I. INTRODUCTION 

In this case, Westcode, Inc. (“Westcode”) retained the services of Digitronics 

Inventioneering Corp. (“Sixnet”) to supply electronic monitoring devices for a rail car 

refurbishing project for the San Francisco Bay Area Rapid Transit Authority (“BART”). 

The products that were supplied did not conform to the contractual design 

specifications in that they contained components that were not rated to perform to the 

contractual temperature specifications. Accordingly, Sixnet was replaced. While 

pursuing a litigation claim for damages for wrongful termination, Sixnet actually 

destroyed the design and production documents related to its use of non-compliant 

components. Notwithstanding the unrefuted evidence in the record regarding the 

component substitution, and the fact that all of the component substitution records had 

been destroyed, the Arbitrator not only permitted Sixnet to present its claims but put 

Westcode in the impossible position of having the prove the flaws in Sixnet’s designs 
 2 

and/or the component substitution without the critical, incisive, design and production 

records. To make matters worse, the Arbitrator actually, based on nothing more than 

anecdotal testimony by interested witnesses, ruled that Sixnet did not breach the 

parties’ contracts and awarded Sixnet $1,075,911.60. This Award should be vacated 

because, among other things, the Arbitrator exceeded his powers, imperfectly executed 

his powers, ignored clear and undisputable law, made numerous mistakes regarding 

unrefuted material facts and imposed an improper remedy. In addition, the Arbitrator 

permitted the whole process to be corrupted by Sixnet’s destruction of critical design 

and production records. 

II. SUMMARY OF RELEVANT FACTS

The unrefuted evidence in this case establishes that in or about March, 1995, 

Daimler Chrysler Rail Systems (North America), Inc. (“Adtranz”) entered into a contract 

with the San Francisco Bay Area Rapid Transit Authority (“BART”) to refurbish and 

rehabilitate 200 of BART’s model “A” and “B” rail cars (“the BART project”). BART also 

had an option to have Adtranz refurbish and rehabilitate 239 rail cars after the first 200 

rail cars were completed for a total of 439 rail cars. The BART project required, among 

other things, that the refurbished rail cars have new heating, ventilation and air 

conditioning (“HVAC”) systems installed, new suspension/pneumatic systems installed, 

and the existing door operator systems overhauled. 

In or about the early part of January 1996, Adtranz tendered purchase orders to 

Westcode for the design and manufacture and installation of HVAC systems, 

suspension systems and door operator systems. The purchase orders incorporated 

certain terms and conditions referred to as The San Francisco Bay Area Rapid Transit 
 3 

District Rehabilitation of Transit Vehicles Agreement Between AEG Transportation 

Systems, Inc. and Westcode, Inc., Agreement No. TXS404067 (“the BART 

Agreement”). 

The HVAC systems were to include a temperature control unit (“TCU”). The 

purpose of the TCU was to monitor and control the performance of the HVAC system. 

The door systems were required to include a door diagnostic unit (DDU”). The DDU 

was to monitor (but not control) the door operating system. Both the TCUs and DDUs 

required customized software as well as hardware. 

Sixnet was selected as Westcode’s sub-supplier for the DDUs and TCUs. On or 

about January 18, 1996, Westcode and Sixnet entered into an agreement titled 

Temperature Control Unit Supply Agreement (“TCU Supply Agreement”) and an 

agreement titled Door Diagnostic Unit Supply Agreement (“DDU Supply Agreement”). 

Westcode’s purchase orders were issued to Sixnet on or about March 22, 1996. 

The BART contract specifications required that the components used on the 

subassemblies be rated on the basis of their respective manufacturer data sheets to 

perform at the temperature range of 20° F to 120° F. Electronic componentry comes 

with manufacturer ratings or specifications which, among other things, guarantee that a 

component will perform under certain specified conditions such as temperature 

extremes. The “commercial rating” is generally 32° F to 158 ° F. The “industrial rating” 

is generally -40°F to 185°F. Industrially rated components were required by the 

specifications under the BART contract. 

The BART conformed contract contained detailed termination provisions. Those 
 4 

provisions, by virtue of the flow through provision, are expressly incorporated by 

reference, into the TCU and DDU Supply Agreements. The contract contained a typical 

default termination provision which made both the failure to supply products according 

to schedule and the supply of products of improper quality, defaults under the contract. 

 Just as important, however, was a “termination-for-convenience” clause which gave the 

buyer the right to terminate any or all of the subcontracts when it was determined by the 

buyer to be in the buyer’s best interest. 

The TCUs, the DDUs suffered from critical component specification and 

functionality problems. As set forth above, among the pertinent contract specifications 

were the following: 

- To perform in temperature extremes of 20°F to 120°F; 

- To contain component parts that were guaranteed, without 

qualification screening or testing, to perform at the 

contractually specified temperature extremes. 

Nearly 25% of the TCUs supplied by Sixnet failed contract burn-in testing. The 

high burn-in failure rate naturally led to a closer examination of the TCUs themselves. 

This examination revealed that Sixnet was using electronic component parts that were 

not properly rated by the manufacturers to perform at the required temperature 

extremes. In other words, the inspection revealed that Sixnet was using components 

with a commercial rating. 

The issue of the use of non-compliant components first surfaced in or around 

August, 1998 when Pierre Zuber was sent in by Adtranz to help determine the cause of 

the high burn-in failures. In his August 13, 1998 memorandum, Mr. Zuber noted the 

presence of non-conforming components in the TCUs and DDUs. 
 5 

Mr. Zuber’s findings, of course, led to Westcode’s first written request, on August 

31, 1998, for back-up materials certifying Sixnet’s previous representation that his 

component manufacturers all “guaranteed the temperature range on the components”. 

 Brandywine Management, an independent consulting firm, was then brought in 

to investigate the problem. In Brandywine’s September 23, 1998 Interim Hardware 

Engineering Report, Brandywine also noted that the TCUs and DDUs utilized 

components not rated by their respective manufacturers to perform within the required 

temperature ranges. Brandywine‘s suggestion was that Sixnet should (1) identify the 

non-compliant components; and (2) produce manufacturing ratings for those 

components; or (3) replace those components. 

It was based on the Brandywine Report, that Westcode, by letter dated 

September 24, 1998, advised Sixnet: 

As you can see we are in a situation that we need to work 

through this problem, as all SIXNET product is now under 

scrutiny. Without the proper documentation (per the supply 

agreements) including the rating date on the components, 

we cannot confirm and defend the design of the production 

units on both the TCU and DDU on any of the product 

delivered to date. 

You recognize that we want you to build more units, 

however, as much as we need more units we will not pay for 

units that are no spec compliant and we will not accept more 

units that we cannot verify that the product is compliant. 

The September 24th letter also confirmed a conversation that a Westcode vice 

president had with a Sixnet engineer wherein the Sixnet engineer admitted that Sixnet 

had in fact supplied boards that deviated from approved designs. 

Having been told by Sixnet engineers that the boards had changed from the First 
 6 

Article, and having found through two separate, independent inspections, noncompliant components, Westcode, at the suggestion of Brandywine, asked to review 

the design data on the components. Sixnet refused to produce documents relating to 

the manufacturer ratings of its components. 

Sixnet’s Gary Lewis, admitted that Sixnet’s TCUs and DDUs incorporated 

components with manufacturer specifications that did not meet the contract 

specifications for temperature extremes. Sixnet’s admissions aside, Westcode’s 

inspections also found numerous commercially rated components in the design. 

Adtranz, the prime contractor, would not, under any circumstances, issue a final 

acceptance for Sixnet’s TCUs or DDUs with the non-compliant commercial grade 

componentry. 

Westcode was not an end user of Sixnet’s defective products. In order to keep 

production moving, the products were obviously turned over to the customer, Adtranz. 

Because they were non-conforming, the products shipped to Westcode were 

only conditionally accepted (the condition being that they would be replaced) by Adtranz 

in order to keep the production moving. All of the BART A and B car, and SEPTA, 

Sixnet products had to be scrapped and replaced. 

On July 30, 1998, Adtranz sent Westcode a notice of intent to terminate the 

Westcode/Adtranz purchase orders for default. Sixnet’s faulty performance was a the 

primary cause for the action taken by Adtranz. 

Westcode immediately forwarded the Adtranz default letter to Sixnet and clearly 

and unequivocally put Sixnet on notice of the critical need to cooperate and the 

consequences if cooperation was not forthcoming. 
 7 

By August 21, 1998, Westcode was taking concrete steps to begin to address 

the alleged defaults under the Adtranz contract caused by Sixnet. Particularly, 

Westcode took over the software portion of the DDU and TCU supply agreements. 

The takeover was accomplished by virtue of the August 21, 1998 Modification 

Agreements and Conditional Release entered into by Sixnet and Westcode. 

Brandywine Management was selected as the sub-supplier to complete the software 

portions of the DDU and TCU supply contracts. 

While the software portions of the contracts were transferred to a new vendor, 

problems with the components used on the hardware were surfacing. While Westcode 

desired that the hardware portions of Sixnet’s contracts be fulfilled by Sixnet, it had no 

choice in light of Sixnet’s performance, but to explore replacement suppliers. Sixnet 

made Westcode’s decision on whether to procure a substitute supplier for hardware 

easy when, on September 18, 1998, Sixnet unilaterally refused to ship any more 

products. 

Sixnet was paid in full for all of its Westcode accounts on October 31, 1998. By 

that time, however, Westcode had no choice but to find a substitute supplier for the 

hardware portions of the TCU and DDU supply contracts. 

On October 13, 1998, Westcode retained PCI to complete the DDU and TCU 

hardware. Using the same specifications that were supplied to Sixnet, PCI was able to 

produce product for the BART A and B car job that conformed to contract 

specifications.

On December 9, 1998 Adtranz notified Westcode that it was actually taking over 
 8 

the DDU/TCU hardware portions of its contract with Westcode. Adtranz actually took 

over the hardware portions of the DDU and TCU supply agreements by letter 

agreement dated January 19, 1999. That January 19, 1999 Agreement completely 

ended any involvement Westcode had in the supply of DDUs and TCUs for the BART A 

and B car rehabilitation project. As of that date, Westcode had no use for TCUs and 

DDUs. Adtranz, of course, did not want to use Sixnet TCUs and DDUs because of the 

component problems. 

Sixnet’s performance created discord and strife between Adtranz and Westcode 

that turned out to be irreparable. Adtranz eventually terminated all three Westcode 

purchase orders in full on or about May 19, 1999. The termination by Adtranz was 

occasioned primarily by the problems created by Sixnet’s performance. 

III. THE PROCEDURAL BACKGROUND OF THE WESTCODE/SIXNET 

LITIGATION

Sixnet commenced the action styled, Digitronics Inventioneering Corp. v. 

Westcode, Inc., State of New York, Supreme Court - Appellate Division, Index No. 99-

1395 on June 14, 1999. By agreement of the parties, the claims were submitted to 

arbitration by ADR Options, Inc. 

