Watching the Watchmen: Ninth Circuit Clarifies Courts’ Role in Reviewing Arbitration Awards

Construction and Procurement Law News, Q2 2019

Firm Alert

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In the words of Judge Milan D. Smith, Jr. of the Ninth Circuit, “[w]e have become an arbitration nation.” Nonetheless, arbitration is a creature of contract, and there are limits to what an arbitrator may do. In Aspic Engineering v. ECC Centcom Constructors LLC, the Ninth Circuit clarified that a court can vacate an arbitrator’s irrational award where the arbitrator expressly disregards the plain language of a contract without justification. Aspic Engineering and Construction Company v. ECC Centcom Constructors LLC, et al.

ECC Centcom Constructors LLC (“ECC”) had two prime contracts with the U.S. Army Corps of Engineers (“USACE”) for the construction of various buildings and facilities in Afghanistan. ECC awarded Aspic Engineering (“Aspic”) two engineering subcontracts related to ECC’s work for USACE (the “Subcontracts”). The Subcontracts incorporated many Federal Acquisition Regulation (“FAR”) clauses, including the FAR clauses related to terminations for convenience and settlement of claims. During the course of ASPIC’s work pursuant to the Subcontracts, USACE terminated its prime contracts with ECC for convenience. Thereafter, ECC notified Aspic that it was likewise terminating the Subcontracts for convenience. Following ECC’s termination of the Subcontracts, disputes arose between ECC and Aspic related to amounts ECC owed Aspic. When ECC and Aspic were unable to resolve those disputes, Aspic initiated arbitration proceedings against ECC.

Following the arbitration hearing, the arbitrator issued an award finding that ECC was liable for Aspic’s claimed damages, which were more than one million dollars. As part of the arbitration award, the arbitrator found that Aspic was not required to comply with the FAR provisions that were incorporated into the Subcontracts on the grounds that it would not be reasonable to hold Aspic, as an Afghani subcontractor, to the strict FAR provisions incorporated into the Subcontracts. Aspic filed a petition in California state court seeking to confirm the arbitration award. ECC removed the matter to federal court in the Northern District of California. The federal district court judge issued a decision vacating the award on the grounds that it conflicted with the Subcontracts. Aspic appealed the district court’s decision to the Ninth Circuit Court of Appeals.

The Ninth Circuit articulated that courts’ ability to review arbitration awards is “both limited and highly deferential” but clarified that a court may vacate an arbitration award where an arbitrator exceeded their powers by issuing an award that is “completely irrational” or exhibits a “manifest disregard of the law.” Going further, the Ninth Circuit explained that an arbitration award is “completely irrational” where the arbitrator’s award “fails to draw its essence” from the contractual agreement that is the subject of the arbitration.

Looking specifically at the arbitration award, the Ninth Circuit found that the arbitrator exceeded his power by finding that Aspic did not need to comply with the FAR provisions. The Ninth Circuit noted that an arbitrator may interpret the contract through evidence demonstrating the parties’ intentions and may find that the parties’ conduct modified the text of a contract. What the arbitrator may not do, however, is disregard contractual provisions to achieve a desired result. The Ninth Circuit found that the Subcontracts incorporated numerous FAR provisions, including provisions governing termination of contracts for convenience and the settlement of claims. In examining Aspic and ECC’s course of conduct, the Ninth Circuit found that Aspic and ECC had not taken any actions to demonstrate that they intended to set aside the FAR provisions or not comply with them. In fact, the Court specifically noted that neither Aspic nor ECC had made any arguments that the FAR provisions were inapplicable to the Subcontracts. As a result, the Ninth Circuit held that the arbitrator exceeded his authority by concluding that Aspic did not need to comply with the FAR requirements and affirmed the district court’s finding that the arbitration should be vacated.

The limited bases for vacating an arbitrator’s award when the contract involves interstate commerce can be found in 9 U.S.C. §§ 10 and 11, the Federal Arbitration Act. Generally, a party must show that the award was procured by corruption, fraud, or undue means; that there was evident partiality or corruption of an arbitrator; that the arbitrator(s) refused to hear evidence or otherwise failed to provide the parties due process; or that the arbitrator somehow exceeded his or her powers and ruled in a way not envisioned by the contract. “Manifest disregard of the law,” referenced by the Ninth Circuit in Aspic Engineering, is connected to this last prong. This basis for vacating an arbitral award has been applied quite narrowly, to the point that it is essentially not recognized in some jurisdictions. However, Aspic Engineering shows that manifest disregard of the law may still be a valid basis for vacating an award in special cases.