JEFFERSON RANDOLPH v. PDS, A01A1590.

• Decision Date: 31 July 2001
• Docket Number: No. A01A1590.,A01A1590.
• Citation: 251 Ga. App. 1,553 S.E.2d 304
• Parties: JEFFERSON RANDOLPH CORPORATION et al. v. PROGRESSIVE DATA SYSTEMS, INC. et al.
• Court: Georgia Court of Appeals

553 S.E.2d 304

251 Ga. App. 1

JEFFERSON RANDOLPH CORPORATION et al. v. PROGRESSIVE DATA SYSTEMS, INC. et al.

No. A01A1590.

Court of Appeals of Georgia.

July 31, 2001.

Michael A. Dailey, Atlanta, for appellants.

Peter H. Strott, Atlanta, for appellees.

ELDRIDGE, Judge.

This is an appeal from the confirmation of an arbitration award made by the American Arbitration Association ("AAA") against Jefferson Randolph Corporation d/b/a JRC Trucking, Inc. and Thurman Carpets, Inc., plaintiffs, for Progressive Data Systems, Inc., William A. Crozier, Jr., and Thomas G. Taylor, defendants, based on their counterclaims. Plaintiffs contend that the trial court erred in confirming an award when the arbitrator overstepped his authority and entered an award on issues not submitted to him, granted OCGA § 9-15-14 attorney fees without identifying conduct authorizing the award, awarded post judgment interest at 18 percent on the entire principal, and awarded prejudgment interest on the principal arbitrator's award. We agree and reverse.

Jefferson Randolph Corporation d/b/a JRC Trucking ("JRC") is in the business of hauling carpet inventory for carpet manufacturers but also sold carpet products through its sister corporation Thurman Carpets ("Thurman"). On May 24, 1996, under an Equipment Sales, Software License, and Service Agreement, JRC bought computer software and hardware from Progressive Data Systems ("PDS") for $167,935.26, which it paid in full, to track the movement of its trucks with inventory and to process the various carpet transactions in which Thurman was involved. The basic software deliverable had a distribution modification that required customization to perform order entry, inventory, and purchasing; however, 15 months after the Agreement was entered into, PDS had not delivered a completed distribution modification under the contract.

JRC came to believe that Crozier and Taylor, principals of PDS, had made false and untrue representations concerning the work that they would perform as to timely performance, contract services, and features. JRC gave notice of its rescinding the Agreement.

On April 22, 1999, JRC sued to rescind the Agreement and for fraud. The defendants answered, counterclaimed, filed a motion to dismiss for failure to have an indispensable party, Thurman, and moved to stay and compel arbitration under the contract under the Federal Arbitration Act. JRC added Thurman as an additional plaintiff.

Initially, JRC opposed arbitration, because Thurman, Crozier, and Taylor were not parties to the Agreement requiring arbitration and were not bound to arbitrate. Subsequently, JRC and the other parties agreed to arbitration, but the parties could not agree upon the issues to submit to arbitration. On December 8, 1999, the trial court ordered the parties to proceed to arbitration "pursuant to the terms of the arbitration provisions included in the contract between the parties." PDS initiated a demand for arbitration before the AAA.

On July 26 and 27, 2000, at the arbitration hearing, PDS made claims only for the unpaid software license fees and all future licensing fees as liquidated damages, pre-judgment interest at the rate of 1.5 percent per month on the accelerated future licensing fees, and expenses of litigation. At the direction of the arbitrator, PDS revised and sought additional damages. JRC and Thurman sought rescission of the Agreement and recovery of consequential damages. PDS never terminated the Agreement nor sent JRC an invoice and demand for the accelerated future invoice payments for eighteen years and three months as liquidated damages.

On August 18, 2000, the arbitrator entered an award against JRC and Thurman and for the defendants on their counterclaims in the amount of $81,540 in compensatory damages, which did not disclose what were consequential damages and prejudgment interest; $64,875 in attorney fees; $2,487 in administrative fees and expenses; and $1,782.99 in expenses and compensation of the arbitrator totaling $150,685. The attorney fees were not differentiated as to what was incurred to collect the future license fees, what had been incurred in defense to plaintiffs' case, and what was reasonable for prosecuting the counter-claim.

PDS moved for the trial court to confirm the award. The plaintiffs moved to vacate or modify the award, because the arbitrator exceeded his authority and made an award as to issues not submitted to him. On February 12, 2001, the trial court confirmed the award. On the same date, the trial court entered a final judgment for such award and further awarded the defendants on their counter-claim "post-award prejudgment interest" in the amount of $12,261.22 on the gross sum of $150,685 and "additional attorney's fees" of $5,000 without any findings of fact or conclusions of law or any hearing, and post-judgment interest on $150,685 at 18 percent per year.

