Houston Appeals Court Affirms Arbitration Award for Environmental and Other Damages in Oil and Gas Case

Texas’ First Court of Appeals in Houston has affirmed a trial court’s decision to confirm an arbitration panel’s damages award in an oil and gas exploration and production dispute.  In Forest Oil Corp. v. El Rucio Land and Cattle Co., Inc., et al., No. 01-13-00040-CV (Tex. App. – Houston [1st Dist.], July 24, 2014), a property owner, McAllen, sued Forest Oil Corporation over the alleged environmental damage the company caused to his ranch.  According to McAllen, Forest Oil contaminated the soil and water on his property by improperly disposing of hazardous materials such as mercury while exercising its mineral lease on a portion of his ranch.  In addition, McAllen sought damages for personal injuries he purportedly sustained as a result of his exposure to naturally occurring radioactive materials.

After McAllen filed his lawsuit, the oil company sought to compel arbitration based on a prior settlement agreement between the two parties.  McAllen argued the parties’ agreement to arbitrate was unenforceable, and numerous appeals ensued.  Eventually, the Supreme Court of Texas held the arbitration agreement was enforceable. The parties’ case ultimately proceeded to arbitration before a panel of three neutral arbitrators.

Following a 17-day arbitration hearing, the panel issued a 2-1 decision in favor of McAllen.  As part of the arbitral award, McAllen received $15 million in actual property damages, $1 million in other damages, and about $6 million in attorney’s fees.  The oil company was also ordered to conduct remediation on the ranch.  The lone dissenter on the arbitral panel, however, argued that the panel should not have conducted arbitration until the Texas Railroad Commission made a final determination regarding remediation on the property.  Following arbitration, a trial court confirmed the arbitral award and Forest Oil appealed the decision to the First Court of Appeals in Houston.

On appeal, the oil company argued that “the Texas Railroad Commission had exclusive or primary jurisdiction over the dispute.”   Forest Oil also claimed that one of the arbitrators exhibited evident partiality, the arbitrators exceeded their authority, and the award resulted from mistake and a manifest disregard of the law.

The appeals court first examined both primary and exclusive jurisdiction in Texas before dismissing the oil company’s claim that the arbitration panel should not have rendered the award.  The Houston court stated the relevant statutes provided no reason to believe the Legislature tasked the Railroad Commission with primary or exclusive jurisdiction over the subject matter in the dispute.  According to the court,

In sum, there is law, besides the Railroad Commission’s regulations, under which a property owner may seek redress for environmental contamination. We conclude that neither the language of the pertinent statutes nor the Railroad Commission’s extensive regulatory scheme show a legislative intent indicating that the Railroad Commission has exclusive jurisdiction to fashion a remedy for non-regulatory based claims, such as those in this suit. See Subaru, 84 S.W.3d at 223.

In addition, the Court of Appeals held,

While determining Forest Oil’s compliance with regulatory standards is a complex problem within the agency’s purview, making factual determinations to determine whether a party is entitled to a common-law remedy or to declaratory relief is not. Simply because the Railroad Commission might have jurisdiction to determine some facts related to a controversy does not oust a court, or in this case, the arbitrators, of jurisdiction to make the underlying factual determinations. See Amarillo Oil Co. v. Energy-Agri Prods., Inc., 794 S.W.2d 20, 26 (Tex. 1990). We conclude that the Railroad Commission did not have primary jurisdiction as asserted by Forest Oil.

Next, the court discussed Forest Oil’s claim that the trial court should have vacated the arbitral award under both the Texas General Arbitration Act and common-law grounds.  After stating Texas law favors arbitration, the Houston court said,

Forest Oil asserts that the arbitrators should have stayed the arbitration pending final approval of its proposed remediation plan by the Railroad Commission. In support of this issue, Forest Oil relies on the arguments it presented in support of its point asserting that the Award violated the Railroad Commission’s jurisdiction and violated public policy. Because we have found Forest Oil’s jurisdictional and public policy arguments to be without merit, we also conclude the instant point is unmeritorious.

After that, the appeals court deferred to the decision of the trial court as the finder of fact regarding the alleged evident partiality of one of the members of the arbitral panel.  The court also addressed Forest Oil’s claim that the arbitrators exceeded their powers in crafting the award,

We do not decide whether the arbitrators made a correct decision under the law and facts of this case. But we do conclude that the declarations can be read to derive from the wording and purpose of the Surface Agreement. In other words, they are rationally inferable from the contract. Thus, the declarations are not so devoid of support that we could conclude that the arbitrators were merely dispensing their own idea of justice. In sum, the Arbitration Panel did not exceed its authority in rendering the declarations.

Finally, the appellate court dismissed the oil company’s argument that the damages award resulted from gross mistake or a manifest disregard of the law.

Because Forest Oil failed to demonstrate a valid reason for overturning the arbitral panel’s award, Texas’ First Court of Appeals affirmed the trial court’s decision confirming the award.

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