Court Opinion

ID: 4362448
Source: CourtListenerOpinion
Date Created: 2019-01-28 18:01:18.302156+00
Date Added: 2024-06-11T14:48:35.321448
License: Public Domain

FOR PUBLICATION

   UNITED STATES COURT OF APPEALS
        FOR THE NINTH CIRCUIT

 ASPIC ENGINEERING AND                             No. 17-16510
 CONSTRUCTION COMPANY,
                 Plaintiff-Appellant,                D.C. No.
                                                  4:17-cv-00224-
                      v.                               YGR

 ECC CENTCOM CONSTRUCTORS
 LLC; ECC INTERNATIONAL LLC,                          OPINION
             Defendants-Appellees.

      Appeal from the United States District Court
         for the Northern District of California
    Yvonne Gonzalez Rogers, District Judge, Presiding

          Argued and Submitted December 17, 2018
                  San Francisco, California

                     Filed January 28, 2019

  Before: MILAN D. SMITH, JR. and JACQUELINE H.
   NGUYEN, Circuit Judges, and JANE A. RESTANI, *
                       Judge.

             Opinion by Judge Milan D. Smith, Jr.

     *
       The Honorable Jane A. Restani, Judge for the United States Court
of International Trade, sitting by designation.
2    ASPIC ENG’G & CONSTR. V. ECC CENTCOM CONSTRUCTORS

                          SUMMARY **

                            Arbitration

    The panel affirmed the district court’s order vacating
under the Federal Arbitration Act an arbitration award
concerning the termination for convenience of two
subcontracts for the construction of buildings and facilities
in Afghanistan.

    The subcontracts were in support of defendants’ prime
contracts with the U.S. Army Corps of Engineers. The
subcontracts incorporated by reference Federal Acquisition
Regulation (“FAR”) clauses governing termination for
convenience, and they contained a clause mandating that
plaintiff, a local company, owed to defendants the same
obligations that defendants owed to the U.S. government.
Voiding parts of the subcontracts, the arbitrator awarded
plaintiff some of its claimed costs despite plaintiff’s failure
to comply with FAR requirements.

    The panel held that, in finding that plaintiff need not
comply with the FAR provisions, the arbitrator exceeded his
powers and failed to draw the essence of the award from the
subcontracts. The arbitrator’s award was “irrational”
because he improperly based his conclusion not on past
practices, but on his rationalization that to enforce the FAR
clauses on plaintiff would be unjust.

    **
       This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
     ASPIC ENG’G & CONSTR. V. ECC CENTCOM CONSTRUCTORS      3

                        COUNSEL

Walt Pennington (argued), Pennington Law Firm, San
Diego, California, for Plaintiff-Appellant.

Joseph G. Martinez (argued), Dentons US LLP, Denver,
Colorado; Andrew S. Azarmi, Dentons US LLP, San
Francisco, California; for Defendants-Appellees.

                         OPINION

M. SMITH, Circuit Judge:

    In this opinion, we review the award to Aspic
Engineering and Construction Company (Aspic) following
arbitration between Aspic and ECC Centcom Constructors,
LLC and ECC International, LLC (together, ECC). ECC and
Aspic entered into arbitration to resolve how much money
ECC owed Aspic after ECC terminated for convenience two
subcontracts it had awarded to Aspic. The arbitrator
awarded Aspic just over $1 million, but ECC sought
successfully to vacate the award in the district court. We
affirm the district court’s vacation of the arbitration award.

  FACTUAL AND PROCEDURAL BACKGROUND

I. The Subcontracts

    In support of its prime contracts with the United States
Army Corps of Engineers (USACE), ECC awarded Aspic
two subcontracts for the construction of various buildings
and facilities in Afghanistan. The first was to be performed
in Badghis province (the Badghis Subcontract). The second
required the construction of a training facility in Sheberghan
province (Sheberghan Subcontract).
4    ASPIC ENG’G & CONSTR. V. ECC CENTCOM CONSTRUCTORS

    The Badghis Subcontract and the Shebergan Subcontract
(together, the Subcontracts) contained terms and conditions
“applicable to all U.S. Government subcontracts.”
Specifically, the Subcontracts incorporated many Federal
Acquisition Regulation (FAR) 1 clauses by reference, or in
haec verba. These clauses included FAR 49.2 through 49.6,
which govern termination for convenience.              The
Subcontracts also contained the following clause mandating
that Aspic owe to ECC the same obligations that ECC owed
to the United States government, as set forth in the FAR
clauses: “The obligations of [ECC] to the Government as
provided in said clauses shall be deemed to be the
obligations of Subcontractor to [ECC].”

