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.”