Fifth Circuit Confirms Arbitral Award

Yesterday, the Fifth Circuit handed down an opinion confirming an arbitral award in favor of Texaco (link is to .pdf file) in a contract dispute over some off-shore oil exploration in the Bohai Bay of China. The opinion confirms the award with discussion of two important points, one which has been discussed at length in the Circuit, and one which has not.The arbitrator in this case awarded Texaco more than $71M, some $20M of which was an award of consequential damages. The contract between the parties, however, contained a provision which read:

Notwithstanding any other provision of the Agreement, neither party shall in any circumstance be liable to the other party under, arising out of or in any way connected with this Agreement or the Deed of Assignment for any consequential loss or damage whether arising in contract or tort (including negligence).

In his arbitral award, the arbitrator found that the no-consequential-damages clause (the “exculpatory clause”) was unenforceable under New York law (the law that he applied pursuant to a different provision of the contract). Apache Bohai Corporation (“Apache”) argued that the arbitrator exceeded his powers in making this award of consequential damages, since the contract clearly seemed to preclude an award of consequential damages.

An argument that an arbitrator has exceeded his or her powers is one of the few grounds on which a party can object to the confirmation of an arbitral award in the Fifth Circuit. In this case, Apache argued that since the “exculpatory clause” which, on its face, seems to suggest that consequential damages were not available to Texaco, begins with the language “notwithstanding any other provision of the Agreement,” and since the arbitration clause was in fact another provision of the Agreement, then the exculpatory clause trumped the arbitration clause and removed the issue of consequential damages from the arbitrator’s purview. In other words, argues Apache, the arbitrator did not have the authority to review the exculpatory clause at all.

The Fifth Circuit was unmoved by this argument. In distinguishing the cases on which Apache relied, the opinion discusses the scenario in which such an argument can work, which is a scenario in which a contract gives the arbitrator jurisdiction over some, but not all, potential disputes between the contracting parties. In such a case, where some claims must be arbitrated but others litigated, the arbirator would exceed his authority by ruling on the claims not set aside for arbitration. In this case, however, the arbitration clause was broad and clearly intended for all disputes between the parties to be arbitrated. That being the case, says the Court, the arbitrator was within the scope of his authority when he ruled on the legal effect of the exculpatory clause.

Apache also challenges the confirmation of the award on the basis that the arbitrator manifestly disregarded the law in the issuance of the award. Manifest disregard of the law is a non-statutory basis on which a party may object to the confirmation of an arbitral award (under FAA analysis, anyway), but as we’ve noted before, the burden is a steep one, and the Fifth Circuit did not make it any easier yesterday. Since the opinion does not forge any new ground on this point, we will not discuss Apache’s arguments under the manifest disregard theory in any detail, other than to note that yet another opinion now exists that lays out the elements of this potential challenge to an arbitration award and explains in detail why the party challenging the award is almost certain to lose.

Finally, we would nod approvingly at a comment on the Texas Appellate Law Blog which reminds folks that parties are free to craft some sort of appellate review into their arbitration agreements if they want to reserve the right to appeal a future arbitral award. We wrote a CLE paper on this very subject back in Spring 2005; feel free to read it if you like (link is to .pdf file), but please remember that the case citations were current as of two years ago, and thus should not be relied upon without updates today (for example, Positive Software (the 2007 version) has made an entire section of the paper obsolete and actually wrong).

Apache Bohai Corp. v. Texaco China BV, ___ F3d. ___ (5th Cir. 2007) (Cause No. 05-20413)

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