The Arbitration was conducted from December 2-4, 2002. After extensive posthearing briefing including the submission of proposed findings of fact and conclusions 

of law, by Award issued July 15, 2003, in Philadelphia, Pennsylvania, the Arbitrator 

found in favor of Sixnet in the amount of $1,075,911.60 which represented lost profits 

and interest thereon. 
 9 

IV. THE UNREFUTED EVIDENCE OF NON-CONFORMING COMPONENTS 

PRODUCED AT THE ARBITRATION HEARING

All of the product manufactured by Sixnet and delivered to Westcode were 

ultimately delivered to and then scrapped by Adtranz. There were not, therefore, any 

delivered items available for inspection in this litigation. There were, however, a few 

remaining I/O boards in Sixnet’s inventory. Consistent with Sixnet’s admissions, the 

review of remaining product disclosed unrefuted evidence at the hearing of the 

substitution of commercial grade components. 

First, a Sixnet engineer on the BART project, Gary Lewis testified that 

components were used on the products that were not rated by their respective 

manufacturers to perform within the contract temperature range of 20°F to 120°F. Mr. 

Lewis could not recall just how many components of that type were used on BART 

TCUs and DDUs or why they were used. 

Inspection of the remaining boards showed not only substandard component 

temperature ratings, but some components were from different manufacturers and, for 

that matter, some were even from different countries. 

The component part substitution in some instances was widespread. By way of 

example, inspection revealed that 11 out of 15 integrated circuits on one set TCU 

boards were commercial as opposed to industrial. 

Inspection also revealed that some of the components found in the only 

assembled TCU produced at the hearing by Sixnet did not match counterpart 

components found in identical unassembled boards that remained in Sixnet’s inventory. 
 10 

There was, therefore, not only a use of substandard commercial grade components, but 

there was also component variation among the boards themselves. 

V. SIXNET’S DESTRUCTION OF DESIGN AND PRODUCTION RECORDS 

Sixnet, at all times, refused to produce any documentation regarding the 

manufacturers’ alleged certifications that components were properly rated. The claims 

and counterclaims in this case center around Sixnet’s performance under TCU and 

DDU Supply Agreements dated January 18, 1996. At the forefront of Sixnet’s 

performance, was the delivery of non-conforming products. Sixnet’s President, Steve 

Schoenberg, and one of its former engineers, Gary Lewis, both admitted during their 

depositions that the Sixnet TCUs and DDUs incorporated components with 

manufacturer specifications that did not meet the contract specifications for 

temperature extremes. 

At his deposition, Mr. Schoenberg stated that a document identified as an “issue 

listing” would identify the components that were used in the different batches of product 

shipped to Westcode. Mr. Schoenberg also testified that the testing that would have 

been done to allegedly qualify the substandard componentry would have been 

documented in design notes. 

By letters dated July 2, 2002 and September 3, 2002 from counsel for Westcode 

to counsel for Sixnet, the above-mentioned documents, as well as any other documents 

which could assist in identifying the components used in the products shipped as well 

as Sixnet’s alleged engineering analysis which allegedly supported the decision to use 

substandard components, be produced. By letter dated August 12, 2002, counsel for 

Sixnet advised counsel for Westcode that all test records had been destroyed. 
 11 

The delivered products are gone. They were conditionally released to 

Westcode’s customer Adtranz despite substantial non-conformities so that the 

production line could keep moving. The only proof of what components actually went 

into those products would have been the issue listing. 

Sixnet commenced this litigation by filing a complaint on June 14, 1999 and 

therefore was obliged to preserve evidence relating to its performance under the 

contract. Further, litigation aside, Article T.6.8.A. of the BART Conformed Contract, 

again, which was incorporated into the Sixnet Supply Agreement, required subsuppliers to maintain records required to provide evidence of the quality of its subsystems. 

Despite repeated contract requests for information certifying the quality of the 

components in Sixnet’s products, despite having a contractual obligation to maintain 

and provide such documentation, and despite itself having commenced this litigation 

knowing full-well that the quality of the components would be a major issue in the case, 

Sixnet destroyed the documents which could establish how many components in each 

batch of products were sub-standard, which components in each batch of product were 

substandard and what testing was allegedly done to qualify those substandard 

components for use in the products. 

On November 1, 2002, Westcode filed a motion seeking relief because of 

Sixnet’s spoliation of critical design and manufacturing evidence. By Order dated 

November 27, 2002, the Arbitrator ruled that the motion was denied without prejudice 

pending proof that the spoliation of the design records harmed Westcode. 

As Sixnet had destroyed the design records and production records of the 
 12 

products that had been supplied and manufactured, the whole proceeding was 

corrupted and Westcode’s ability to present a case was severely prejudiced. 

As to, for example, the design and testing phase of the product, which is a phase 

on which the Arbitrator placed great emphasis in his Opinion, the case turned into a 

rank swearing contest by Sixnet’s representatives. Sixnet’s representatives argued, 

without any documentation to support their argument, or any incisive documentation or 

other evidence available to Westcode to probe the argument, that the substandard 

components utilized in the few remaining subassemblies and pieces of subassemblies 

that were available at the time of the arbitration, were actually contained in design 

copies of the products. While there was evidence which undermined the integrity of 

that contention, Westcode was substantially prejudiced by not having the design 

records or the production records available. 

Without the design documents, the futility into which the Arbitrator permitted the 

proceeding to turn, can best be exemplified in an exchange between Westcode’s 

counsel and Mr. Schoenberg during an examination of some of the remaining physical 

product during the hearing. The examination centered around the fact that two identical 

boards contained similarly placed components made by different manufacturers, with 

different temperature ratings. When counsel for Westcode asked Mr. Schoenberg to 

identify whether the components made by different manufacturers were both contract 

compliant, he stated that they “most certainly” are. Since, obviously, the temperature 

certification documents had been “destroyed”, counsel for Westcode asked Mr. 

Schoenberg how he could make such a statement with such certainty. The explanation 

was: 
 13 

I know they are interchangeable because they are both 

qualified parts or they wouldn’t be on those boards. 

The same circular logic applied when Mr. Schoenberg was presented with three boards 

with identical component parts manufactured by three different manufacturers from 

three different countries. 

Westcode renewed its motion for spoliation sanctions on December 31, 2002 

during the post-arbitration briefing. That motion was never decided. 

The design phase of the product is a circumstance on which the Arbitrator 

placed heavy reliance in determining that the subassemblies were contract compliant. 

The circumstantial evidence irrefutably proves that the contention that the substandard 

components were approved for use in the design of the product is false. In fact, as a 

matter of law, the design phase of the product, in light of the clear contract language, is 

legally meaningless in regards to component selection criteria for production units. 

Nevertheless, the Arbitrator placed great emphasis on that phase of the product and to 

the extent the Arbitrator’s position had any merit, the design and production documents, 

which would have shown temperature ratings of the components that were used, and 

whether they complied with the contract specifications, were critical. 

The Arbitrator ruled that Westcode’s claim that Sixnet’s products were noncompliant was false because the product had obtained a First Article approval and the 

products were tested. The only evidence the Arbitrator could have relied on was the 

anecdotal testimony by Mr. Schoenberg to the effect that the components were 

compliant otherwise Sixnet would not have used them. If Westcode was going to be 

put to the task of challenging such a circular argument, it had no footing absent Sixnet’s 
 14 

design and production documents. Westcode, however, should never have found itself 

in a position of having to disprove the Sixnet’s design without the design documents. 

Accordingly, the Arbitrator should never have permitted Sixnet’s case to proceed or, in 

the alternative, Sixnet’ claims should have been dismissed or denied at the conclusion 

of the hearing when the extent of Westcode’s prejudice became manifestly clear. 

VI. SUMMARY OF THE ARBITRATOR’S DECISION

The Arbitrator found that Sixnet was not in breach of any of its contractual 

obligations. In so doing, the Arbitrator either did not address Westcode’s express 

warranty defenses or the Arbitrator must have ruled that the product supplied by Sixnet 

was somehow contract compliant. The contractual specifications with which the 

Arbitrator would have had to have concluded the product complied were never 

identified. The Arbitrator then awarded Sixnet “contract compensatory (Hadley v. 

Baxendale) damages” in the amount of $1,075,911.60. The amount of the award 

includes interest from July 15, 2001 in the amount of $164,122.11. 

The Arbitrator did not anywhere in the Award address the effect of the 

termination-for-convenience provision which was incorporated into the parties’ 

Agreement. As mentioned above, the Arbitrator never decided Westcode’s renewed 

motion for spoliation. In fact, not only was Sixnet not sanctioned as a result of the its 

destruction of the design and production records but, indeed, the inferences deducible 

from the lack of such documentation most definitely went to the spoliator - Sixnet. 
 15 

VII. LEGAL ANALYSIS 

A. THE STANDARD FOR VACATING AN ARBITRATION AWARD 

1. The Deference Afforded Arbitrators is not Unlimited

While arbitrators today are given a great amount of deference, they are not given 

carte blanche. John Morrell & Co. v. Local Union 304A, United Food and Commercial 

Workers, 913 F.2d 544, 559 (8th Cir. 1990) (quoting Piggly Wiggly Operators 

Warehouse v. Piggly Wiggly Operators Warehouse Independent Truck Drivers Union, 

Local 1, 611 F. 580, 583 (5th Cir. 1980), cert. den., 500 U.S. 905 (1991). In greater 

detail below, we will discuss the bases for reviewing and vacating commercial 

arbitration awards. 

Because of the role it plays in industrial governance, judicial deference to an 

arbitrator’s decision in the labor context is much stronger than the deference afforded 

an arbitrator’s decision in the commercial context. See, Huber, Hunt & Nichols, Inc. v. 

United Association of Journeymen and Apprentices of the Plumbing and Pipefitting 

Industry, Local 38, 282 F.3d 746, 754 (9th Cir. 2002) cert. den. 123 S.Ct. 342 (2002); 

Louisiana Pacific Corp. v. International Brotherhood of Electrical Workers AFL-CIO, 

Local Union 2294, 600 F.2d 219, 223 n. 10 (9th Cir. 1979). Hence, it is not surprising 

that some of the grounds that will be discussed have been cross-pollinated from the 

labor arbitration field. 

Before proceeding further to discuss standards for vacatur, it is important to 

recognize the very atypical nature of the parties’ Arbitration Agreement in this case. 

Under well recognized law, the terms of the parties’ Arbitration Agreement is what 
 16 

determines the scope of review. 

Generally, arbitrators are not bound by formal rules of procedure and evidence, 

and the standard for judicial review of arbitration procedures is merely whether a party 

to arbitration has been denied a fundamentally fair hearing. See, Graham’s Service, 

Inc. v. Teamsters Local 975, 700 F.2d 420, 422 (8th Cir. 1982). However, Federal 

Courts invoke the Federal Arbitration Act (“the FAA) primarily to give effect to 

contracting parties’ expectations for resolving disputes. Dluhos v. Strasberg, 321 F.3d 

365, 369 (3rd Cir. 2003). Accordingly, the FAA revolves around the interpretation of the 

parties’ arbitration agreement. Id.; see also, Harrison v. Nissan Motor Corp., 111 F.3d 

343, 350 (3rd Cir. 1997). 

