SCOTX Affirms Arbitration Award, Finds No Manifest Disregard of the Law in Oil & Gas Dispute

The Supreme Court of Texas has affirmed a court of appeals’ judgment regarding an arbitration panel’s damages award in an oil and gas exploration and production dispute.  The background for Forest Oil Corp. v. El Rucio Land and Cattle Co., Inc., et al.,  No. 14-0979 (Tex., April 28, 2017), was previously published in a prior blog post:

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 First District of Texas ultimately affirmed the trial court’s decision confirming the arbitration award and Forest Oil filed a petition for review with the Supreme Court of Texas.  On appeal, the following issues were presented to the Texas high court:

1. May an arbitration panel issue an award that invades the exclusive or primary jurisdiction of the Railroad Commission to regulate and control the wastes associated with oil-and-gas operations?

2. Is an arbitrator who is contemporaneously contacted by one of the parties about mediating a related case, but then conceals that contact, evidently partial?

In a 14-page opinion, the Supreme Court of Texas held the Texas Railroad Commission “did not have exclusive jurisdiction over the claims at issue” in the case.  In addition, the court ruled “Because McAllen’s claims are inherently judicial, the doctrine of primary jurisdiction does not apply and vacatur is not warranted for failure to abate the arbitration hearing.

With regard to Forest Oil’s evident partiality claims, the court stated:

McAllen’s objection to Ramos’ serving as a mediator in another case was not disclosed to Forest. It is difficult to see how Ramos could be partial to McAllen for objecting to his serving as a mediator in a case in which McAllen was a party. One would think, if anything, the objection would have made Ramos biased against McAllen. But in any event, there is no direct evidence that Ramos knew of the possible mediation, much less that McAllen had objected to avoid any conflict with Ramos’ serving as an arbitrator in this case. Even if the fact that Ramos’ staff was contacted about his serving as a mediator is circumstantial evidence that Ramos knew of the mediation, we must defer to the trial court’s contrary finding if supported by the evidence. The trial court judged the witnesses’ credibility and weight of their testimony, ultimately concluding that Ramos “should not be disqualified for failure to disclose a trivial, non-prejudicial, not consummated invitation to act as mediator.” The trial court’s implied finding that Ramos was unaware of the mediation is supported by the evidence.

The Texas Supreme Court next dismissed Forest Oil’s argument “that the arbitration award must be vacated because the panel exceeded its authority under the Settlement Agreement by awarding damages not permitted by Texas law and issuing declarations that imposed its own notion of economic justice, all in manifest disregard of the law.”

According to the court:

The Settlement Agreement calls for arbitration of McAllen’s claims, including that Forest breached the Surface Agreement’s requirement that Forest “perform remedial work where the need therefore arises as a result of and is caused by Lessees’ operations or activities on the Leases.” The Settlement Agreement gives the arbitrators “the authority to award punitive damages where allowed by Texas substantive law”.  Forest argues that the panel’s award of damages exceeds Texas law, and therefore the arbitrators exceeded their authority. But the Settlement Agreement also provides that all “disputes relating to his Agreement or disputes over the scope of this arbitration clause [] will be resolved by arbitration.” Under this provision, determining what damages Texas law allows is as much within the arbitrators’ broad authority as determining the amount to be awarded. The panel’s declarations clarified Forest’s remediation obligations under the agreements, outlining which materials required remediation or removal and which parties would bear future costs. All these issues are within the bounds of the parties’ agreements, and the panel was authorized to decide them.

Finally, the Supreme Court of Texas held the parties did not agree to judicial review of the arbitral award before affirming the court of appeals’ judgment.

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