Pacific Gas and Elec. Co. v. Superior Court (Anacapa Oil Corp.), No. C005317

• Court: California Court of Appeals
• Writing for the Court: BLEASE
• Citation: 277 Cal.Rptr. 694,6 Cal.App.4th 207
• Parties: Previously published at 227 Cal.App.3d 51, 234 Cal.App.3d 428, 6 Cal.App.4th 207 227 Cal.App.3d 51, 234 Cal.App.3d 428, 6 Cal.App.4th 207 PACIFIC GAS AND ELECTRIC COMPANY, Petitioner, v. SUPERIOR COURT of Sutter County, Respondent. ANACAPA OIL CORPORATION et al., Real Parties in Interest.
• Decision Date: 29 January 1991
• Docket Number: No. C005317

Page 694

277 Cal.Rptr. 694 Previously published at 227 Cal.App.3d 51, 234 Cal.App.3d 428, 6 Cal.App.4th 207 227 Cal.App.3d 51, 234 Cal.App.3d 428, 6 Cal.App.4th 207 PACIFIC GAS AND ELECTRIC COMPANY, Petitioner,
v.
SUPERIOR COURT of Sutter County, Respondent.
ANACAPA OIL CORPORATION et al., Real Parties in Interest. No. C005317. Court of Appeal, Third District, California. Jan. 29, 1991.

As Modified on Denial of

Rehearing Feb. 20, 1991.

Review Granted May 23, 1991.

Review is transferred to the Court of Appeal Oct. 1, 1992.

Page 696

[234 Cal.App.3d 435] [6 Cal.App.4th 214] Howard V. Golub, David H. Fleisig, Richard L. Meiss and Pamela C. Christensen, San Francisco, for petitioner.

No appearance for respondent.

Hanna & Morton, Edward S. Renwick, David C. Karp, Los Angeles, Diepenbrock, Wulff, Plant & Hannegan, Forrest A. Plant, Sacramento, for real parties in interest.

BLEASE, Acting Presiding Justice.

This petition for a writ of mandate seeks to overturn a superior court order which vacates a binding arbitration award. The award resolved disputes over the construction of contracts for the purchase [234 Cal.App.3d 436] of natural gas by Pacific Gas and Electric Company (PG & E) from real parties in interest Anacapa Oil Corporation (Anacapa). The arbitration award construed the contracts to permit repricing of the gas at its market price which is below ceiling prices listed in provisions of federal law.

The superior court vacated the award because "[t]he arbitrators exceeded their powers" in the construction of the contracts. (Code Civ.Proc., [6 Cal.App.4th 215] § 1286.2, subd. (d).) ¹ It concluded that the contracts read in the light of federal law provide that the federal ceiling price for gas is also the contract floor price. It justified a review of the legal merits of the award on two grounds: (1) the issues submitted to arbitration were "qualified", i.e., were to be resolved pursuant to the law in the manner of a court; (2) legal errors in the construction of the contracts appear "on the face of" the award.

We issued an alternative writ to consider the perplexing problem of the scope of judicial review of an arbitration award where it is claimed the arbitrators exceeded their powers. ²

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We will conclude that the scope of judicial review is determined by the finality which the arbitration agreement and law confer upon the arbitration award. Under the modern view of arbitration law, in the absence of an agreement specifying a broadened scope of review courts may not review an arbitration award for mere error of law or fact appearing on the face of the award, regardless whether the issues submitted are qualified.

In this case the parties' contract gives the arbitrators the power to enter a binding award on any dispute arising under any provision of the contract. That precludes the vacation of the award for mere error of law or fact.

However, finality does not immunize an arbitration award from review for error so egregious that it produces a result completely outside the expectations of the parties to an arbitration agreement, as where the award arbitrarily remakes a contract. As appears, the award in this case does not remake the contract and thus satisfies this limited standard of review.

We will grant the petition.

234 Cal.App.3d 437

FACTS AND PROCEDURAL BACKGROUND

A. The Gas Purchase Agreements

In 1971 and 1973 the parties entered into two contracts for the purchase by PG & E of gas produced from wells owned by Anacapa. Each contract uses virtually the same terms. Each contract provides for a set price for the gas unless modified in accordance with subparagraph 7(b). Subparagraph 7(b) of [6 Cal.App.4th 216] each contract provides in identical terms for the redetermination of the price after January 1, 1975, upon request of either party. If the parties fail to agree on a new price "the price to be paid for such gas shall be the reasonable market value of such gas, which ... shall be established by arbitration in accordance with Section 6 of the attached General Conditions."

Section 6 of each contract provides that "[t]he decision of a majority of the arbitrators, after a hearing ... shall be binding upon the parties hereto." It also provides that "[i]n addition to those disputes which are required to be arbitrated under the provisions hereof [i.e., market price], any other dispute ... arising between Buyer and Seller under any provision hereof which cannot be settled by the parties within a reasonable time may be submitted by either party to arbitration" by a panel of three arbitrators. Further, "[e]xcept as otherwise specifically provided in this Section any arbitration shall be subject to the provisions of Title 9 of Part 3 of the Code of Civil Procedure", which provides for a statement of decision in ordinary civil cases.