2. The Terms of the Parties’ Arbitration 

Agreement Obligated this Arbitrator to 

Correctly Apply the Relevant and 

Substantive Law to Determine the Outcome 

of the This Case 

Obviously, in order to define the parties’ expectations, and, accordingly, the 

Arbitrator’s duties and obligations, it is essential to review the terms of the Arbitration 

Agreement itself. Here, the Arbitration Agreement contained several extremely unique 

provisions which are set forth in pertinent part as follows (emphasis added):1

 1

The parties agreed to arbitration pursuant to the ADR Options Rules. The rules in 

question are from the ADR Options Rules of Procedure, a copy of which is attached to the 

undisputed record as Exhibit “SS”. 
 17 

1. Scope

These rules, as in place at the time of proceeding, shall govern all 

arbitration proceedings in ADR Options. 

These rules may be modified or voided by agreement of all parties. 

 This agreement to arbitrate is an agreement for common law arbitration 

unless the parties agree expressly in writing for arbitration pursuant to the 

Uniform Arbitration Act, a similar statute or other contractual term(s). 

Rulings on legal issues are based on the principles of law 

which would be applicable if the case were heard in the appropriate 

court of public jurisdiction. This may be changed by agreement of 

all parties to the dispute.

 * * * 

4. Proceedings

Proceedings are either arbitrations or mediations. 

a. Standard arbitrations are binding in nature 

and offer the opportunity to present 

evidence in a manner similar to a non-jury 

trial in the public courts.

 * * * 

6. Discovery

The parties shall have the right to take depositions and to 

obtain discovery based on the discovery rules of the public court in 

which the case had been previously filed, or if no case is pending, 

then discovery shall be governed by the local Rules of Civil 

procedure of the appropriate court of public jurisdiction. 

Notwithstanding the above, the scope and time for discovery may be 

modified by agreement of the parties and the ADR Options arbitrator. 

 * * * 

9. Evidence

Rules of Evidence of the appropriate court of public 

jurisdiction shall apply unless otherwise agreed by the parties.
 18 

10. Substantive Law

The law of the case shall be the substantive law of the 

appropriate jurisdiction. In the event of a dispute as to the 

applicability of substantive law, all parties shall submit briefs to the 

ADR Options arbitrator, who shall decide the appropriate law of the 

case.

As can be seen from the above-quoted rules, the parties in this case did not 

bargain for typical arbitration. In this case, the parties by virtue of the arbitration 

provisions to which they agreed, clearly bargained for processes that more closely 

resembled litigation than arbitration. The parties bargained for a proceeding that 

allowed for discovery, the exchange of documents, and depositions. The parties also 

bargained for a proceeding that required the Arbitrator to apply the pertinent procedural 

and substantive rules and law in reaching an outcome. If the Arbitrator failed in those 

obligations (which he did) then he breached the Agreement and exceeded his powers. 

3. The Standards for Vacatur Under the 

Federal Arbitration Act 

With the terms of the Arbitration Agreement as background, it is now appropriate 

to turn to the vacatur standards. Article 10 of the Federal Arbitration Act provides, in 

pertinent part, as follows: 

(a) In any of the following cases the United 

States Court in and for the District wherein the 

award was made may make an order vacating 

the award upon the application of any party to 

the arbitration: 

(1) where the award was 

procured by corruption, fraud or 

undue means; 
 19 

(2) where there was evident 

partiality or corruption in the 

arbitrators, or either of them; 

(3) where the arbitrators were 

guilty of misconduct in refusing to 

postpone the hearing, upon 

sufficient cause shown, or in 

refusing to hear evidence 

pertinent to and material to the 

controversy; or of any other 

misbehavior by which the right to 

the parties have been prejudiced; 

or 

(4) where the arbitrators 

exceeded the powers, or so 

imperfectly executed them that a 

mutual, final and definite award 

of the subject matter submitted 

was not made. 

9 U.S.C. § 10(a). 

A party urging vacatur on the grounds of evident partiality must produce specific 

facts to show that the alleged partiality is “direct, definite and capable of demonstration 

rather than remote, uncertain or speculative”. Ergobuilt, Inc. v. Neutral Posture 

Ergonomics, Inc., 2002 WL 1489521, p. 5 (N.D. Tex.) (relying on Mantle v. Upper Deck 

Co., 956 F.Supp. 719, 729 (N.D. Tex. 1997)). 

Misconduct warranting the vacatur of an award under Section 10(a)(3) need not 

amount to bad faith but rather misconduct born of indiscretion. Newark Stereotypers 

Union No. 18 v. Newark Morning Ledger Co., 397 F.2d 594, 598 (3d Cir. 1968) cert.

den. by 393 U.S. 594 (1968). The misconduct in question must amount to a denial of a 

fundamentally fair hearing. Rocke v. Local 32b-32j Service Employees Union, 755 

F.Supp. 622, 624 (S.D.N.Y. 1991) see also, Newark Stereotypers Union, supra at 599. 
 20 

Arbitrators “exceed their powers” under the FAA when they fail to meet their 

obligations as specified in the arbitration agreement. Western Employers Insurance 

Co. v. Jefferies & Co., Inc., 958 F.2d 258, 261 (9th Cir. 1992) (relying on Western 

Canada SS Co. v. Cia. DeNav. San Leonardo, 105 F.Supp. 452 (S.D.N.Y. 1952)). In 

the Western Employers Insurance Co. case, for example, the parties’ arbitration 

agreement required that the award be accompanied by statements containing findings 

of fact and conclusions of law. The award was rendered in a manner that did not 

include any findings of fact or conclusions of law. In vacating the award, the court in 

that case found that the parties had a right to an arbitration according to the terms for 

which they contracted. The court recognized that the purpose of the FAA required 

courts to enforce the terms of the privately negotiated agreements to arbitrate, like any 

other contracts. Id. at 261. Although findings of fact and conclusions of law are not 

arbitration requirements generally, because of the terms of the particular arbitration 

agreement in that case, by failing to comply with those terms, and by failing to provide 

findings of fact and conclusions of law, the court found that the arbitrators had 

exceeded their powers under Section the Act. See also, New Elliott Corp. v. MAN 

Gutehoffnungshutte AG, 969 F.Supp. 13, 15 (S.D.N.Y. 1997). 

In order to determine whether arbitrators exceed their powers, this Court should 

employ a two step analysis: (a) the form of the award must be rationally derived either 

from the agreement between the parties or from the parties’ submission to the 

arbitrators, and (b) the terms of the award must not be completely irrational. Mutual 

Fire Marine & Inland Ins. Co. v. Norad Rains Co., Ltd., 868 F.2d 52, 56 (3rd Cir. 1989). 

Among the other grounds for vacatur which have evolved from the FAA are: 
 21 

1. the award is arbitrary or capricious; 

2. the award does not draw its essence from the underlying 

contract; or 

3. the award is in manifest disregard of the law. 

See, Williams v. CIGNA Financial Advisors, Inc., 197 F.3d 752, 758 (5th Cir. 1999) cert.

den. 529 U.S. 1099 (2000) (collecting cases); Harris v. Parker College of Chiropractic, 

286 F.3d 790, 792 n. 1 (5th Cir. 2002); Dluhos v. Strassberg, 321 F.3d 365, 372 (3rd Cir. 

2003) (manifest disregard of the law); Local 683 International Brotherhood of 

Teamsters, Chauffeurs, Warehousemen and Helpers of America v. Jersey Coast Egg 

Producers, Inc., 773 F.2d 530, 534 (3rd Cir. 1985) cert. den. 475 U.S. (1986); Ergobuilt, 

Inc. v. Bodybuilt, Inc., 2002 WL 1489521 (N.D. Tex.); Weinberg v. Silber, 140 

F.Supp.2d 712, 717 (N.D. Tex. 2001) cert. den. 475 U.S. 1085 (1986). 

An award is arbitrary and capricious when it is so palpably faulty that no judge, or 

group of judges, could ever conceivably have made such an award. Safeway Stores v. 

American Bakery & Confectionary Workers Local 111, 390 F.2d 79, 83 (5th Cir. 1988); 

see also, Alabama Education Association v. Alabama Professional Staff Organization, 

655 F.2d 607, 609 (5th Cir. 1981). The award must exhibit a wholesale departure from 

the law or not be grounded in the contract which provides for the arbitration. Brown v. 

Rauscher Pierce Refsnes, 994 F.2d 775, 781 (11th Cir. 1993). 

The “essence” test requires a court to determine whether the arbitrator’s award 

was so unfounded in reason and fact, so unconnected with the wording and purpose of 

the arbitration agreement as to manifest an infidelity to the obligation of the arbitrator. 

Executone Information Systems, Inc. v. Davis, 26 F.3d 1314, 1325 (5th Cir. 1994). In 
 22 

making this inquiry, the question is whether the award, however arrived at, is rationally 

inferrable from the contract. Id. (relying on Anderman/ Smith Operating Co. v. 

Tennessee Gas Pipeline Co., 918 F.2d 1215, 1219 (5th Cir. 1990). 

Under the manifest disregard standard, the governing law ignored by the 

arbitrators must be well defined, explicit and clearly applicable. The error must have 

been obvious and capable of being readily and instantly perceived by the average 

person qualified to serve as an arbitrator. Moreover, the term “disregard” applies if the 

arbitrator appreciates the existence of a clearly governing legal principle but decides to 

ignore it or pay no attention to it. Merril Lynch Pierce Fenner & Smith, Inc. v. Bobker, 

808 F.2d 930, 933-934 (2nd Cir. 1986); Prestige Ford v. Ford Dealer Computer 

Services, Inc., 324 F.3d 391, 395 (5th Cir. 2003); Merril Lynch Pierce Fenner & Smith, 

Inc. v. Raford, 903 F.2d 1410, 1413 (11th Cir. 1990); M&C Corp. v. Erwin, Behr, Gmbh 

& Co., KG, 87 F.3d 844, 850 (6th Cir. 1996); Marshall v. Green Giant Co., 942 F.2d 539, 

550 (8th Cir. 1991); see also, Smith v. PSI Services II, Inc., 2001 WL 41122 (E.D. Pa.); 

and Kennington, Ltd., Inc. v. Wolgin, 1998 WL 221034 (E.D. Pa.); and Ruggiero v. A.R. 

Barron & Co., Inc., 1996 WL 179980 (E.D. Pa.). A court may infer that the arbitrator 

manifestly disregarded the law if it finds that the error made by the arbitrator is so 

obvious that it would be instantly perceived by the average person qualified to serve as 

an arbitrator. Willemijn Houdsteramaatschappij BV v. Standard Microsystem, 103 F.3d 

9, 13 (2d Cir. 1997). 

An arbitration award must also be vacated if it is unsupported by the record. 