    USACE eventually terminated ECC’s prime contract for
convenience on the Badghis project. Days later, ECC
notified Aspic that it was terminating the Badghis
Subcontract for convenience. Understandably, Aspic sought
payment for its expenses. On February 9, 2014, Aspic
submitted its termination settlement proposal for the
Badghis project to ECC. After review, ECC informed Aspic
that the corroborative documents it had submitted in support
of its settlement proposal were inadequate, and Aspic
admitted it did not have many of the required materials.
Nevertheless, ECC eventually submitted its termination
settlement proposal to USACE, and included Aspic’s claim
for $229,915 in termination costs within that proposal.

   Upon receipt of the termination settlement proposal,
USACE notified ECC that it would not pay any of ECC’s
subcontractor termination costs—including the money
Aspic claimed it was owed—until the Defense Contract

    1
      Title 48 of the Code of Federal Regulations contains the FAR
regulations.
        ASPIC ENG’G & CONSTR. V. ECC CENTCOM CONSTRUCTORS             5

Audit Agency had conducted an audit. Following that audit,
USACE informed ECC that it had overpaid Aspic for its
performance under the Badghis Subcontract. In light of that
determination, USACE refused to pay any of Aspic’s
claimed termination costs.

    USACE also terminated ECC’s contract for the
Sheberghan project for convenience. Two days later, ECC
terminated the Sheberghan Subcontract for convenience.

    Aspic again submitted a termination settlement proposal
to ECC, this time requesting $1,032,462. ECC, however, did
not present these claimed costs to the USACE. USACE
eventually issued a no-cost termination settlement between
USACE and ECC—a settlement in which USACE claimed
that the money previously paid to ECC and its
subcontractors, including Aspic, constituted adequate
compensation.

II. Prior Proceedings

    Aspic believed it deserved more money for its efforts
under the Subcontracts. In August 2015, it submitted a
settlement demand for $652,000 on the Sheberghan
Subcontract. ECC refused to pay, so Aspic filed for
arbitration. Aspic again tried to settle the dispute—issuing
settlement offers of $830,000 to ECC Centcom Constructors
and $150,000 to ECC International—but ECC did not accept
either of these offers.

   In accordance with the Subcontracts, the parties
proceeded to arbitration. 2 The Arbitrator issued a Partial
    2
      Part A “General Terms and Conditions” of the Subcontracts
contained provisions requiring arbitration for disputes arising from the
contracts and the application of California law.
6    ASPIC ENG’G & CONSTR. V. ECC CENTCOM CONSTRUCTORS

Final Award, awarding Aspic $1,072,520.90 and holding
ECC Centcom Constructors and ECC International jointly
and severally liable for the total amount. Aspic then sought
attorneys’ fees and costs. Contemporaneously, ECC moved
to reduce the Partial Final Award by Aspic’s waived
damages, and opposed Aspic’s request by arguing that each
party ought to bear its own attorneys’ fees. The Arbitrator’s
Final Award (the Award) incorporated the Partial Final
Award, denied attorneys’ fees and costs, and awarded Aspic
half of the administrative fees and expenses.

    Aspic filed a petition in the Superior Court for San Mateo
County, California seeking to confirm the Award. Aspic
also sought to reverse the Arbitrator’s determination that it
was not entitled to attorneys’ fees. The Superior Court
affirmed the Award and modified it to award Aspic
attorneys’ fees of $435,840, plus all of its arbitration costs.
The Superior Court then denied ECC’s ex parte application
to vacate its prior order.

    ECC removed the case to the Northern District of
California. Before the district court, ECC renewed its effort
to vacate the Award and the Superior Court’s judgment.
Aspic did not oppose ECC’s motion to vacate the Superior
Court’s judgment, and the district court granted that motion.

