Arbitration Award Ruling That, Because of Cultural Differences, a Local Afghan Subcontractor Is Not Bound by the F.A.R. Provisions Incorporated Into the Subcontracts Is Vacated as Contrary to the Subcontract Terms

by Pepper Hamilton LLP
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Aspic Eng’g & Constr. Co. v. ECC Centcom Constructors, LLC, No. 17-cv-00224-YGR, 2017 U.S. Dist. LEXIS 111767, at *10-12 (N.D. Cal. July 18, 2017)

This matter came before the Court on a motion to vacate a final arbitration award (the “Arbitration Award”) entered in favor of Aspic Engineering and Construction Company “Aspic”) and against ECC International, LLC and ECC CENTCOM Constructors, LLC (collectively, “ECC”).  ECC entered into two prime contracts with the U.S. Army Corp of Engineers (“USACE”) in connection with two reconstruction projects for police training facilities in Afghanistan (the “Projects”).  These prime contracts incorporated, among other things, Federal Acquisition Regulations (“FAR”) Sections 49.206 and 52.249-2, which allowed USACE to terminate the Projects for convenience.  ECC subcontracted portions of the work on the Projects to Aspic.  The subcontracts between ECC and Aspic likewise incorporated several FAR sections.  Although Aspic is an Afghan engineering and contracting firm, it had experience in contracting with the U.S. government and a familiarity with the U.S. Government contract requirements, including FAR clauses.  After ECC and Aspic had partially performed work on the Projects, USACE issued a notice of termination for convenience, which ended the Projects in their entirety.

Aspic filed a demand for arbitration, seeking to recover its lost profits on the Projects.  The Arbitrator issued a partial final award in favor of Aspic, in the amount of $1,072,520.90.  The Arbitration Award stated, in pertinent part, that:

“. . . In light of the fact that the ASPIC was a local Afghanistan subcontractor that had some experience with government contracting but not nearly as extensive as that of ECC, and in view of the fact that the normal business practices and customs of subcontractors in Afghanistan were more ‘primitive’ than those of U.S. subcontractors experienced with U.S. Government work, it was not reasonable to expect that Afghanistan subcontractors would be able to conform to the strict and detailed requirements of general contractors on U.S. Federal projects …

It was not reasonable that when the parties entered into the subcontract agreements, they both had the same expectations as to the performance of the agreements.  ECC could not expect that ASPIC would be capable of modifying their local business practices to completely and strictly conform to the US governmental contracting practices that were normal to ECC. There was not a true meeting of the minds when the subcontract agreements were entered.  Hence, ASPIC was not held to the strict provisions of the subcontract agreements that ECC had to the USACE …” [Emphasis in original]

The Arbitration Award was made final on November 14, 2016.  ECC subsequently filed a Motion to Vacate the Arbitration Award.

The first question before the Federal Court for the Northern District of California was which law governed the Court’s review of the Arbitration Award.  The Court noted that there is a presumption that the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) applies to the recognition and enforcement of an arbitration award between parties who are not all citizens of the United States, and any disputes regarding the enforcement are governed by the Federal Arbitration Act (“FAA”).  Despite the fact the subcontracts included a choice-of-law provision that applied California law, the Court found that the New York Convention and the FAA governed the case.  Under the FAA, an arbitration award may be vacated when (i) “the arbitrators exceeded their powers” or (ii) the arbitrators were guilty of … any misbehavior by which the rights of any party have been prejudiced.”  9 U.S.C. §10(a)(3)-(4).

Moving to the merits of the motion, the Court found that the conclusions, and justifications, of the Arbitrator were entirely lacking in foundation.  Specifically, “the Arbitrator voided and reconstructed the subcontracts based on his personal belief that that subcontracts did not reflect a meeting of the minds.”  Of importance, the Arbitrator made this finding even though neither party presented this argument at the arbitration.  In ruling that Aspic was not required to comply with the Subcontracts’ extensive detailed requirements pertaining to federal regulations, the Court held that the Arbitrator fundamentally “disregarded” the subcontracts “to correct what he perceived as an injustice.”  In doing so, the Arbitrator awarded Aspic costs and lost profits which were presumably not available under the subcontracts.  As such, the Arbitration Award “fail[ed] to draw its essence from the agreement.”  Ultimately the Court held that because the Award conflicted directly with the subcontracts, it should be vacated.

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

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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