News America Publications, Inc. v. Newark Typographical Union Local 103, 918 F.2d 

21, 24 (3rd Cir. 1990) reh. den. 921 F.2d 40 (1990). When the critical facts underlying 
 23 

the arbitrator’s decision are conceitedly wrong, the award cannot stand. Long 

Electronics Corp. of America v. International Union Local 272, 492 F.2d 1255, 1257 (1st

Cir. 1974). Where the record demonstrates an unambiguous and undisputed mistake 

of fact and the record demonstrates strong reliance on that mistake by the arbitrator in 

making his award it can be fairly said that the arbitrator exceeded his powers or so 

imperfectly executed them that vacation may be proper. National Post Office Mail 

Handlers, Watchmen, Messengers and Group Leaders v. United States Postal Service, 

751 F.2d 834, 843 (6th Cir. 1985) (relying on 9 U.S.C. § 10(d)). 

Because of the unique nature of the Arbitration Agreement in this case, the 

Arbitrator was obligated to proceed in this matter as if he was a judge presiding over a 

non-jury trial. He was also obligated, expressly by the parties’ Agreement, and implicitly 

by the nature of his role as a judge in a non-jury proceeding, to correctly interpret the 

contract and law, and apply it to the facts in the record. There is no question of 

credibility here because the facts that are critical to the outcome of the case are not in 

dispute. The Arbitrator in this matter did not discharge his obligations to the parties, he 

breached his obligations under the Arbitration Agreement, he disregarded the law, he 

disregarded the undisputed facts in the record and he decided the case on theories that 

were not submitted to him. For those reasons, the Arbitrator exceeded his powers, so 

imperfectly executed his powers and allowed the process to become corrupted thereby 

warranting that the Award be vacated. 
 24 

B. THE AWARD IN THIS CASE MUST BE VACATED

1. To the Extent that the Arbitrator Determined 

that Sixnet’s Products Conformed to the 

Contract Temperature and Component 

Selection Specifications He Ignored the 

Record, Mainfestly Disregarded the 

Applicable Undisputed Law, and His 

Decision Was Based on Critical Facts 

Which Were Wrong 

a. The Parties’ Agreement 

Included, By Virtue of the Flow 

Through Provision of the TCU 

and DDU Supply Agreements, 

Among Other Things, The 

Temperature and Component 

Selection Criteria of the BART 

Conformed Contract Book

The Agreement consisted, as the Arbitrator recognized (See, Arbitrator’s 

Conclusions of Law, ¶ 2), of not only the Supply Agreement but the terms of the prime 

contract between Adtranz and Westcode that were incorporated by virtue of the flow 

through provision of the Supply Agreements. Where a contract between a supplier and 

a sub-supplier incorporates the terms of the prime contract, the sub-supplier is bound 

by the provisions of the prime contract. See, Paine Webber v. Bybyck, 81 F.3d 1193, 

1201 (2d Cir. 1996) (New York law) (document referred to in contract made part of 

contract as if incorporated into body); Frommeyer v. L&R Construction Co., 261 F.2d 

879 (3d Cir. 1958); Charles Simkin & Sons, Inc. v. Massiah, 289 F.2d 26, 29-30 (3d Cir. 

1961). See also, Home Lumber Co v. Appalachian Regional Hospitals, Inc., 722 

S.W.2d 912, 914 (Ky. App. 1987) (where prime contract contained arbitration clause, 
 25 

case remanded to determine if purchase order incorporated terms and conditions of 

prime contract by reference thereby making dispute between general contract or/and 

subcontractor arbitrable). The same applies in this case. 

The Pennsylvania Superior Court recently addressed the effect and purpose of 

“flow through” clauses in construction contracts in Bernotas v. Super Fresh Food 

Markets, Inc., 2002 WL 31846192 (Pa.Super.) app. grt. 825 A.2d 637 (2003). 

Specifically in that case a plaintiff was injured in a slip and fall at a supermarket. Work 

was being done at the time of the accident by a general contractor and a subcontractor. 

 The contract between the owner and the general contractor contained an 

indemnification clause. The contract between the general contractor and the 

subcontractor contained a flow through provision incorporating the prime contract. 

The purpose of this type of contract provision, commonly 

referred to as a “flow through” or “conduit” clause, is to 

assure that a subcontractor is bound to the prime contractor 

in the same manner that the prime contractor is bound to the 

owner. In essence, the provision requires the subcontractor 

to stand in the shoes of the prime contractor with regard to 

rights and obligations encompassed in the prime contract to 

the extent they arise within the purview of the subcontract. 

 * * * 

In the case sub judice, [prime contract] obligated [supplier] 

to indemnify [owner] for any damages that were not caused 

by [owner’s] sole negligence. The subcontract expressly 

incorporated the terms of the contract documents without 

qualification, including [prime contract]. [Subsupplier] 

acknowledged that it had an opportunity to review the 

contract documents and affirmed that the contract 

documents were available upon request. Thus, 

[subsupplier], in effect, agreed to indemnify [supplier] for any 

damages that were not caused by [owner’s] sole negligence 

that occurred within the purview of the subcontractor. 
 26 

Id. (relying on, inter alia, J.&J. Struthers Industries v. Callanan Industries, Inc., 626 

N.Y.S.2d 891 (N.Y. App. Div. 1995) app. den. by 658 N.E.2d 220 (1995)). 

Article 2.10 of the Supply Agreements in this case made the purchase orders 

and the terms/provisions and specifications of the entire BART Conformed Contract 

part of the parties’ agreements. 

b. Pennsylvania Law Applies to 

the Case

There is a choice of law issue in this case which is, from the standpoint of the 

outcome of the case, more academic than practical. As will be discussed in more detail 

below, the law of the two jurisdictions from where the choices could come, 

Pennsylvania or New York, are substantially identical. The reasoning employed by 

Arbitrator, however, as it relates to this issue, evinces a clear misapprehension of the 

record and is in manifest disregard of the law. 

The purchase order, which of course was attached as Exhibits to Sixnet’s 

Statement of Claim, contained a backside. The backside contained a provision, Article 

19 in particular, which provided that the order should be interpreted according to the 

laws of the Commonwealth of Pennsylvania. The TCU and DDU Supply Agreements , 

Article 2.9, in particular, on the other hand provided for disputes to be interpreted under 

the laws of the State of New York. The flow-through provisions of the Supply 

Agreements mandated that, in the event of a conflict between the choice of law 

provisions, the terms of the purchase order take precedence which would have 

mandated the application of Pennsylvania law. 

At the hearing, for the first Sixnet’s President, time, Mr. Schoenberg, testified 
 27 

that the purchase order was originally delivered to him by telefax, and according to Mr. 

Schoenberg, the telefax did not include the general terms and conditions portion of the 

purchase order. Mr. Schoenberg admitted that Sixnet eventually received a full copy of 

the purchase order, front and backside, but that he could not recall when. The 

Arbitrator concluded, that based on this testimony, the terms on the backside of the 

purchase order were not included as part of the contract. 

In dismissing the backside of the purchase order, the key evidence that the 

Arbitrator completely overlooked was that Sixnet was, at the time it received the BART 

purchase orders, already a Westcode supplier. Sixnet, by that time, had already 

received identical purchase orders for other jobs and those purchase orders contained 

both the front side and backsides with identical general terms and conditions. TR/H/pp. 

258-259. Under that scenario, Sixnet had to have had, at the very least, constructive 

knowledge of the terms and conditions included on the backside purchase orders, if not 

actual knowledge.2

 Sixnet, therefore, cannot profess ignorance of the terms and 

condition on the backside of the purchase order when it was issued on the BART 

projects. The terms and conditions of the purchase order should be part of the contract 

and Pennsylvania law, therefore, should be applicable to this case, although New York 

law is substantially identical. 

 2

When Sixnet received the backsides of the purchase orders in this case in the form 

of the full copy, it never rejected, or objected to, the terms and conditions stated therein. 
 28 

 

TR/H/p. 266. 

c. Sixnet had the Unrefuted 

Contractual Obligation to 

Deliver Product that Complied 

with the Design Specifications 

Regarding Temperature 

Ratings and Component 

Selection Criteria

The contract documents contained detailed and express specifications relating to 

the design and performance of the TCUs and DDUs. Regarding such specifications, 

the Uniform Commercial Code provides that any affirmations of fact or promise made 

part of the basis of the bargain creates an express warranty that the goods will conform 

to the affirmation or promise. McKinney’s U.C.C. § 2-313(a)(I); 13 Pa.C.S.A. § 

2313(a)(I); and Hyland v. First U.S.A. Bank, 1995 WL 595861 (E.D. Pa.). If the goods 

do not meet the affirmation, the warranty is breached. Id. Technical specifications are 

types of affirmations or promises that become express warranties. McKinney’s U.C.C.

§ 2-313; and 13 Pa.C.S.A. § 2313, Official Comment, ¶ 5 (emphasis added). 

There are different types of specifications. A performance specification, for example, 

requires the contractor to produce a result or means of achieving the particular result. The 

contractor is free to determine how to achieve the result. The risk of non-performance 

however, is on the contractor. Fruin-Colnon Corp v. Niagra Frontier Transportation, 180 

A.D.2d 227, 585 N.Y.S.2d 248, 253 (1992). A design specification, on the other hand, 

specifies materials and methods and impliedly warrants feasability and sufficiency. The 
 29 

contractor must follow the design specifications without deviation. Id. Once the buyer 

proves the existence of an express warranty, it is the seller’s burden to prove that the 

products delivered conformed therewith. See, Borman’s Inc. v. Olympic Mills, Inc., 1993 WL 

190344, p. 4 (S.D.N.Y.) (N.Y. law). 

In contrast to the express warranties, the implied warranty of fitness provides that 

goods will be fit for any particular purpose for which the seller has reason to know that the 

goods will be put. McKinney’s U.C.C. § 2-315; 13 Pa.C.S.A. § 2315; Cucchi v. Rollins, 

524 Pa. 514, ___, 574 A.2d 565 n.6 (1990). To establish a claim for breach of an 

implied warranty of fitness for a particular purpose, there must sufficient evidence that 

(1) the seller had reason to know of the particular purpose for which the buyer 

purchased the product; and (2) the seller recommended the product for such purpose, 

knowing that the buyer was relying on the seller’s expertise and skill in making that 

particular choice. See, Id. (citing 13 Pa. C.S.A. § 2315 (1984)); Keirs by Keirs v. Weber 

Nat’l Stores, Inc., 352 Pa.Super. 111, ___, 507 A.2d 406, 410 (1986). The implied 

warranty of merchantability means that goods must simply be fit for their ordinary 

purpose. See, McKinney’s U.C.C. § 2-314; and see also, Altronics v. Repco, 957 F.2d 

1102, 1105 (3d Cir. 1992); and Stratos v. Super Sea Glass, 1994 WL 709375 (E.D. Pa.) 

(Padova, J.). Implied warranties do not apply where there are express warranties in the form 

of contract specifications. The implied warranties are displaced by the express warranties. 

Malul v. Capital City Cabinets, Inc., 191 Misc.2d 399, 740 N.Y.S.2d 828, 834 (N.Y. Civ. 

2002). 

Professor Anderson, in his commentary to the UCC discussed what must be proven 

to establish a breach of warranty. As Professor Anderson notes, in regards to an express 
 30 

warranty claim in particular, the focus is not on whether the product malfunctions but rather 

on whether the product conforms to the applicable contractual specifications. Professor 

Anderson notes: 

It is unfortunate that the warranty law has been so influenced by 

the tort law. With respect to negligence and strict tort, it is 

logical to require that there be a defect in the goods. In the 

case of warranty, it should be sufficient to impose liability that 

there has been a breach of warranty. In many cases, the 

breach of warranty consists of the presence of a defect that 

prevents the goods from being used. In other cases, the breach 

consists merely of failing to conform to the contract’s standard. 