    The district court then held a hearing on the parties’
motions to vacate the Award and to confirm and correct the
Award. Following the hearing, the district court vacated the
Award. The court held that the Award conflicted with the
contract because the arbitrator “voided and reconstructed
parts of the Subcontracts based on a belief that the
Subcontracts did not reflect a ‘true meetings [sic] of the
minds.’” Aspic moved for reconsideration, which the court
denied. Aspic then timely appealed.
     ASPIC ENG’G & CONSTR. V. ECC CENTCOM CONSTRUCTORS       7

   JURISDICTION AND STANDARD OF REVIEW

    We have jurisdiction pursuant to 9 U.S.C. § 16 and
28 U.S.C. § 1291. The Supreme Court has held that review
of a district court’s decision confirming an arbitration award
“should proceed like review of any other district court
decision finding an agreement between two parties, e.g.,
accepting findings of fact that are not ‘clearly erroneous’ but
deciding questions of law de novo.” First Options of
Chicago, Inc. v. Kaplan, 514 U.S. 938, 948 (1995). We
apply the same standard of review where the district court
vacates an arbitration award. See Aramark Facility Servs. v.
Serv. Emp’s Int’l Union, Local 1877, AFL CIO, 530 F.3d
817, 822 (9th Cir. 2008) (applying de novo review for legal
rulings and clear error for findings of fact).

                        ANALYSIS

    Aspic offers a litany of reasons why the Arbitrator’s
Award was rational. However, that argument ignores our
limited powers when reviewing arbitrated cases. Pursuant to
the Federal Arbitration Act (FAA), we “must” confirm an
arbitration award unless we vacate, modify, or correct the
award as prescribed in 9 U.S.C. §§ 10 and 11. Bosack v.
Soward, 586 F.3d 1096, 1102 (9th Cir. 2009). “Neither
erroneous legal conclusions nor unsubstantiated factual
findings justify federal court review” of an arbitral award
under the FAA. Id. Review of an arbitration award is “both
limited and highly deferential.” Comedy Club, Inc. v.
Improv W. Assocs., 553 F.3d 1277, 1288 (9th Cir. 2009)
(quoting Poweragent Inc. v. Elec. Data Sys. Corp., 358 F.3d
1187, 1193 (9th Cir. 2004)).

    We may vacate an arbitration award where, among other
reasons, “the arbitrators exceeded their powers, or so
imperfectly executed them that a mutual, final, and definite
8    ASPIC ENG’G & CONSTR. V. ECC CENTCOM CONSTRUCTORS

award upon the subject matter submitted was not made.”
9 U.S.C. § 10. We have held that arbitrators “exceed their
powers” when the award is “completely irrational” or
exhibits a “manifest disregard of the law.” Kyocera Corp. v.
Prudential-Bache Trade Servs., Inc., 341 F.3d 987, 997 (9th
Cir. 2003) (internal citations omitted).

    An award is completely irrational “only where the
arbitration decision fails to draw its essence from the
agreement.” Comedy Club, 553 F.3d at 1288 (quoting
Hoffman v. Cargill Inc., 236 F.3d 458, 461–62 (8th Cir.
2001)). An arbitration award “draws its essence from the
agreement” if the award is derived from the agreement,
viewed “in light of the agreement’s language and context, as
well as other indications of the parties’ intentions.” Bosack,
586 F.3d at 1106 (quoting McGrann v. First Albany Corp.,
424 F.3d 743, 749 (8th Cir. 2005)). Under this standard of
review, we decide “only whether the [arbitrator’s] decision
‘draws its essence’ from the contract,” not the “rightness or
wrongness” of the arbitrator’s contract interpretation. Id.
(quoting Pacific Reinsurance Mgmt. Corp. v. Ohio
Reinsurance Corp., 935 F.2d 1019, 1024 (9th Cir. 1991)).

    The question in this appeal, therefore, is not whether the
Arbitrator’s Award was reasonable overall, but whether the
Arbitrator exceeded his powers in finding that Aspic need
not comply with the FAR provisions. We hold that he did.

