Confirmation / Vacation of Arbitration Awards

The Ninth Circuit recently affirmed a district court order vacating an arbitration award arising from the termination of subcontracts for the construction of army buildings and facilities in Afghanistan. Defendants ECC Centcom Constructors, LLC and ECC International, LLC (together, “ECC”) had two prime contracts with the U.S. Army Corps of Engineers (“USACE”) for the construction of army buildings and facilities in two provinces in Afghanistan. ECC in turn awarded two subcontracts to Aspic Engineering and Construction Company (“Aspic”) for the completion of those projects. Relevant to this dispute, the subcontracts incorporated many Federal Acquisition Regulation (“FAR”) clauses by reference, including those governing termination for convenience, and mandated that Aspic owe to ECC the same obligations that ECC owed to the United States government.

After USACE terminated ECC’s prime contracts for convenience, ECC and Aspic could not agree on a termination settlement amount for both contracts, particularly after USACE refused to pay for any of Aspic’s claimed termination costs. ECC and Aspic proceeded to arbitration to resolve the termination of both subcontracts, and the arbitrator awarded Aspic just over $1 million. Although the award was initially confirmed in California state court, a California federal court later vacated the award, reasoning that it conflicted with contract language. The federal court reasoned that the arbitrator “voided and reconstructed parts of the Subcontracts based on a belief that the Subcontracts did not reflect a ‘true meetings [sic] of the minds.’” Aspic appealed, and the Ninth Circuit framed the issue as “whether the Arbitrator exceeded his powers in finding that Aspic need not comply with the FAR provisions.”

The Ninth Circuit affirmed the district court’s order vacating the award. Specifically, it took issue with the arbitrator’s reasoning that “[t]here 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.” In so finding, the Panel reasoned, “[w]hen an arbitrator disregards the plain text of a contract without legal justification simply to reach a result that he believes is just, we must intervene.” Specifically, it found that the arbitrator’s award in this case was “irrational” because it “directly conflicted with the subcontracts’ FAR-related provisions, without evidence of the parties’ past practices deviating from them, in order to achieve a desired outcome.”

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

A district court has decided against giving an arbitration panel a third chance to get it right after the court found that the panel manifestly disregarded the law in its initial and modified arbitration awards.

The arbitration was initiated after claimants lost all of the money they had put into a set of investment accounts that they had opened with respondent Interactive Brokers LLC. Claimants alleged, among other things, that Interactive should not have allowed them to engage in the types of trades they did using the portfolio margin account they had with Interactive, as this violated FINRA Rule 4210. The panel issued an arbitration award in claimants’ favor, and claimants moved for confirmation. The court declined to do so, however, finding that it could not make sense of the award of compensatory damages, in part because the award stated that “[a]ny and all claims for relief not specifically addressed herein . . . are denied,” without explaining which claims had been specifically addressed. The court remanded the case to the arbitration panel with instructions to clarify the basis for its award.

The panel then issued a second award, and once again claimants moved to have it confirmed, while Interactive moved to have it vacated. The court found that the panel had done little to clarify its original award and focused on the panel’s emphasis on Interactive’s alleged violations of FINRA Rule 4210, which the court determined was the predicate for finding Interactive liable and denying its counterclaim.

Interactive argued that this reliance on Rule 4210 met the stringent standards for vacating an arbitral award based on manifest disregard for the law. Under Fourth Circuit precedent, this requires that the law at issue be “clearly defined and . . . not subject to reasonable debate, and that arbitrator was “aware of the law, understood it correctly, found it applicable to the case before [him], and yet chose to ignore it in propounding [his] decision.” The court found this standard was met based on the following:

• it is clearly established that there is no private right of action for violations of FINRA Rules;
• based on Interactive’s briefs explaining this law and the panel’s own references to that briefing, the panel was aware of that law;
• the court’s own instructions to the panel to make clear the predicate for liability, to which the panel responded by further emphasize the alleged violation of FINRA Rule 4210, established that the panel understood the law, found it applicable to the case, and chose to ignore it.

The court thus vacated the award and reinstated Interactive’s counterclaims. Finding that the panel had both flagrantly ignored the law and struggled to follow the court’s prior order, the court remanded the matter to a new panel of arbitrators for reconsideration of Interactive’s counterclaims.

Interactive Brokers LLC v. Saroop et al., Civil Action No. 3:17-cv-127 (E.D. Va. Dec. 19, 2018)