For example, when the seller delivers a red table instead of the 

green table required by the contract there is clearly a breach of 

warranty. Yet the red table was not defective in any intelligent 

sense of the word merely because it did not conform to the 

contract. * * *. 

Many of the cases seek to make a quantitative distinction as to 

how dangerous a product must be in order to be classified as 

‘defective’. Yet there is not a warranty in the [Uniform 

Commercial] Code that could not be broken by a perfectly made 

product. Conformity to the standard, satisfaction of the 

minimum criteria of the warranty of merchantability, [and] fitness 

for the particular purpose of the buyer are the criteria for 

determining whether warranties have been satisfied. Failure to 

satisfy the criteria are the significant matters without regard to 

whether the goods are `defective’ or without flaw. 

The need for defining a defect becomes unnecessary insofar as 

warranty law is concerned if the matter is approached from the 

aspect of conformity or nonconformity, rather than in terms of 

whether there is a defect. The presence of a defect should be 

regarded as merely evidence of the fact that the goods are in 

such a condition that some warranty has been broken. If all the 

circumstances lead to the conclusion that the goods do not 

conform, there is a breach of warranty. It is unnecessary to 

determine whether what made them not conform is to be 

labeled a `defect’. 

Anderson, Uniform Commercial Code, § 2-314:56 at 163 (1983)); see also, Michael v. 

Shiley, Inc., 46 F.3d 1316, 1331 (3d Cir. 1995), cert. den. by 516 U.S. 815, (applying Pa law) 

(product need not be defective to be considered breach of express warranty buyer need only 
 31 

prove that that express warranty was breached); Carl Beasley Ford, Inc. v. Burroughs Corp., 

361 F.Supp. 325, 331 (E.D. Pa. 1973), aff’d 493 F.2d 1400 (3d Cir. 1974) (noting that 

warranty is breached if seller’s product fails to conform to promised result); see also, Hyland 

v. First U.S.A. Bank, supra; and Sagnia-Blythe v. Gamblin, 160 Misc.2d 930, ___, 611 

N.Y.S.2d 1002, 1004 (N.Y. Civ. 1994). 

In the Michael case, supra, the Third Circuit dealt with the precise issue upon which 

the Arbitrator mistakenly relied in this case. In Michael, the defendant sold the plaintiff a 

heart valve. The valve contained an express warranty. The defendant contended that 

because there was no proof that the valve was defective, there could be no claim for breach 

of the express warranty. The Third Circuit, rightly so, disagreed. The Third Circuit 

recognized Professor Anderson’s point that an express warranty claim does not require 

proof of defect or malfunction. Rather, the express warranty claim simply requires proof that 

the express warranty was breached. 

d. Sixnet’s Products Did Not 

Conform to the Pertinent Design 

Specifications Because They 

Contained Components That 

Were Not Rated By Their 

Manufacturers To Perform At 

The Temperature Range of 20°F 

to 120°F

The express warranties at issue in this case are, again, as follows: 

- the product had to perform in temperature 

extremes of 20°F to 120°F; and 

- the product had to contain electrical 

component parts that were rated on the basis 

of manufacturer data sheets, without prescreening or qualification testing, to perform 

within the above-mentioned temperature 

specifications. TR/H/p. 155 (Schoenberg). 
 32 

It is admitted Sixnet’s products did not conform to the aforementioned 

warranties. Mr. Schoenberg admitted, Mr. Lewis admitted, and a visual inspection of 

the boards themselves showed,3

 that the TCU and DDU boards clearly had 

components that were not rated by the manufacturer to perform down to 20°F. 

There were no waivers obtained by any party in this case to those specifications. 

 Sixnet’s products were, thus, contractually required to conform to these specifications 

without deviation. E.g., Fruin-Conlon v. Niagra Frontier Transportation, 180 A.D.2d 

227, 585 N.Y.S.D.2d 248, 253 (1992)(contractor must follow design specifications 

without deviation); see also, 13 Pa.C.S.A. ¶ 2313, Official Comment, ¶ 5. The use of 

components that were not rated by their respective manufacturers to conform to the 

required temperature specifications was an unmistakable breach of express warranty. 

e. Because Sixnet’s Products 

Were Non-Conforming, 

Westcode was Entitled to 

Cancel the Orders

When a seller provides non-conforming product, the buyer may reject the 

product and/or cancel the contract. McKinney’s U.C.C., §§ 2-601 & 2-711; 13 Pa.C.S.A. 

§§ 2601 & 2711. As to rejecting non-conforming goods, the Commercial Code provides as 

 3

Mr. Schoenberg admitted that component classifications and ratings are 

conspicuous from the face of a board. Anybody visually inspecting a component who 

knows what they are looking for can identify what the ratings are. TR/H/p. 238. 
 33 

follows: 

§ 2601. Rights of buyer on improper delivery.

Subject to the provisions of this division on breach in installment 

contracts (section 2612) and unless otherwise agreed under the 

sections on contractual limitations of remedy (sections 2718 and 

2719), if the goods or the tender of delivery fail in any respect 

to conform to the contract, the buyer may: 

1. reject the whole; 

2. accept the whole; or 

3. Accept any commercial unit or units and reject the rest. 

13 Pa.C.S.A. § 2-601; see also, McKinney’s § 2-601 (emphasis added). Further, as to 

cancellation the Code provides in pertinent part: 

§ 2711. Remedies of buyer in general; security interest of buyer in rejected 

goods. 

(1.) Cancellation and additional remedies. Where the 

seller fails to make delivery or repudiates or the 

buyer rightfully rejects or justifiably revokes 

acceptance then with respect to any goods 

involved, and with respect to the whole of the 

breach goes to the whole contract (section 2612 

(relating to “installment contract”; breach)), the 

buyer may cancel... . 

McKinney’s U.C.C. §2-711; see also, 13 Pa.C.S.A. § 2-711. A material breach of contract 

also clearly entitles the non-breaching party to rescind the contract. E.g., Logan v. 

Cherrie, 16 Chest. 194 (1967). 

Sixnet’s performance did not conform to the terms of the contracts. The 

products contained component parts that were not rated to perform at the contractual 

temperature specifications. Sixnet’s products breached both the express design and 

performance specifications contained in the contracts. Under § 2711(a), because the 

product did not conform to the contract specifications, Westcode was fully justified in 
 34 

rejecting the goods and canceling the contracts. See, McKinney’s U.C.C. §§ 2-601 & 

2-711; 13 Pa.C.S.A. §§ 2601 & 2711(a). 

Sixnet also refused, in violation of Article T.16.8.A.3 of the BART Conformed 

Contract, to comply with Westcode’s requests for design and production records regarding 

the temperature performance specifications of the components used in its boards. 

Finally, it was also Sixnet who ultimately repudiated the agreements when it 

unilaterally stopped delivery and forced Westcode and Adtranz to find an alternate supplier 

for the TCUs and DDUs. Based on the foregoing numerous and material contract breaches 

and performance defaults, Westcode was entitled to terminate the Sixnet purchase orders. 

f. The Arbitrator Ignored the 

Undisputed Facts and Law and 

Found for Sixnet Based 

Largely on Mistaken Facts and 

Irrelevant Theories 

Despite what is set forth above, the Arbitrator concluded that the claim that the 

Sixnet supplied sub-assemblies failed to meet specifications was not only wrong, but 

according to the Arbitrator, was “false”. (Arbitrator’s Conclusions of Law, ¶ 5(d)). The 

three bases relied upon by the Arbitrator for making such a conclusion are as follows: 

1. The Arbitrator concluded that identical subassemblies were given First Article approval; 

2. The Arbitrator concluded that essentially 

identical sub-assemblies were supplied to 

Adtranz and integrated into SEPTA and/or 

BART cars; and 

3. The Arbitrator concluded all sub-assemblies 

by Sixnet were successfully tested by Sixnet 

before shipment. 

In fact, all three bases relied upon by the Arbitrator either ignore unrefuted evidence, 
 35 

find no support in the record, ignore Sixnet’s destruction of documents and/or ignore 

clear unmistakable law. 

i. First Article Approval Did Not 

Relieve Sixnet of Its 

Obligations to Supply Products 

that Conformed to the 

Contract’s Temperature and 

Component Selection 

Specifications

First, the Arbitrator completely misapprehended the effect of First Article 

approval.4

 First article approval did not immunize the product from either the 

requirement to comply with all contractual specifications or the obligation to deliver 

documents during production which verify the compliance with all contractual 

specifications. 

By way of example, Article 15.3.B of the BART Conformed Contract provides 

that notwithstanding First Article approval, or any other approval for that matter, each 

subsystem and component is still required to pass acceptance tests to prove its 

conformity with the relevant contract requirements. Further, notwithstanding, the 

issuance of first article approval, in the letter containing the said approval, Westcode 

made it perfectly clear to Sixnet that: 

 4

The Arbitrator concluded that Westcode employed an individual (Frank Welsh) to 

monitor the design, development and testing of the units and that Mr. Welsh spent 

80%-100% of his time working on “the Sixnet designs”. (Arbitrator’s Findings of Fact, ¶ 

20). Those, however, were not hardware designs. Mr. Welsh clearly testified that he 

was not at Sixnet for purposes of the design of the product (See, TR/H/p. 30) and that 

most of his time was spent on software issues as opposed to hardware issues. 
 36 

“[N]either review nor approval of any aspect of Sixnet’s work 

supplied under the contract shall in any way relieve Sixnet of 

any of its obligations with respect to conformance to 

specifications or the performance of work under the 

contract”. 

Plaintiff’s Exhibit 14. Mr. Schoenberg even admitted in his testimony that First Article 

approval did not relieve Sixnet of the obligation of complying with the contract 

specifications his product was required to meet regarding temperature ratings. 

TR/H/pp. 229, 243 & 246.

First Article approval may give a supplier certain assurances regarding who will be 

financially responsible for subsequent design changes but it does not immunize the product 

from subsequent scrutiny. It also does not give a supplier carte-blanche to deviate from the 

contract requirements and specifications. This case was not about who was responsible for 

the financial burden for design modifications. The fact that a first article approval was 

issued, therefore, was irrelevant to Sixnet’s defense. 

ii. Assuming, Arguendo, That 

First Article Approval Could 

Relieve Sixnet of The 

Obligations to Comply With 

Certain Temperature or 

Component Selection Criteria, 

There Was No Proof That The 

Sub-Assemblies that Sixnet 

Provided Were Identical to the 

First Article

One point that is clear and unrefuted is that if, as the Arbitrator argued, the 

boards were all produced to a First Article design, there would be no deviation among 

the boards. As Mr. Schoenberg himself admitted, no deviation among components is 

permitted from an approved First Article. TR/H/p. 342. 
 37 

As unrefuted evidence in this case showed, however, there were product 

deviations among the components used on the same boards. By way of one example, 

on one particular type of board, out of 13 boards still remaining at the time of this case, 

6 contained a component identified as U4 with a commercial rating and 7 contained the 

same component with an industrial rating. 