    In this case, the Arbitrator held, in relevant part:

        The parties entered into two lengthy
        subcontract agreements for the two projects
        which were prepared by ECC and presented
        to ASPIC. Each subcontract included very
        detailed provisions relating to Federal
        regulations governing the work as well as
ASPIC ENG’G & CONSTR. V. ECC CENTCOM CONSTRUCTORS   9

  pass through and ‘Pay when/if Paid’ clauses.
  The subcontracts were somewhat onerous as
  to ASPIC and were clearly drafted to give
  every advantage to ECC. In light of the fact
  that the ASPIC was a local Afghanistan
  subcontractor that had some experience with
  government contracting but not nearly as
  extensive as that of ECC, and in view of the
  fact that the normal business practices and
  customs of subcontractors in Afghanistan
  were more ‘primitive’ than those of U.S[.]
  subcontractors experienced with U.S[.]
  Government work, it was not reasonable to
  expect that Afghanistan subcontractors
  would be able to conform to the strict and
  detailed requirements of general contractors
  on U.S. Federal projects. Notwithstanding
  that expectation, ECC prepared its
  subcontract agreements to require the same
  level of precision and adherence to Federal
  procedures from ASPIC as ECC had toward
  the USACE through the pass through
  provisions of the agreements.

  It was not reasonable that when the parties
  entered into the subcontract agreements, they
  both had the same expectations as to the
  performance of the agreements. ECC could
  not expect that ASPIC would be capable of
  modifying their local business practices to
  completely and strictly conform to the US
  governmental contracting practices that were
  normal to ECC. There was not a true meeting
  of the minds when the subcontract
  agreements were entered. Hence, ASPIC was
10 ASPIC ENG’G & CONSTR. V. ECC CENTCOM CONSTRUCTORS

       not held to the strict provisions of the
       subcontract agreements that ECC had to the
       USACE. This arbitration demonstrated that
       ASPIC conducted its business practices in a
       manner normal to Afghanistan which was
       clearly not the same as a U[.]S[.]
       subcontractor working on a Federal project in
       the U.S. (emphasis added).

    Aspic contends that vacatur of the Award is not
warranted because the Arbitrator did not exceed his powers
in holding that ECC never intended for Aspic to conform
fully to the Subcontracts’ terms. Conversely, ECC argues
that the Arbitrator erred by explicitly disregarding the
Subcontracts’ requirements. The crux of this dispute,
therefore, is whether the Arbitrator improperly strayed from
the plain text of the contract.

    An arbitrator may interpret the contract “in light of . . .
indications of the parties’ intentions” and find that the
parties’ conduct modified the text of a contract. See Bosack,
586 F.3d at 1106. In Metzler Contracting Co. v. Stephens,
for example, we held that an arbitrator acted within his
powers when he concluded that the parties, “through their
acts and conduct,” had waived a portion of the underlying
cost-plus contract. 479 F. App’x 783, 784 (9th Cir. 2012).
We found “plausible” the arbitrator’s interpretation of the
contract despite the contract’s provision limiting the parties’
ability to waive contract provisions. Id. at 784–85.

    What an arbitrator may not do, however, is disregard
contract provisions to achieve a desired result. In Pacific
Motor Trucking Co. v. Automotive Machinists Union, the
arbitrator ruled that the company could not demote an
employee from the Working Foreman position
     ASPIC ENG’G & CONSTR. V. ECC CENTCOM CONSTRUCTORS      11

notwithstanding the fact that the contract granted the
company discretion over the position. 702 F.2d 176, 177
(9th Cir. 1983). We noted that while the arbitrator attempted
to “justify the award on the basis of past practice . . . there
was no practice indicating that the employer lacked
discretion over maintaining the [Working Foreman]
position.” Id. Thus, we held that the district court properly
vacated the award because the arbitrator “dispense[d] his
own brand of industrial justice” by “disregard[ing] a specific
contract provision to correct what he perceived as an
injustice.” Id. (quoting United Steelworkers of Am. v.
Enterprise Wheel & Car Corp., 363 U.S. 593, 597 (1960)).

    Here, the Subcontracts incorporate numerous FAR
provisions, including those that govern termination for
convenience and the settlement procedure. FAR § 52.249-2
sets forth the procedure to be used in the event of termination
for convenience. 48 C.F.R. § 52.249-2. FAR § 49.108-3
requires that each settlement be “supported by accounting
data and other information sufficient for adequate review by
the Government,” and “in general conformity with the
policies and principles . . . in this subpart and subparts 49.2
or 49.3.” 48 C.F.R. § 49.108-3.

