Ninth Circuit to Arbitrator: You can’t do that, even here in arbitration nation.

At one time, some courts didn’t think arbitration was the right way to resolve disputes.  Arbitrators didn’t need to be lawyers, and they often didn’t approach  things the way a court would.  To those used to the way courts decide disputes, arbitrators’ way of deciding disputes could seem, well, arbitrary.  And so, many courts were hostile to arbitration.  Yet, many businesses felt they needed a quicker and less expensive way to resolve disputes and move on. 

Permitting arbitration and limiting review

So, Congress passed the Federal Arbitration Act (FAA), 9 U.S.C. § 1, et seq. In 1925.  The FAA applies in both state and federal courts so long as interstate commerce is involved, which it usually is.    Under the FAA, agreements to arbitrate are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation any contract.”  9 U.S.C. § 2.  This confirmed arbitration as a legally acceptable way to resolve disputes. 

The FAA also limited the grounds on which courts could overturn an arbitration award.  Those grounds include things like corruption, fraud, evident partiality of arbitrators, or that arbitrators refused to hear pertinent and material evidence.  9 U.S.C. § 10.  They also include exceeding arbitrators’ powers or exercising them so imperfectly that a final and definite determination of the dispute submitted was not made. Id.    

Not included are erroneous legal conclusions or unsupported fact finding.  Many courts have held that, as the Eighth Circuit put it, so long as “the arbitrator is even arguably construing the contract and acting in the scope of his[ or her] authority,” a court reviewing the award must confirm it. Gas Aggregation Services, Inc. v. Howard Avista Energy, LLC, 319 F.3d 1060,1064 (8th Cir. 2003).  The Ninth Circuit has stated this another way.  Arbitrators “exceed their powers,” thus requiring a court to vacate an award, when the award is ‘completely irrational.” Kyocdera  Corp. v. Prudential-Bache Trade Services, Inc., 341 F.3d 987, 997 (9th Cir. 2003). 

The limited role courts play in policing arbitration awards may surprise people used to resolving disputes in court.  But, if the idea is to make sure arbitration is faster and less expensive than litigation, discarding appellate review of the arbitrator’s fact finding and legal conclusions makes sense.

Given the great deference courts provide arbitration awards, it is worth noting when an award is overturned.  Which brings us to a recent Ninth Circuit decision, Aspic Engineering & Construction Co. v. ECC Centcom Constructors, LLC No. 17-16510 (9th Cir., Jan. 28, 2019). 

The case of the subcontractor and the government regulations

The EEC defendants had prime contracts with the U.S. Army Corps of Engineers for construction of buildings and facilities in Afghanistan.  Those contracts, as would be expected, incorporated the Federal Acquisition Regulations.  The plaintiff, Aspic, was a subcontractor.  Its contracts with ECC had  clauses stating that it owed ECC the same obligations to follow the acquisition regulations as ECC owed to the government and had “Pay when/if Paid” clauses. 

The federal regulations allowed the Army Corps of Engineers to terminate contracts for convenience, which it did for two projects on which Aspic was the subcontractor.  ECC then terminated its subcontracts with Aspic.   Aspic made a submission for payment of its expenses.   Some of its documentation was handwritten, not translated to English, and used dates from the Islamic calendar, apparently in violation of the federal acquisition requirements.  Eventually, the Corps of Engineers did audits of the two projects and found that ECC had overpaid Aspic on one project and decided that the government had already adequately compensated ECC and its subcontractors for the other.  ECC thus refused to pay any more to Aspic.

After trying unsuccessfully to settle its dispute over payment, Aspic filed for arbitration.  The arbitrator awarded Aspic over $1 million.  But the district court vacated the award because the Arbitrator had  “voided and reconstructed parts of the Subcontracts based on a belief that the subcontracts did not reflect a ‘true meetings [sic] of the minds.’”

Aspic appealed to the Ninth Circuit.  The Ninth Circuit noted the deferential standard for reviewing arbitration awards, stating “[n]either erroneous legal conclusions nor unsubstantiated factual findings justify federal court review of an arbitral award under the FAA.”  It further noted review is “both limited and highly deferential.” 

Then it found the district court was right to vacate the award.

Completely irrational

The Ninth Circuit noted that the FAA’s ground for vacating an award where arbitrators exceed their powers is met where the award is “completely irrational.”  And, it said this award was because it didn’t “draw its essence from the agreement.”   

The arbitrator had decided that Aspic, as an Afghanistan subcontractor inexperienced with U.S. federal government work, could not be expected to conform to the “strict and detailed requirements “ placed on general contractors for U.S. Federal projects.  Because Aspic could not reasonably have been expected to modify its local business practices to conform to U.S. government contracting practices, there was not a “true meeting of the minds,” when Aspic entered into the agreements.  So, the arbitrator wouldn’t hold Aspic to those standards.   Instead, Aspic was entitled to conduct its business in a “manner normal to Afghanistan.”  To do otherwise, the arbitrator said, would be unjust.

The Ninth Circuit concluded that the arbitrator had disregarded contract provisions to achieve a desired result.  And that the arbitrator could not do.

In summing up, the court observed that  “[w]e 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.”

What does it mean?

The court focused primarily on disregard of the written language of the contract.  But what of the arbitrator’s finding that there hadn’t been a “meeting of the minds?”  We all remember from our law school contracts class that a meeting of the minds is a requirement for finding an agreement exists.  Couldn’t the arbitrator’s decision be considered an unsupported factual finding leading to an erroneous legal conclusion that the parties had not agreed to incorporate the onerous federal regulations and practices into their contract?  If so, that isn’t a ground to overturn the award.

Maybe.  The court dealt with this at least indirectly by noting that neither party argued the regulations were not incorporated into the contract.  And yet, arbitrators typically aren’t bound to simply adopt the arguments of one party or the other.

Living in “arbitration nation”

The answer to what the court was up to  may be found in the court’s observation that we have become an “arbitration nation.”*  It also noted that that government contracting regulations are important to getting the work of the U.S. done.  A rogue arbitrator, the court implied, should not be in a position to undermine this whole regulatory scheme.

Which brings us to a final point.  After reading cases where arbitration awards are vacated, one may well conclude that, when an arbitrator does something that seems fairly far out of bounds, a court will find some way to fix it.  It may even stretch a little to do that. That may not always be perfectly in sync with strict legal standards.  But it  should make some of us at least a little more comfortable to be living in an arbitration nation.

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  • Perhaps the Ninth Circuit is familiar with the excellent blog by Liz Kramer, analyzing recent decisions and trends in arbitration law.  It is name  — you guessed it — “Arbitration Nation.”  Check it out at arbitrationnation.com.

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