Inscribed over the doors of the U.S. Supreme Court are the words “Equal Justice Under Law.” It’s a reminder that judicial decisions should be just. That doesn’t necessarily mean fair.
In Aspic Engineering and Construction Company v. ECC Centcom Constructors, LLC, U.S. Court of Appeals for the 9th Circuit, Case No. 17-16510 (January 28, 2019), the 9th Circuit overturned an arbitration decision in favor of a local Afghani subcontractor seeking termination costs after it was terminated for convenience by a U.S.-based general contractor. This, despite the arbitrator’s finding that the subcontract was “clearly drafted to give every advantage to” the general contractor, that the local Afghani subcontractor’s “experience with government contracting [was] not nearly as extensive as that of” the general contractor, and “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.”
Aspic Engineering and Construction
Local Afghani subcontractor Aspic Engineering and Construction Company was awarded two subcontracts by ECC Centcom Constructors the general contractor on two projects in Afghanistan overseen by the United States Army Corps of Engineers. The first subcontract involved construction of various buildings in the Badghis province of Afghanistan . The second subcontract involved the construction various buildings Sheberghan province of Afghanistan . Both subcontracts included clauses from the Federal Acquisition Regulation (FAR), which were incorporated by reference, and included flow-down provisions obligating Aspic to ECC in the same manner that ECC was obligated to the U.S. government.
The Army Corps of Engineers later terminated ECC’s prime contracts on both the Badghis and Sheberghan projects and ECC in turn terminated both the Badghis and Sheberghan subcontracts. Following unsuccessful settlement negotiations over Aspic’s termination costs, Aspic submitted its claim to arbitration in accordance with the subcontracts, and the arbitrator later awarded Aspic termination costs of $1,072,520.90, but denied Aspic’s request for attorney’s fees and costs, and awarded Aspic one-half of its arbitration administration fees and expenses.
Following the arbitration, Aspic filed a petition with the San Mateo Superior Court to affirm the arbitrator’s award of termination costs and to reverse the arbitrator’s denial of attorney’s fees and costs. The Superior Court affirmed the termination costs, awarded Aspic attorney’s fees and costs of $435,840, and awarded Aspic all of its arbitration administration fees and expenses.
ECC then moved the case to the U.S. District Court for the Northern District of California where it filed a motion asking the court to vacate both the arbitration award and the judgment of the San Mateo Superior Court. For reasons unexplained, Aspic did not oppose the motion and the motion was granted. Although Aspic filed motion for reconsideration following the ruling, the motion was denied, and Aspic appealed.
The 9th Circuit Decision
On appeal, the 9th Circuit cautioned that, under the Federal Arbitration Act (FAA), its review of arbitration decisions was limited. “Neither erroneous legal conclusions nor unsubstantiated factual findings justify federal court review” under the FAA, explained the Court.
Rather, explained the 9th Circuit, federal courts will not vacate, modify, or correct an arbitration award unless “the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made” and that an arbitrator “exceed[s] their powers” only where an award is “completely irrational” or exhibits a “manifest disregard for the law.” A high threshold, indeed.
But, continued the 9th Circuit, an award may be found to be “completely irrational” “where the arbitration decision fails to draw its essence from the agreement.” And this, as the Court explained, was the fatal flaw in the arbitrator’s decision.
According to the arbitrator:
The subcontracts “were clearly drafted to give every advantage to ECC;”
While Aspic “had some experience with government contracting” it was “not nearly as extensive as that of ECC;”
“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;” and
The arbitrator also noted Aspic’s hand-written receipts written in the “native language” and the use of dates from the Islamic calendar.
Based on these findings, the arbitrator found that “ECC could not expect that Aspic would be capable of modifying their local business practices to completely and strictly conform to the U.S. governmental contracting practices that were normal to ECC.” In short, held the arbitrator, “there was not a true meeting of the minds when the subcontract agreements were entered,” and Aspic should not be held to the strict provisions of the subcontracts relating to FAR provisions relating to terminations for convenience.
While in many respects fair, the arbitrator’s decision was not just, because as the 9th Circuit explained, the arbitrator “disregard[ed] contract provision to achieve a desired result”:
Despite finding that the Subcontracts plainly required Aspic to comply with the FAR sections, the Arbitrator reasoned that the expectations of a seemingly less sophisticated contractor complying with these regulations was unreasonable. Thus, the Arbitrator did not base his conclusion upon Aspic and ECC’s actual past procedures, but upon his rationalization that to enforce the FAR clauses on Aspic would be unjust. This an arbitrator may not do.
By concluding that Aspic need not comply with the FAR requirements, the Arbitrator exceeded his authority and failed to draw the essence of the Award from the Subcontracts. The Award disregarded specific provisions of the plain text in an effort to prevent what the Arbitrator deemed an unfair result. Such an award is “irrational.”
The 9th Circuit further explained that public policy supported this conclusion. While acknowledging that the FAR regulations are “undoubtedly extensive,” they “permit the government to maintain fairly uniform contracting standards in the many contracts it entered into with parties located in the United States and around the world,” explained the Court, and “to allow contractors subcontractors, foreign or domestic, the evade the FAR provisions because a subcontractor was too unsophisticated or inexperienced to fully understand them would potentially cripple the government’s ability to contract with private entities, and would violate controlling federal law.”
The moral of the story is that fairness doesn’t always follow justice. For those of you who are more pragmatic, the practice pointer is that while there’s generally a high bar for overturning an arbitration decision, one way to get over that bar in a contractual dispute is if the arbitrator doesn’t follow the terms of the parties’ contract, at least under the FAA.
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