Westcode also found component differences between the TCU Sixnet 

introduced as an exhibit in this case and some of the boards which remained in its 

inventory. 

If a commercially rated component was indeed approved for use on a First 

Article, all of the subsequent production units would have had to have used the same 

component. There is no way that the variance among boards, with regard to the same 

components, could be explained on the basis of a First Article approval. 

We do not know what components were on the First Article because Sixnet 

neither saved the First Article itself not did it save the First Article design records. It is 

certain, however, from the deviations found, among the surviving boards, and from the 

admissions of Sixnet itself, that the components, whatever they were, changed without 

obtaining any waivers from Westcode. There was absolutely no factual support for the 

Arbitrator’s conclusion that production products were identical to First Articles. 
 38 

iii. The Arbitrator’s Contention 

that Essentially Identical 

Subassemblies Were Supplied 

to Adtranz on Other Jobs 

Ignores the Unrefuted Record 

Because There Was No 

Evidence In The Record 

Regarding The Contractual 

Specifications for Temperature 

for Other Jobs In The Record

The Arbitrator concluded that essentially identical sub-assemblies were supplied 

by Sixnet and “successfully integrated” into other jobs. This argument has absolutely 

no legal relevance in this case because, first, there was no evidence in the record as to 

whether the design specifications for the products in the other jobs were identical to the 

design specifications on the BART job. Second, this point, relied upon by the Arbitrator, 

highlights that the Arbitrator considered this case to be a warranty of merchantability 

case as opposed to an express warranty case. The express warranties in the contract 

displaced any implied warranty. Malul, supra. 

Whether an essentially identical product was acceptable on the SEPTA job has 

no relevance to whether the products supplied on the BART job conformed to the BART 

contract specifications. Whether the SEPTA job permitted “green tables” is of no 

relevance. Whether “green tables” worked on the SEPTA job was irrelevant. The 

BART job at issue in this case clearly required “red tables”. 

In fact, every time Mr. Schoenberg attempted to testify regarding the use of 

DDUs (contrary to what the Arbitrator concluded, there were no TCUs supplied on other 

jobs for Adtranz) on other projects, Westcode objected. See, TR/H/pp. 151 & 171. In 
 39 

fact, in connection with the colloquy over an objection to Mr. Schoenberg’s attempt to 

introduce testimony that there were “no DDU problems” on the other BART contract, the 

C-2 project, the fact that the case was about contract specific express warranties, not 

merchantability, was expressly made. TR/H/p. 173. Professor Anderson’s example 

about the red table and green table was even part of the colloquoy. Id. 

Westcode ordered a “red table”. At best, Sixnet delivered a “green table”. 

Whether the Arbitrator thought that the “green table” was as good as or better than the 

“red table” is irrelevant. As Professor Anderson, and caselaw, recognizes, Westcode 

was not required, indeed was not permitted, to accept anything other than a “red table” 

regardless of how well made a red table might be. Anderson, Uniform Commercial 

Code, § 2-314:56 at 163 (1983)); see also, Michael v. Shiley, Inc., 46 F.3d 1316, 1331 

(3d Cir. 1995), cert. den. by 516 U.S. 815, (applying Pa law) (product need not be 

defective to be considered breach of express warranty); Carl Beasley Ford, Inc. v. 

Burroughs Corp., 361 F.Supp. 325, 331 (E.D. Pa. 1973), aff’d 493 F.2d 1400 (3d Cir. 

1974) (noting that warranty is breached if seller’s product fails to conform to promised 

result). 

iv. Assuming, Arguendo, the Case 

Was an Implied Warranty , as 

Opposed to an Express 

Warranty Case, the 

Arbitrator’s Conclusions That 

Essentially Identical Product 

Was Incorporated Into the 

SEPTA Job is Wrong. 

Factually, contrary to what the Arbitrator may contend, the unrefuted record 

established that the Sixnet products supplied on the SEPTA job were not “successfully 
 40 

integrated” into the SEPTA job. As with the job in question in this case. The record 

quite clearly showed that Sixnet product supplied on the SEPTA job had to be scrapped 

and replaced. Even if the performance of health monitors for SEPTA was relevant to 

whether the DDUs and TCUs complied with the BART specifications, the evidence was 

that the SEPTA health monitors were, indeed, just as unacceptable as the BART 

products. 

v. The Conclusion that the Sixnet 

Subassemblies Were All 

Tested Completely Ignores 

That Sixnet Destroyed All Of 

The Test Results

Lastly, the conclusion that the sub-assemblies were “successfully tested as [sic] 

Sixnet” flies in the face of the fact that Sixnet destroyed those testing documents. 

Sixnet admitted that it used non-conforming components. Sixnet claimed that those 

components were tested. The testing results, indeed documents showing which 

components themselves were actually tested, were never produced. Without those 

documents Sixnet could not possibly be deemed to have sustained its burden to prove 

that its components satisfied the contract specifications. Any finding to the contrary 

sandbags Westcode. 

The error in the Arbitrator’s analysis, and the prejudice suffered by Sixnet’s 

destruction of critical documents, cannot be more clearly established then the 

Arbitrator’s conclusion that the components were successfully tested by Sixnet. 
 41 

vi. Assuming, Arguendo, That The 

Contention That The 

Commercially Rated 

Components Had All 

Successfully Been Qualified To 

Perform At The Required 

Temperature Extremes, 

Qualification Testing Was Not 

Permitted Under the Contract.

The BART Conformed Contract, Article T.17.1.B.2, provided the following 

regarding the required performance specifications of the electronic components 

(emphasis added): 

2. Electrical, electronic and electromechanical parts 

selection: Selection for parts for contract hardware 

shall be made on basis of suitability for their 

applications, proven ability to comply with 

requirements of the Contract Documents and 

availability from at least two Suppliers. Additionally, 

like parts shall be interchangeable without selection 

or screening. 

Not only was screening and qualification testing expressly prohibited, but the contract 

expressly required that components in the products be rated, in the first instance, on 

the basis of their respective manufacturer data sheets, to perform to the contract 

temperature specifications. See, the BART Contract, Article 17.9.A.1.a & TR/H/pp. 155 

& 609. 

In that regard, the contract provided as follows: 

17.9 ELECTRICAL MATERIALS

A. Electrical, Electronic, and Electromechanical Parts 

Requirements 

1. Specifications 
 42 

a. Each electrical, electronic 

and electromechanical 

part shall be selected and 

controlled on the basis of 

manufacturers data 

sheets, catalog cuts, or 

control drawings that 

identify the parts physical, 

environmental, and 

performance requirements 

as well as quality and 

reliability requirements, 

including inspections and 

tests for qualification and 

acceptance, and lot 

sampling where required. 

Even if the components had been tested to perform at 20° F, such testing was 

prohibited. The contract required that components be selected on the basis of 

manufacturer ratings, not Sixnet qualification testing. 

In finding that the contention that the Sixnet subassemblies were non-compliant 

was “false”, the Arbitrator applied the theory of warranty law that had nothing to do with 

the case. The Arbitrator also based his decision on facts that were not only not 

supported by the record, but contrary to unrefuted portions of the record. Assuming, 

arguendo, that the facts relied upon by the Arbitrator to reach his conclusion were 

correct, or even supported by the record, the Arbitrator misstated or misapprehended 

the significance of those alleged facts in light of clear and unambiguous, and 

undisputed for that matter, contract language. 

The facts relied upon by the Arbitrator and the conclusions that he deduced 

therefrom, were subject to extensive post-arbitration briefing. The Arbitrator’s errors, 
 43 

therefore, cannot be considered mere mistakes, but rather must be the product of a 

manifest disregard of the record and the law. The Arbitrator also, by ignoring the theory 

of the case, and by misstating facts and misapplying the law, and ignoring the contract, 

breached the obligations imposed upon him by the parties’ Arbitration Agreement, so 

imperfectly executed those obligations, and exceeded the powers given to him under 

the parties’ Arbitration Agreement as to require that the Award be vacated. 

2. Assuming, Arguendo, that there is any Question 

Regarding Whether Sixnet’s Products Conformed to the 

Contractual Temperature and Component Selection 

Specifications, the Arbitrator Exceeded His Powers or 

so Imperfectly Executed them, by Permitting Sixnet to 

Even Attempt to Prove the Design of its Product 

Through Anecdotal Testimony After Sixnet had 

Destroyed all the Critical Design and Production 

Records That Westcode was Denied a Fundamentally 

Fair Hearing

Sixnet’s assemblies admittedly contained components that did not conform to 

the contract specifications. Sixnet refused, for so-called “business reasons”5 to produce 

 5

After receiving the August 31, 1998 letter, Mr. Schoenberg testified that he knew 

that there was an issue regarding the component selection criteria for his products. He 

admitted that Westcode was entitled to know the specifications of the components used in 

his products. TR/H/p. 223. His only response as to why the information was not produced 

was because he did not considered it to be “an appropriate time”. Id. at 223. Mr,. 

Schoenberg testified: 

I made a conscious decision that we were not going to respond 

by doing that engineering work for no compensation”. 

Mr. Schoenberg contends that he relied on manufacturers to certify the components to 

operate within the proper temperature range. TR/H/p. 370. The problem with that, is, 

however, that in a job such as this he may have been called upon, and in fact was called 

upon, to substantiate whether the components he used were contract compliant. It is no 
 44 

any documentation regarding the temperature ratings or selection of the components in 

its products during the contract period. Sixnet then commenced this litigation, knowing 

full well that the temperature ratings of these components would be at the crux of this 

case, and destroyed those documents. 

The crux of this case revolved around the components used in the design and 

production units produced by Sixnet. Neither the First Articles nor the production units, 

were available for inspection in this case. 

 

excuse in such a situation to say that the components are compliant because the 

manufacturer said so. When the lives and the health and the safety of passengers are 

involved on high speed rail cars, the parties in question have the right to expect more. 

They have the right, and in fact the contract provided, that documentation was to be 

provided. It was not. 

It was an extreme miscarriage of justice which resulted in a fundamentally unfair 

hearing to permit Sixnet to even attempt to prove the design and production of its 

products in litigation that it commenced, after allowing Sixnet to destroy the design and 

production documents. It was an extreme travesty of justice, in light of unrefuted 

physical evidence that clearly showed not only the use of components of variable 

grades, manufacturer and even country of origins on the products, for the Arbitrator to 

infer, based on nothing more than the rank, anecdotal testimony of a clearly interested 

witness, that Westcode was complicit in Sixnet’s component substitution and variation. 

The Arbitrator in regards to Westcode’s motions for spoliation misapplied the law, 

failed to enforce Westcode’s rights under the Arbitration Agreement, allowed the entire 
 45 

proceeding to be corrupted, and devastatingly prejudiced Westcode’s rights. 

