, 497 F.Supp. 541, 545 (S. D. Ga. 1980). The arbitrator found that Air Data had met only the first two factors and awarded some, but not all, of the claimed damages.

On appeal, Gainesville Mechanical challenged the award on the ground that the arbitrator manifestly disregarded the law by awarding modified total cost damages when Air Data had met only two of the four criteria. O.C.G.A. § 9-9-13 (b) (5). The Court of Appeals noted that Gainesville Mechanical had the burden to prove that it had been prejudiced by the arbitrator’s manifest disregard of well-defined, explicit and clearly applicable governing law, and affirmed the arbitrator’s award. Without a transcript of the arbitration proceedings, the Court reviewed the challenge to the award by reviewing only the award itself. As no Georgia court had adopted any requirements for use of the total cost or modified cost methods for calculating damages, Gainesville Mechanical had not shown well-defined, explicit and clearly applicable law that the arbitrator allegedly disregarded. The Court of Appeals therefore upheld the award, holding that Gainesville Mechanical had not proved that the arbitrator’s award manifestly disregarded the law, the only statutory ground available for challenging the arbitration award.

The Gainesville Mechanical case confirms the lack of Georgia jurisprudence on the total cost method or modified total cost method of proving damages, but it provides some support for claimants pursuing a cardinal change theory. This decision also underscores the difficulty of overturning an arbitration award and the importance of building a record for any later challenge.