Aspic Eng'g and Constr. Co. v. ECC Centcom Constructors LLC and ECC Int'l LLC, No. 17-165104 (9th Cir. Jan. 28, 2019) [click for opinion]

ECC Centcom Constructors, LLC and ECC International, LLC (together, "ECC") had a contract with the U.S. Army Corps of Engineers ("USACE") and awarded Aspic Engineering and Construction Company ("Aspic") two subcontracts to build various buildings and facilities in Afghanistan. The subcontract incorporated many Federal Acquisition Regulation ("FAR") clauses from the primary contract with the USACE. FAR regulations allow the federal government to maintain fairly uniform contracting standards.

USACE terminated its contract with ECC for one project for convenience and ECC subsequently terminated Aspic for convenience. Aspic then submitted a termination settlement proposal to ECC for that project. Aspic admitted it did not have many of the required materials to corroborate the costs sought, but ECC eventually submitted Aspic's claim with its termination settlement proposal to USACE. USACE, after an audit, found that ECC had overpaid Aspic and refused to pay any of Aspic's claimed termination costs. ECC therefore refused to pay Aspic any of its claimed costs either.

USACE later terminated the other contract for convenience as well. ECC and USACE eventually entered into a no-cost termination settlement under that agreement. ECC thus refused to pay Aspic's claimed costs related to this project also. Aspic tried to settle its claims with ECC, but eventually went to arbitration wherein the Arbitrator awarded Aspic its claimed costs. The Superior Court where Aspic went to enforce the award affirmed and also granted Aspic its attorneys' fees. EEC removed the case to the Northern District of California, where the district court overturned and vacated the award and the Superior Court's judgment.

The Ninth Circuit affirmed the district court's decision to vacate the award. Noting the limited review afforded to courts in reviewing arbitral awards, the court stated it may still vacate an arbitration award where, among other reasons, "the arbitrators exceed their powers." 9 U.S.C. § 10. The court further explained that "arbitrators 'exceed their powers' when the award is 'completely irrational' or exhibits a manifest disregard of the law." In turn, an award is completely irrational "only where the arbitration decision fails to draw its essence from the agreement."

The Ninth Circuit found the decision to be completely irrational because the arbitrator ignored clear contract terms solely to arrive at what he perceived to be a just result. The arbitrator's decision was based on a finding that "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. …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."

The court noted that the Award here conflicted directly with the terms of the contract, that there was no evidence of past performance for the Arbitrator to base this deviation from the contract on, and that neither party had argued the FAR provisions did not apply. Thus, the court found that the Arbitrator had based his conclusions not on the contract, but what he thought was the desired just result, and that was something that the Arbitrator could not do.

The court also concluded that "[t]o allow contractors and subcontractors, foreign or domestic, to 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."