Separate and apart from discovery sanctions is the evolving common law rule 

that a spoliator of key evidence is punished in some form usually involving the striking 

of its pleading. DiDomenico v. C&S Aeromatik Supplies, Inc., 252 A.D.2d 41, ____, 

682 N.Y.S.2d 452, 459 (2d. Dept. 1998); and Yi Min Ren v. Professional Steam 

Cleaning, Inc., 271 A.D.2d 602, ___, 706 N.Y.S.2d 169-170 (2d. Dept. 2000).6 The 

sanction applies even if the destruction occurred through negligence, as opposed to 

wilfulness, if the spoliator is on notice that the evidence might be needed for future 

litigation. DiDomenico, supra at ___, 682 N.Y.S.2d at 459. 

Spoliation sanctions...are not limited to cases where the 

evidence was destroyed wilfully or in bad faith, since a 

party’s negligent loss is can be just as fatal to another 

party’s ability to present [a case or] a defense. 

Squitieri v. City of New York, 248 A.D.2d 201, ___, 669 N.Y.S.2d 589, ___ (1st Dept. 

1998). As the Court in DiDomenico noted: 

 6

Pennsylvania law is generally in accord with New York law on the issue of spoliation. 

 See, Troup v. Tri County Confinement Systems, Inc., ___ Pa.Super. ___, ___, 708 A.2d 

825, 828 (1998); and Cohen v. Chateau at Camelback, 37 Pa. D.&C.4th 317, 321 (Mon. 

1997). 

Where...one party has destroyed critical...proof, such that it’s 

opponents are “prejudicially bereft of appropriate means to 

[either present or] confront a claim with incisive evidence”, 

the spoliator’s pleading is properly stricken in order to 

obviate a trial that is based on a rank swearing contest. 
 46 

DiDomenico, supra at ___, 682 N.Y.S.2d at 459-460. 

It is has been repeatedly held that the spoliation of an original document will 

prevent the spoliator from proving the contents of the destroyed document by 

secondary evidence. People v. Betz, 272 A.d 737, ___, 74 N.Y.S.2d 791, 795 (1st Dept. 

1947) (collecting cases). The loss or destruction of key evidence before it can be 

examined by the opposing party warrants a dismissal, or at the very least the preclusion 

by that party from offering evidence as to what was destroyed. See, Squitieri, supra at 

___, 669 N.Y.S.2d 591. 

None of the critical design or production documents were produced in this case 

despite clear and unequivocal notice that Sixnet was in breach of the Supply 

Agreements by reason of the non-compliant components as early as August 31, 1998, 

and despite Sixnet’s own institution of litigation. This case obviously turned out to be a 

“rank swearing contest”. 

It was Sixnet’s burden to prove that its products satisfied the contractual 

temperature specifications. See, Borman’s, Inc. v. Olympic Mills, Inc., 1993 WL 

1890344, p. 4 (S.D.N.Y.) (N.Y. law). Sixnet admitted that it used components that were 

not properly rated. Sixnet offered nothing more than anecdotal testimony that the rating 

notwithstanding, the components were compliant with contract temperature 

specifications because of some alleged undefined design phase qualification testing. 

Even if qualification testing were permitted, there are no documents from Sixnet which 

could ever identify, let alone prove, which non-compliant components, in which batches 

of shipped product, were allegedly tested. Just as important, however, there was no 

way that Westcode could even explore the anecdotal testimony about the results of any 
 47 

alleged qualification testing. Alleged qualification testing, if it occurred, is not an excuse 

to use substandard components. Assuming, arguendo, such testing could support the 

use of substandard componentry, there was no way Westcode could possibly have 

refuted bald anecdotal testimony that such testing actually occurred in this case. 

Westcode was prejudicially bereft of any way to confront Sixnet’s arguments with 

incisive evidence. 

In this case, the sanction of striking Sixnet’s pleadings i.e., dismissing its claims 

against Westcode was not only completely warranted, but it was required to insure 

fairness to the parties. First, without design and production records, Sixnet could not 

sustain its burden of proving that its subassemblies were contract compliant. Just as 

important, however, Sixnet had actual knowledge that its use of substandard 

componentry would play a prominent role in, and was key to, Westcode’s claims and 

defenses. Sixnet refused to produce information relating to its decision to use such 

components during the term of the contract and, well after initiating this litigation, 

allegedly permitted such information to be destroyed knowing full well that it was key to 

Westcode’s claims and defenses. 

Westcode’s prejudice was obviously substantial. The Arbitrator actually relied on 

the anecdotal testimony of interested witnesses (Mr. Schoenberg in particular) that the 

components had be qualified and that Westcode was complicit in their use on the First 

Article. Based on these “conclusions”, the Arbitrator then found that the claim that the 

subassemblies were non-compliant was “false”. 

It was wrong of the Arbitrator to allow Sixnet to prove the design of complex 

electronic subassemblies with nothing more than anecdotal testimony from its President 
 48 

that the subassemblies were contract compliant. Despite admissions that commercially 

rated components were used in the subassemblies, no Sixnet witness could identify 

where they were used, when they were used, why they used or how many of them were 

used. In addition, even if qualification testing was permitted, no Sixnet witness could 

identify whether or how the commercially rated components were qualified. The 

Arbitrator should never have permitted Sixnet to sustain its burden to prove the design 

of its product without any incisive evidence regarding the design. It was, however, a 

miscarriage of justice for the Arbitrator to have credited such self-serving testimony 

when, because of Sixnet’s document destruction, Westcode was denied any 

meaningful evidence with which the self-serving anecdotal testimony of Sixnet could 

even be probed, let alone challenged. 

In denying Westcode’s spoliation motion, the Arbitrator allowed Sixnet to destroy 

the critical evidence in this case and to corrupt the proceeding. The Arbitrator also 

ignored the law, denied Westcode any meaningful opportunity to present its defenses, 

exceeded his powers and/or so imperfectly executed his powers as to require that the 

Award be vacated. 
 49 

3. Assuming, Arguendo, that Sixnet’s Delivery of NonConforming Products Did Not Entitle Westcode to 

Cancel the Purchase Orders, the Arbitrator Exceeded 

His Powers and/or So Imperfectly Executed Them, By 

Awarding Lost Profits and Interest 

a. Lost profits Were Not Permitted Under the 

Contract Documents Because of the 

Termination-For-Convenience Clause 

Contained in the Contract Documents 

Westcode was justified in canceling the Sixnet purchase orders in their entirety 

because of Sixnet’s faulty performance and its breach of the contractual specifications. 

 Under such a scenario, Sixnet is entitled to no damages. Even if one were to assume, 

however, for purposes of argument, that Sixnet’s performance was exemplary, 

Westcode is obligated for no more than convenience type damages - i.e., recovery of 

costs incurred for such things as unused, contract compliant, inventory. Sixnet was not, 

even if one assumes that Sixnet’s performance was praise worthy, under any 

circumstances, entitled to allegedly lost future profits.

Because the Supply Agreements expressly incorporate the terms of the BART 

Conformed Contract, all of the provisions contained therein, including the terminationfor-convenience clause, were part of the parties’ contractual undertaking. Sixnet did not 

contest this point during the arbitration or in post-arbitration briefs. See, Sixnet’s Reply 

to Westcode’s Proposed Findings of Fact and Conclusions of Law, pp. 6-7. 

The record in this case establishes that Adtranz would not have done business 

with Sixnet because of Sixnet’s faulty performance and lack of cooperation. Pursuant 
 50 

to the termination-for-convenience rights in the Adtranz contract, Adtranz took over the 

TCU and DDU portions of the Westcode purchase orders. 

As of January 19, 1999, Westcode no longer had a need for TCUs and DDUs for 

the A and B car project. By virtue of its poor performance, lack of cooperation and the 

express incorporation of the prime contract into the TCU and DDU Supply Agreements, 

Sixnet is limited to termination-for-convenience-type damages which, in this case, 

would be for costs actually incurred for allegedly unuseable inventory. 

In general, a termination-for-convenience clause permits one party to terminate a 

contract even in the absence of fault or a breach by the other party without suffering the 

consequences of a breach of contract. See, A.J. Temple Marble Co. v. Long Island 

Rail Road, 256 A.D.2d 526, 527, 682 N.Y.S.2d 422, 423 (2d Dept. 1998); Harris Corp. 

v. Giesting and Assoc., Inc., 297 F.3d 1270, 1272-1273 (11th Cir. 2002). Mr. 

Schoenberg, who admitted to having done a fair amount of government work, was very 

familiar with termination-for-convenience provisions. Termination-for-convenience-type 

terminations permit the terminated party to be compensated only for costs incurred plus 

a reasonable profit on work performed - but do not allow the recovery of anticipated 

profits. E.g., Dart Advantage Warehousing, Inc. v. United States, 52 Fed.Cl. 694, 709 
 51 

(Fed. Cl. 2002).7

 7

As noted by the Supreme Court in A.J. Temple Marble & Tile Co. v. Long Island Rail 

Road, 172 Misc.2d 422, 659 N.Y.S.2d 412, 414 (Queens Cty. 1997), aff’d in part by 256 

A.D.2d 526, 682 N.Y.S.2d 422 (2d Dept. 1998), the authority on termination-forconvenience clauses has developed mainly in the Federal courts because the clauses are 

found mostly in government contracts. Thus, the Court in A.J. Temple Marble & Tile noted 

that courts should look primarily to Federal case law for guidance on that clause. New 

York law, in fact, is not contrary to the law that has developed in the Federal courts over 

the import of a termination-for-convenience clause. 

It is universally recognized that a party to a contract, who has a right to cancel or 

terminate a contract may assert that right at any time even though it was not asserted at 

the time of the breach. E.g., College Point Boat Corp. v. United States, 267 U.S. 12, 

15-16 (1925); First Commodity Traders, Inc. v. Heinold Commodities, Inc., 766 F.2d 

1007, 1013 (7th Cir. 1985); Ashcraft & Gerel v. Coady, 244 F.3d 948, 952 (D.C. Cir. 

2001); A/S Dampskibbesettskabet v. U.S., 64 F.Supp.2d 298, 313 (S.D.N.Y. 1999); and 

Restatement (2d) of Contracts, § 385 comment (a) (1981). See also, Daniel E. Terreri 

& Sons, Inc. v. County Brd. of Comm., 152 Ohio App.3d 95, ___, 786 N.E.2d 921, 934 

(2003). 

A party who is sued for breach of such a contract may defend on the grounds that 

there existed, at the time of the alleged breach, a legal excuse for non performance even 

though he may have been unaware of that fact at the time. E.g., College Point Boat 
 52 

Service, supra. In the context of a contract which contains a termination-for-convenience 

clause, the aforementioned principle of contract law is referred to as a “constructive 

termination-for-convenience”. This principle allows an actual breach to be retroactively 

justified. E.g., Linan Faye Construction Co., Inc. v. Housing Authority of the City of 

Camden, 49 F.3d 915, 923 (3d Cir. 1995). 