On November 8, 1978, the Natural Gas Policy Act of 1978 ("NGPA") went into effect. (15 U.S.C. §§ 3313 ff.) It divided natural gas into various categories and provided for respective "ceiling prices", the maximum lawful price at which the gas could be sold. By letter agreements dated June 30, 1980, the parties amended their 1971 and 1973 contracts to take into consideration the ceiling prices mandated by the NGPA. Each letter agreement provides that "Effective January 1, 1982, the price ... shall be revised each month to the price equal to the highest applicable price ... under (i) Section 102 of the NGPA...." Each letter agreement further provides that "[a]t such time as ceiling prices under the Natural Gas Policy Act of 1978 ... cease to apply to all or any part of [Anacapa's] gas, then the provisions of subparagraph 7(b) shall apply to the redetermination of the price to be paid for gas delivered...." Pursuant to these provisions each subparagraph 7(b) of the 1971 and 1972 contracts was amended to provide that "[e]ffective upon deregulation of price controls under any Federal or State legislation, and not more than once in any subsequent three-year period", either party could invoke the repricing provisions of section 6 and [234 Cal.App.3d 438] secure a market price determination by binding arbitration. Finally, each letter agreement provided that "[a]t no time shall the price paid for gas delivered under said

Page 698

agreement exceed the maximum lawful price permitted by legislation enacted by the United States or the State of California."

On January 1, 1985, some gas subject to the NGPA was deregulated. On that date PG & E invoked subparagraph 7(b) and sought an agreement with Anacapa to value the gas produced from all of the Anacapa wells at its [6 Cal.App.4th 217] market price. Anacapa refused, contending that under a proper construction of the NGPA none of the gas was deregulated and that the ceiling prices continued to apply. That gave rise to the proceedings resulting in this petition.

B. The Submission To Arbitration

On March 25, 1985, Anacapa filed a complaint in the superior court for the County of Sutter seeking a declaration that, under sections 102 and 105 of the NGPA, Anacapa is entitled to be paid the ceiling price for gas produced from its wells and damages in the amount of the underpayments found to be due. Anacapa also sought a declaration that PG & E had an implied obligation under the contracts to avoid causing physical harm to Anacapa's wells or harm to Anacapa's interest in obtaining gas from reservoirs tapped by neighboring producers by shutting in or failing to take enough gas from its wells.

PG & E responded with a petition to compel arbitration of the "controversies that are the subject of the lawsuit ... in the manner provided by paragraph 7(b) of the 1971 Agreement and of the 1973 Agreement and paragraph 6 of the General Conditions." Anacapa objected to arbitration principally upon the ground that submission of any controversy other than pricing to arbitration is subject to the consent of both parties. With respect to the issue of shut in, Anacapa claimed the contracts should be read as adhesion contracts. The court granted the petition and ordered arbitration ³ on the ground that doubts concerning the scope of arbitrable issues are to be resolved in favor of arbitration.

Anacapa proceeded to arbitration and proposed an agenda containing a "Statement of Issues" for resolution. These issues were incorporated in the [234 Cal.App.3d 439] arbitrators' prehearing order as the "basic issues" of the proceeding. They are:

"A. Whether, as contended by Anacapa, the June 30, 1980 Amendments to the 1971 and 1973 Agreements obligate PGandE to pay Anacapa ceiling price for gas purchased after December 31, 1984. 'Ceiling price,' of course, means ceiling price under the Natural Gas Policy Act of 1978. If so, how much money does PGandE owe Anacapa? [p] B. Whether, as contended by PGandE, during any period of time prior to January 1, 1985, gas from any of [6 Cal.App.4th 218] Anacapa's wells was misclassified for Natural Gas Policy Act purposes so that PGandE paid an amount in excess of the maximum lawful ceiling price? If so, to what extent is PGandE entitled to a refund for any such excess payment? [p] C. To what extent does PGandE have an obligation, as contended by Anacapa, to avoid causing drainage of gas away from Anacapa's wells and into wells operated by Anacapa's competitors? [p] D. Assuming for sake of argument that PGandE is not obligated to pay ceiling price for the gas purchased from Anacapa after December 31, 1984, then the contracts call for a reversion to "reasonable market value." If reasonable market value rather than ceiling price is the standard after December 31, 1984, what is the reasonable market value of the gas sold by Anacapa to PGandE?"

In addition the parties agreed to a provision in the prehearing order that "The award will be in the form of a statement of decision, as provided by C.C.P. § 632, issued by the arbitrators."

Page 699

C. The Arbitrator's Award

A bifurcated hearing was held on issues A. B....