1. Plaintiffs contend that the trial court erred in confirming the arbitrator's award, because he "overstepped his authority." We agree.

Under Section 3.15 of the Agreement, PDS was entitled to damages:

Upon the occurrence of an Event of Default, Vendor may (1) terminate this Agreement and invoke all rights Vendor possesses upon termination and (2) if Customer remains liable for any monetary obligation created under this Agreement, accelerate and declare all obligations of Customer as a liquidated sum and proceed against Customer in any lawful way for satisfaction of such sum, or repossess as much of the System as remains in Customer's possession.

Prior to suit, PDS never terminated the Agreement, which would have been a useless act, because JRC had already given notice of the rescission of the Agreement and ceased to use the system. However, JRC had fully paid $167,935.26, the cost of the system, as well as the $7,500 a year licensing fee; on January 8, 1998, after termination of the Agreement, JRC ceased to pay the annual fees owed under the contract for eighteen years and three months, which PDS sought as compensatory damages in its counterclaim. PDS never sent JRC an invoice or demand to pay the accelerated future license fees for eighteen years and three months prior to suit. From the time of the termination notice until the time of the arbitrator's award, approximately 27 months of license fees had been unpaid and 16 future years of license fees had not accrued, absent an acceleration of the obligation as liquidated damages. By PDS' claim for damages, it sought $7,500 as nominal damages under the breach of confidentiality provision. The rest of PDS' damages were claims for the liquidated damages of $136,875, prejudgment interest of 1.5 percent per month, and attorney fees.

The arbitrator correctly found in his award that the liquidated damages provision of Section 3.15 was a penalty under OCGA § 11-2-718, regarding liquidated damages; plaintiffs brought this Code section to the arbitrator's attention prior to the award. The $7,500 for breach of confidentiality as nominal damages would have been appropriate damages in the absence of consequential damages. OCGA § 13-6-6; Crawford & Assoc. v. Groves-Keen, Inc., 127 Ga.App. 646 650(1), 194 S.E.2d 499 (1972). However, nominal damages are not recoverable when the claimant seeks and recovers special damages, as well as nominal damages. See Bennett v. Associated Food Stores, 118 Ga.App. 711, 716(2), 165 S.E.2d 581 (1968). The only other contract damages that were owed at the time of the award were license fees for the 27 months at $7,500 a year plus prejudgment interest. Therefore, contract damages of $81,540 are unsupported by any evidence and must be in whole or in part attributable to liquidated damages for the future licensing fees, as well as prejudgment interest on an alleged commercial account that constituted accelerated future lost income.

(a) In this case, the arbitrator, by denominating the acceleration of future license fees as a penalty rather than recoverable liquidated damages, correctly recognized that, under Georgia law and public policy, liquidated damages are a penalty to deter a breach of contract, where the liquidated damages are unreasonable and there is no difficulty ascertaining future damages. OCGA §§ 11-2-718(1); 13-6-7; AFLAC, Inc. v. Williams, 264 Ga. 351, 354(2), 444 S.E.2d 314 (1994); Carter v. Tokai Financial Svcs., 231 Ga.App. 755, 758-759(2), 500 S.E.2d 638 (1998). For a liquidated damages clause to be enforceable in Georgia, such damages must demonstrate: (1) that the injury caused by the breach must be difficult or impossible of estimation; (2) that the parties must intend to provide for damages; and (3) that the sum stipulated must be a reasonable pre-estimate of the probable loss. Southeastern Land Fund v. Real Estate World, 237 Ga. 227, 230, 227 S.E.2d 340 (1976); Oasis Goodtime Emporium I v. Cambridge Capital Group, 234 Ga.App. 641, 507 S.E.2d 823 (1998); Wehunt v. ITT Business Communications Corp., 183 Ga.App. 560, 359 S.E.2d 383 (1987). Where, as here, both liquidated and other damages are recoverable under the Agreement, the liquidated damages are an unenforceable penalty. Southeastern Land Fund v. Real Estate World, supra at 228, 227 S.E.2d 340. As in this case, where half of a long-term retainer fee is treated as liquidated damages, such provision is unenforceable as a penalty to deter termination. AFLAC, Inc. v. Williams, supra at 354, 444 S.E.2d 314. Here, the liquidated damages are all the future license fees without reduction for expenses or for present cash value and interest imposed as if it were a past due debt instead of accelerated future fees, not yet earned. Future economic loss of earnings must be reduced to present cash value, since the fees have not been earned. See generally OCGA § 51-12-13; Chouinard v. City of East Point, 237 Ga.App. 266, 270(5)(b), 514 S.E.2d 220 (1999); Crosby v. Spencer, 207 Ga.App. 487, 488(2), 428 S.E.2d 607 (1993). If...