Apache Bohai Corp. Ldc v. Texaco China Bv

• Decision Date: 27 February 2007
• Docket Number: No. 05-20413.,05-20413.
• Citation: 480 F.3d 397
• Parties: APACHE BOHAI CORPORATION LDC; Apache China Corporation LDC, Plaintiffs-Appellants, v. TEXACO CHINA BV, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

480 F.3d 397

APACHE BOHAI CORPORATION LDC; Apache China Corporation LDC, Plaintiffs-Appellants, v. TEXACO CHINA BV, Defendant-Appellee.

No. 05-20413.

United States Court of Appeals, Fifth Circuit.

February 27, 2007.

Joseph D. Jamail (argued), Frank M. Staggs, Jr., Jamail & Kolius, Joy M. Soloway, Fulbright & Jaworski, Harry M. Reasoner (argued), Gwendolyn Johnson Samora, James L. Loftis, Brandon Edmund Roach, Vinson & Elkins, Houston, TX, John D. Taurman, Vinson & Elkins, Washington, DC, W. Wendell Hall, Fulbright & Jaworski, San Antonio, TX, Marcy Hogan Greer, Fulbright & Jaworski, Austin, TX, for Plaintiffs-Appellants.

Adam P. Schiffer (argued), H. Victor Thomas, Jr., King & Spalding, Houston, TX, for Defendant-Appellee.

Appeal from the United States District Court for the Southern District of Texas.

Before JONES, Chief Judge, SMITH and STEWART, Circuit Judges.

JERRY E. SMITH, Circuit Judge:

Apache Bohai Corporation and Apache China Corporation (collectively "Apache") appeal a judgment confirming an arbitration award in favor of Texaco China ("Texaco"). Apache argues that the arbitrator exceeded his powers by invalidating an exculpatory clause in the parties' agreement and manifestly disregarded the law by awarding consequential and cost-of-drilling damages and by failing to apply mitigation principles to reduce the award. Because the arbitration clause granted the arbitrator sufficient authority to consider the validity of the exculpatory clause, and because the arbitrator did not ignore any plainly governing principles of applicable law, we affirm.

I.

In the mid-1990's Texaco entered into production sharing contracts ("PSC's") with the Chinese National Offshore Oil Corporation ("CNOOC") under which Texaco agreed to explore, develop, and produce petroleum from Blocks 9/18 and 11/19 in the Bohai Bay of China in exchange for a share of any petroleum produced. The PSC's divided the exploration period into three phases, each of which required drilling commitments from Texaco. At the end of each phase, Texaco had to elect either to relinquish its entire interest in a block or to continue exploring and relinquish only a portion of its interest.

Texaco had until January 31, 1999, to make an election for Block 9/18 and until June 30, 1999, for Block 11/19. To help meet its drilling commitments, Texaco entered into two farm-in agreements with Apache Bohai's predecessor-in-interest in which Apache agreed to assume Texaco's drilling commitments in return for a 50% share of any future oil production. Apache committed to drill three exploration wells: one on each of Blocks 9/18 and 11/19 and a third on the block of Apache's choice.

In January 1999 Apache and Texaco elected to enter the next phase of exploration on Block 9/18. In March, Apache proposed an area of Block 11/19 to be relinquished so that exploration on it could continue. On June 14, Apache informed Texaco that it was withdrawing from the agreements and would not drill any of the three wells. Texaco had only sixteen days remaining to make an election on Block 11/19 and was saddled with the recently acquired drilling commitment on Block 9/18. Apache tendered its 50% interest in the two blocks to Texaco, although Texaco demanded compliance and refused to accept the tender.

While searching without success for a replacement farm-in company, Texaco secured two three-month extensions of the election deadlines for Block 11/19. During the extensions, Texaco learned from CNOOC that oil had been discovered on a block adjacent to Block 11/19 and that seismic data indicated that the oilfield extended onto Block 11/19. In November 1999 Texaco and CNOOC negotiated a new deal with the following conditions: The exploration well for Block 9/18 could be shifted to Block 11/19; a portion of Block 9/18 containing the oil field was shifted to Block 11/19; a one-year extension was granted for Texaco to decide whether to continue exploring Block 11/19; Texaco released all remaining acreage of Block 9/18; if Texaco chose to continue exploring Block 11/19, it would not be forced to relinquish any further acreage. In December 1999 Texaco accepted Apache's 50% interest in the blocks so it could complete the new deal.

Texaco initiated arbitration proceedings against Apache as provided in the farm-in agreements.¹ The arbitrator determined that Apache had fundamentally breached its commitment to Texaco in reckless indifference to Texaco's interests. He invalidated the Exculpatory Clause as void under New York law and awarded Texaco over $71 million dollars, of which about $20 million represented consequential damages for Texaco's loss of a 50% interest in Block 9/18, and about $26 million represented direct damages for the cost of drilling the three wells Apache was obligated to drill. The arbitrator did not reduce Texaco's recovery by any alleged gains Texaco had received from the renegotiated deal with CNOOC. The district court confirmed the award.

