Ninth Circuit Finds Arbitration Award Is ‘Irrational’ Because It Disregards the Contract’s Plain Text Simply to Reach a Just Result

Aspic Eng’g & Constr. Co. v. ECC Centcom Constructors LLC, No. 17-16510, 2019 BL 26363 (9th Cir. Jan. 28, 2019)

Aspic Engineering and Construction Company (“Aspic”), a local Afghan subcontractor, entered into multiple subcontracts with ECC Centcom Constructors and ECC International (“ECC”), the prime contractor, to construct buildings and facilities in Afghanistan.  The subcontracts contained terms and conditions “applicable to all U.S. Government subcontracts,” and mandated that Aspic owed ECC the same obligations that ECC owed to the federal government.  The subcontracts also incorporated multiple Federal Acquisition Regulation (“FAR”) clauses, including FAR 49.2 through 49.6, which govern the recovery of expenses in the event a contractor is terminated for convenience, i.e. required documentation and procedures.

In 2014, ECC was terminated for convenience, so ECC notified Aspic that it also intended to terminate Aspic’s subcontracts for convenience.  Aspic, in turn, submitted multiple settlement proposals to get paid for its work under the subcontracts.  When ECC denied most of Aspic’s proposals, Aspic filed for arbitration, seeking payment for its costs of partially performing under the subcontracts.  Despite Aspic’s failure to comply with the FAR requirements governing payment for partial work in the event of a termination for convenience, the arbitrator awarded Aspic over $1 million.  The arbitrator concluded that Aspic was not required to strictly comply with the FAR requirements based on several factors, including: (i) the subcontracts were drafted to give every advantage to ECC; (ii) it was not reasonable to expect that Afghan subcontractors would be able to conform to the strict and detailed requirements of general contractors on U.S. Federal projects; (iii) it was not reasonable that the parties had the same expectations; and (iv) there was not a true meeting of the minds.

A California Superior Court confirmed the award, however, ECC was not given proper notice.  As a result, ECC removed the case to the Northern District of California, which vacated the Superior Court’s judgment.  ECC also filed an motion to vacate the arbitration award in its entirety.  Upon review, the court held that the arbitrator’s award conflicted with the subcontracts and vacated the award.  The district court further explained that the arbitrator had improperly voided and reconstructed parts of the subcontracts based on a belief that they did not reflect a true meeting of the minds.

On appeal, the Ninth Circuit Court of Appeals affirmed the district court’s decision to vacate the arbitration award.  The Ninth Circuit began its analysis by discussing its limited power to review arbitration decisions.  The court explained that awards may only be overturned when arbitrators “exceed their powers,” and the award is “irrational” or exhibits a “manifest disregard of the law.”  The crux of the decision turns on whether the arbitrator’s decision draws its essence from the contract.  The Ninth Circuit also explained that whether the award directly conflicted with the subcontracts was insufficient—on its own—to vacate the award.

In reaching its conclusion to affirm lower court’s decision to vacate the arbitration award, the Ninth Circuit determined that the arbitrator’s reasoning made the award irrational.  Specifically, the court noted that the arbitrator’s decision to ignore the contractual language was not based on past practices.  Rather, the arbitrator reasoned that enforcing the FAR clauses would be unjust.  By doing so, the Ninth Circuit found that the arbitrator “failed to draw the essence of the Award from the Subcontracts.”

The Ninth Circuit also pointed out that neither party argued the FAR provisions did not apply.  To the contrary, Aspic attempted to enforce certain provision of the FAR against ECC.  Finally, the court discussed the purpose of the FAR system; allowing inexperienced contractors to evade the provisions, without a showing of past practice, could potentially cripple the government’s ability to contract with private entities.

To view the full text of the court’s decision, courtesy of Bloomberg, click here.

Ryan R. Deroo

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