    As the district court determined, the Award “conflicts
directly with the [Sub]contract[s].”         The Arbitrator
recognized that the Subcontracts’ pass-through provisions
obligated Aspic to meet the FAR requirements, yet he found
that Aspic “was not held to the[se] strict provisions” based
on Aspic “conduct[ing] its business practices in a manner
normal to Afghanistan.” This finding alone—if based on
past practice—would be insufficient for us to vacate an
arbitral award.

   In arriving at that conclusion, however, the Arbitrator
evaded the pass-through provisions by determining that
12 ASPIC ENG’G & CONSTR. V. ECC CENTCOM CONSTRUCTORS

there was not a true “meeting of the minds” when the parties
formed the Subcontracts because “the normal business
practices and customs of subcontractors in Afghanistan were
more ‘primitive’ than those of U.S. subcontractors,” and
ECC could not expect Aspic to “strictly conform” to United
States governmental contracting regulations. The Arbitrator
then alluded to Aspic’s hand-written receipts written in the
“native language” and the use of dates from the Islamic
calendar. The Arbitrator found that rejecting Aspic’s
supporting materials because they were not translated into
English and the Gregorian calendar “would result in a
forfeiture and unfairness in the resolution of the Aspic
claims.”

    These facts demonstrate that despite finding that the
Subcontracts plainly required Aspic to comply with the FAR
sections, the Arbitrator reasoned that the expectation of a
seemingly less sophisticated contractor complying with
these regulations was unreasonable. Thus, the Arbitrator did
not base his conclusion upon Aspic and ECC’s actual past
procedures, but upon his rationalization that to enforce the
FAR clauses on Aspic would be unjust. This an arbitrator
may not do.

    By concluding that Aspic need not comply with the FAR
requirements, the Arbitrator exceeded his authority and
failed to draw the essence of the Award from the
Subcontracts. The Award disregarded specific provisions of
the plain text in an effort to prevent what the Arbitrator
deemed an unfair result. Such an award is “irrational.”

    Our conclusion is further supported by the fact that
neither party argued that the FAR provisions did not apply
in their arbitration briefs. To the contrary, substantial
portions of the parties’ briefs emphasize the other’s failure
to comply with certain FAR sections: Aspic decried ECC’s
     ASPIC ENG’G & CONSTR. V. ECC CENTCOM CONSTRUCTORS       13

violation of its duty to settle set forth in FAR § 49.108-3, and
ECC contended that Aspic failed to properly present its
settlement costs to ECC pursuant to FAR § 52.249-2.

    We observe that it is a serious matter when an arbitral
award determines that a (sub)contractor need not comply
with the federal contracting regulations when no past
practices demonstrate variation from those requirements.
These regulations, while undoubtedly extensive, permit the
government to maintain fairly uniform contracting standards
in the many contracts it enters into with parties located in the
United States and around the world. See 48 C.F.R. § 1.101
(“The [FAR] System is established for the codification and
publication of uniform policies and procedures for
acquisition by all executive agencies.”).            To allow
contractors and subcontractors, foreign or domestic, to evade
the FAR provisions because a subcontractor was too
unsophisticated or inexperienced to fully understand them
would potentially cripple the government’s ability to
contract with private entities, and would violate controlling
federal law.

                      CONCLUSION

    We have become an arbitration nation. An increasing
number of private disputes are resolved not by courts, but by
arbitrators. Although courts play a limited role in reviewing
arbitral awards, our duty remains an important one. When
an arbitrator disregards the plain text of a contract without
legal justification simply to reach a result that he believes is
just, we must intervene.

    The Arbitrator’s Award in this case was “irrational”
because it directly conflicted with the Subcontracts’ FAR-
related provisions, without evidence of the parties’ past
practices deviating from them, in order to achieve a desired
14 ASPIC ENG’G & CONSTR. V. ECC CENTCOM CONSTRUCTORS

outcome. We therefore affirm the district court’s vacatur of
the Award. Because we affirm the district court, we also
conclude that Aspic’s argument that the Arbitrator erred in
failing to award it attorneys’ fees and arbitral costs is moot.

   AFFIRMED.