II.

We review a district court's confirmation of an award de novo, but the review of the underlying award is "exceedingly deferential." Brabham v. A.G. Edwards & Sons, Inc., 376 F.3d 377, 380 (5th Cir.2004). We vacate an award only for certain statutory grounds, including "where the arbitrators exceeded their powers," 9 U.S.C. § 10(a)(4), or under narrow common law exceptions, such as "manifest disregard for the law" or "contrary to public policy."² An award may not be set aside for a mere mistake of fact or law. Id.

Apache raises two principal arguments for vacation of the award. First, it contends that the arbitrator exceeded his powers by vitiating the exculpatory clause under New York law and awarding consequential damages in the face of the parties' clear contrary intentions. Second, it contends the arbitrator manifestly disregarded New York law by awarding consequential and cost-of-drilling damages and by failing to credit Apache for Texaco's successful mitigation.

A.

"Arbitration is a matter of contract": The powers of an arbitrator are "dependent on the provisions under which the arbitrators were appointed." Brook v. Peak Int'l, 294 F.3d 668, 672 (5th Cir. 2002). Where arbitrators act "contrary to express contractual provisions," they have exceeded their powers. Delta Queen Steamboat Co. v. AFL-CIO, 889 F.2d 599, 604 (5th Cir.1989). If the contract creates a plain limitation on the authority of an arbitrator, we will vacate an award that ignores the limitation.³

Where limitations on the arbitrator's authority are uncertain or ambiguous, however, "they will be construed narrowly." Action Indus., Inc. v. U.S. Fid. & Guar. Co., 358 F.3d 337, 343 (5th Cir.2004). "A reviewing court examining whether arbitrators exceeded their powers must resolve all doubts in favor of arbitration." Id.; Brook, 294 F.3d at 672. In Action Industries, the contract precluded consequential damages in connection with installation, use, or failure of equipment but was silent as to damage limitations for design defects. Finding the contract ambiguous, we upheld an award of consequential damages for a design flaw against a claim that the award exceeded the arbitrators' powers. Id.

The farm-in contracts contain a broad arbitration clause covering "any dispute" arising out of the contract, including any questions of validity. Where parties have included broad arbitration clauses, we have upheld awards that invalidated contractual provisions. See Dole Ocean Liner Express v. Ga. Vegetable Co., 84 F.3d 772, 774-75 (5th Cir.1996). In Dole, the agreement stated that "[a]ny dispute, controversy or claim, arising out of or relating to this Contract or a breach thereof, shall be finally resolved by arbitration." Id. at 773 n. 2. The arbitrator, relying on a Mississippi choice-of-law clause, decided that the liquidated damages provision was unenforceable under Mississippi law. In reviewing the claim that the arbitrator exceeded his powers by invalidating the provision, we concluded that because "the determination of whether the liquidated damages provision was legally enforceable was left to the arbitration panel under the contract, the arbitrators did not `exceed their powers' by finding, as a matter of law, that it was void." Id. at 775.

Apache argues that the first seven words of the Exculpatory Clause, "notwithstanding any other provision in this agreement," take the awarding of consequential damages out of the jurisdiction of the arbitrator. Apache claims that this language creates a supremacy clause, meant to override all other contractual provisions, including the choice-of-law and arbitration clauses. Thus, the arbitrator has no jurisdiction to consider whether New York law would vitiate the effect of the Exculpatory Clause, and he exceeded his powers by considering the issue.⁴

Apache seeks support in ASOMA Corp. v. M/V Seadaniel, 971 F.Supp. 140 (S.D.N.Y.1997). The factual setting and analysis in that case are helpful, but not in support of Apache's claim.

In ASOMA, the parties had signed a limitation of liability clause providing as follows:

Notwithstanding any other provision in this contract, any claims for damage or loss to cargo shall be governed by Hague-Visby Rules, and any other clause herein repugnant to the Hague-Visby Rules shall be null and void and of no force and effect as respect to cargo claims . . . . Any arbitration clause in this contract shall not apply to claims for cargo loss or damage but such claims shall be brought in the United States District Court for the Southern District of New York, to which jurisdiction Owners hereby consent.

Id. at 142. The court observed that the provision removed the issue of cargo claims from the contract's broad arbitration provision, so it refused to compel arbitration. Id. at 143. Notably, unlike the Exculpatory Clause under Apache's characterization, the contractual provision at issue in ASOMA was not primarily a supremacy clause, but a forum-selection and choice-of-law clause....