The universally recognized effect of a termination-for-convenience clause in a 

contract is to moot all breaches of contract claims and to limit recoveries to costs. E.g., 

Kalvar Corp. v. U.S., 543 F.2d 1298, 1304-1305 (Ct. Cl. 1976) cert. den. 434 U.S. 830 

(1977). See also, Linan Faye, supra at 924; Inland Container, Inc. v. United States, 512 

F.2d 1073, 1080 (Fd. Ct. Cl. 1975) (though contract breached, plaintiff not entitled to lost 

profits because contract contained a termination for convenience clause); and A.R. Sales 

Co., Inc. v. U.S., 49 Fed. Cl. 621, 630 (Fed. Cl. 2001) (well settled that presence of 

termination for convenience clause restricts damages recoverable for breach to damages 

which would have been allowed under termination for convenience clause had it been 

invoked). There is little question but that a deteriorating business relationship justifies a 

termination for convenience. Id. at 925-926. 

The Adtranz/Westcode relationship and the Westcode/Sixnet relationship were both 

subject to discretionary terminations for convenience. There is no dispute that the 

Westcode/Sixnet relationship had deteriorated. Adtranz in fact terminated all three 

Westcode purchase orders - DDU, TCU and all. Westcode had the contractual right, even 

if Sixnet was not in breach, default or violation of the contracts, to terminate Sixnet. 

Westcode was justified in canceling the Sixnet purchase orders in their entirety 

because of Sixnet’s faulty performance and its breach of the contractual terms and 
 53 

specifications. Under such a scenario, Sixnet was entitled to no damages. Even if one 

were to assume, however, for purposes of argument, that Sixnet’s performance was 

exemplary, Westcode was obligated for no more than convenience type damages - i.e., 

recovery of costs incurred for such things as unused, contract compliant, inventory. Sixnet 

was not, even if one assumes that Sixnet’s performance was praise worthy, under any 

circumstances, entitled to allegedly lost future profits as the Arbitrator awarded. 

The Arbitrator clearly applied remedies in this case that were not permitted. The 

Arbitrator completely disregarded, in fact ignored the termination-for-convenience clause 

which even Sixnet acknowledged to be part of the parties’ Agreement. The effect of a 

termination-for-convenience clause in an agreement again, which was not disputed by 

Sixnet, is to preclude the recovery of lost profits in the event of a termination. Despite 

extensive briefing on the issue, the Arbitrator completely ignored it and awarded lost profits 

to Sixnet anyway. Not only did the Arbitrator fail to interpret the contract and fail to 

interpret and apply the law in regards to the termination-for-convenience clause, but since 

there was so much extensive briefing on the issue it can only be concluded that the Award 

of such a remedy was in manifest disregard of the law. 

b. The Arbitration Agreement Did Not Permit 

The Arbitrator to Award Interest In Lost 

Future Profits

The remaining portion of the Award consists of interest in the amount of 

$164,122.11. Quite clearly, ADR Rule, number 13,8

 which the Arbitration Agreement 

 8

In pertinent part, ADR Rule 13 provides: 
 54 

required the Arbitrator to apply, restricted the Arbitrator’s ability to award interest or delay 

damages. The Award, to the extent of the delay damages, is improper for that reason as 

well. 

The ADR Options Rules which were incorporated by reference into the terms of the 

Arbitration Agreement, quite clearly prohibit the Arbitrator from issuing an award based on 

interest. In so doing in this case, the Arbitrator ignored his own rules and the rules of his 

arbitration body. Accordingly, in awarding the remedy of lost future profits, and interest on 

those profits, the Arbitrator exhibited a manifest disregard for the law, exceeded the powers 

given to him by virtue of the parties’ Arbitration Agreement and/or so improperly executed 

the powers given to him as to warrant that the Award be vacated. 

4. The Award is so Replete With Conclusions That Ignore 

The Record and The Law As To Show That The Arbitrator 

So Imperfectly Executed His Powers That The Award 

Should Be Vacated

 

No monetary award shall be imposed for delay damages or 

interest, unless all parties agree, in advance and in writing, that 

the prevailing party would be entitled to such an award. 

In addition to what is set forth above, there are other numerous errors in the Award. 

 For one, the Arbitrator concluded that Adtranz terminated the BART suspension contract 

on the basis of Westcode’s performance. (Arbitrator’s Findings of Fact, ¶ 5(j)). In fact, that 

statement is not true. Kenneth Kelsey, the contract administrator for Adtranz, testified that 

the primary cause for Adtranz’ termination of Westcode was Sixnet’s performance. 

TR/Kelsey/pp. 12 & 22. 
 55 

The Arbitrator placed great weight on the “Denial of Breach” provision in the August 

21, 1998 Modification Agreement. The Arbitrator’s conclusion there suffers from fatal legal 

and factual flaws. 

Legally, of course, the denial of breach provision is not a release. Further, it is 

expressly stated in that provision that the agreement itself may not be utilized as evidence 

in any proceedings arising out of the BART project - which is exactly what the Arbitrator 

did. 

Factually, however, the unrefuted record shows that the complaints about noncompliant components did not manifest themselves until after August 21, 1998. Mr. 

Zuber’s initial report was not even circulated within Adtranz until August 13, 1998. 

Defendant’s Exhibit 26. That report, of course, triggered additional investigations by 

Brandywine Management which were not presented until September 23, 1998. 

Defendant’s Exhibit 27. That report was provided to Mr. Schoenberg on September 24, 

1998, nearly one month after the execution of the Modification Agreement. Assuming, 

arguendo, that the denial of breach language was legally meaningful, it clearly can not be 

interpreted to have contemplated the issue which is at the heart of this case. 

The Arbitrator also questioned the credibility of Westcode’s complaints about the 

compliance of Sixnet’s product by pointing to certificates of compliance that Westcode 

issued to Adtranz along with the product. (Arbitrator’s Conclusions of Law ¶ 29). The 

Arbitrator suggested that this was proof of the Sixnet products’ “complete compliance with 

all Westcode specifications and all the requirements contained in the relevant contract”. 

The Arbitrator completely overlooked, however, that the Sixnet product was so 

blatantly non-conforming that Westcode’s customer, Adtranz, would not accept it. 
 56 

TR/Kelsey/ pp. 14-15. Rather, the unrefuted evidence established that Adtranz allowed the 

product to be delivered and installed in HVAC units under the condition that they would all 

ultimately be replaced. Id. The unrefuted record clearly establishes that the so-called 

certificates of compliance in fact were accompanied by rejection reports not only 

memorializing the conditional nature of the “acceptance” but also detailing, literally, 95 

different reasons for rejection. Defendant’s Exhibit 76. 

The Arbitrator concluded that Westcode’s professed concern over the components 

that were being used in the Sixnet products was a subterfuge. (Arbitrator’s Conclusions of 

Law, ¶ 5(e)). The Arbitrator based his conclusion on the supposed fact that, on October 

13, 1998, the same day Westcode entered into an agreement with PCI, to manufacture the 

Sixnet products, Westcode demanded documentation “by Sixnet’s vendors of their 

component parts for the Sixnet assemblies”. (Arbitrator’s Findings of Fact, ¶ 51) The 

Arbitrator argued that such a demand had never been made prior to that date, would have 

required Sixnet to research years (if not decades) of materials related to its products and 

might or might not have been able to satisfy as the information requested was “proprietary 

to Sixnet’s vendors and not to Sixnet”. The unrefuted record is vastly different than the 

conclusions reached by the Arbitrator. 

First, Defendant’s Exhibit 27, a September 24, 1998 letter to Mr. Schoenberg from 

Richard J. Kelly, a Westcode Vice President makes clear that as of that date there was 

grave concern that “components on the boards...[did] not meet the requirements of the 

specifications”. The letter also reminds Mr. Schoenberg that a member of his staff had 

“verbally confirmed that the boards had changed from the approved First Article”. 

The September 24, 1998 letter enclosed in the Brandywine “interim report” on the 
 57 

findings that existed as of that date regarding non-compliant components. The report is 

extensive and in that letter Mr. Kelly advises Mr. Schoenberg: 

As you can see we are in a situation that we need to work 

through this problem as all Sixnet product is now under 

scrutiny. Without the proper documentation (per the Supply 

Agreement) including the rating data on the components, we 

cannot confirm and defend the design or the production units 

on both the TCU and DDU on any of the product delivered to 

date. 

You recognize that we want you to build more units, however 

as much as we need more units we will not pay for units that 

are not spec compliant and we will not accept more units that 

we cannot verify that the product is compliant. 

In that same letter, which was three weeks before PCI was hired, and three weeks 

before October 13, 1998, Mr. Kelly, on behalf of Westcode, then proposed that Mr. 

Schoenberg forward the design data related to the hardware including the component 

selection ratings. Mr. Kelly even offered to send people to Sixnet to assist in the process of 

gathering that material. 

Not only was the Arbitrator wrong in trying to correlate the timing of the request for 

documentation with the date on which PCI was hired, the Arbitrator was also wrong to even 

question the bona fides of the request for documentation. The interim report, which was 

sent to Mr. Schoenberg on September 24, 1998, itself proposed the collection of the design 

data in order to determine the compliance of all of the components used on the Sixnet 

product. Westcode clearly did not create a demand for design data as a subterfuge. 

Westcode was in hot water with its customer, Adtranz, primarily over Sixnet’s 

performance. All of Sixnet’s product was under scrutiny. Sixnet had admitted that its 

production units had deviated from the First Article designs. Westcode was told by 
 58 

Brandywine to gather design documents from Sixnet in order to verify the products. In an 

effort to accommodate its customer, ADtranz, and to work with Sixnet, Westcode made the 

appropriate document requests. The unrefuted evidence in the record showed that there 

was nothing improper about Westcode’s conduct in that regard. 

Many of the facts upon which the Arbitrator relied were mistaken. Several of those 

facts were critical to the reasoning that the Arbitrator used in finding that the components 

were compliant. Without those facts, the Arbitrator’s support for the Award crumbles or is 

nonexistent. In addition, however, even as to non-critical facts, the mere number of factual 

errors made by this Arbitrator establishes a near complete misapprehension of, or even 

disregard for, the record. 

There is no excuse for the number of factual errors made by the Arbitrator that could 

possibly sustain the Award. All of the facts as they related to the Arbitrator’s findings were 

not only contained in a detailed and volumunous record that was transcribed and sent to 

the Arbitrator at the parties’ expense but they were also contained and highlighted for the 

Arbitrator’s benefit in detailed, proposed findings of fact, proposed conclusions of law, and 

other post-arbitration briefs. Other than a manifest disregard for the record, there is no 

excuse for having gotten so many facts wrong, and for having gotten facts so critical to the 

reasoning supporting his decision, wrong. 

The Arbitrator was obligated to proceed in this matter like a judge in a non-jury trial. 

The Arbitrator was, therefore, obligated to base his decision on the record and the 

applicable law. The Arbitrator not only did not base his decision on the law and the record, 

but his decision exhibits a manifest disregard of the record and the law. For that reason 

the Award must be vacated. 
 59 

IV. CONCLUSION

For the reasons stated more fully above, the Plaintiff, Westcode, Inc., respectfully 

requests that the July 13, 2003 Award from ADR Options, Inc. be vacated in its entirety. 

Respectfully submitted, 

PHILLIPS & CAMPBELL, P.C.

____________________________________ 

Patrick C. Campbell, Jr. 

ID No. 53350 

314 N. Middletown Road 

Lima, PA 19037 

610/548-7100 

Attorneys for Plaintiff 

Dated: September 5, 2003