Apache Bohai Corp. LDC v. Texaco China BV

United States Court of Appeals

Fifth Circuit

F I L E D

In the February 27, 2007

United States Court of Appeals Charles R. Fulbruge III

for the Fifth Circuit Clerk

_______________

m 05-20413

_______________

APACHE BOHAI CORPORATION LDC; APACHE CHINA CORPORATION LDC,

Plaintiffs-Appellants,

VERSUS

TEXACO CHINA BV,

Defendant-Appellee.

_________________________

Appeal from the United States District Court

for the Southern District of Texas

m 4:01-CV-2019

___________________________

Before JONES, Chief Judge, SMITH and in the parties’ agreement and manifestly disre-

STEWART, Circuit Judges. garded the law by awarding consequential and

cost-of-drilling damages and by failing to apply

JERRY E. SMITH, Circuit Judge: mitigation principles to reduce the award. Be-

cause the arbitration clause granted the ar-

Apache Bohai Corporation and Apache bitrator sufficient authority to consider the val-

China Corporation (collectively “Apache”) idity of the exculpatory clause, and because

appeal a judgment confirming an arbitration the arbitrator did not ignore any plainly gov-

award in favor of Texaco China (“Texaco”). erning principles of applicable law, we affirm.

Apache argues that the arbitrator exceeded his

powers by invalidating an exculpatory clause

I. While searching without success for a re-

In the mid-1990’s Texaco entered into pro- placement farm-in company, Texaco secured

duction sharing contracts (“PSC’s”) with the two three-month extensions of the election

Chinese National Offshore Oil Corporation deadlines for Block 11/19. During the exten-

(“CNOOC”) under which Texaco agreed to sions, Texaco learned from CNOOC that oil

explore, develop, and produce petroleum from had been discovered on a block adjacent to

Blocks 9/18 and 11/19 in the Bohai Bay of Block 11/19 and that seismic data indicated

China in exchange for a share of any petroleum that the oilfield extended onto Block 11/19. In

produced. The PSC’s divided the exploration November 1999 Texaco and CNOOC nego-

period into three phases, each of which re- tiated a new deal with the following condi-

quired drilling commitments from Texaco. At tions: The exploration well for Block 9/18

the end of each phase, Texaco had to elect ei- could be shifted to Block 11/19; a portion of

ther to relinquish its entire interest in a block Block 9/18 containing the oil field was shifted

or to continue exploring and relinquish only a to Block 11/19; a one-year extension was

portion of its interest. granted for Texaco to decide whether to con-

tinue exploring Block 11/19; Texaco released

Texaco had until January 31, 1999, to make all remaining acreage of Block 9/18; if Texaco

an election for Block 9/18 and until June 30, chose to continue exploring Block 11/19, it

1999, for Block 11/19. To help meet its drill- would not be forced to relinquish any further

ing commitments, Texaco entered into two acreage. In December 1999 Texaco accepted

farm-in agreements with Apache Bohai’s pre- Apache’s 50% interest in the blocks so it could

decessor-in-interest in which Apache agreed to complete the new deal.

assume Texaco’s drilling commitments in re-

turn for a 50% share of any future oil pro- Texaco initiated arbitration proceedings

duction. Apache committed to drill three ex- against Apache as provided in the farm-in

ploration wells: one on each of Blocks 9/18 agreements.1 The arbitrator determined that

and 11/19 and a third on the block of Apache’s

choice.

1

The agreements contained the following rele-

In January 1999 Apache and Texaco elect- vant provisions:

ed to enter the next phase of exploration on

Block 9/18. In March, Apache proposed an § 4.03SSNotwithstanding any other provision

area of Block 11/19 to be relinquished so that of the Agreement, neither party shall in any cir-

exploration on it could continue. On June 14, cumstance be liable to the other Party under,

Apache informed Texaco that it was with- arising out of or in any way connected with this

drawing from the agreements and would not Agreement or the Deed of Assignment for any

consequential loss or damage whether arising in

drill any of the three wells. Texaco had only

contract or tort (including negligence).” [the

sixteen days remaining to make an election on “Exculpatory Clause”]

Block 11/19 and was saddled with the recently

acquired drilling commitment on Block 9/18. § 15.01SSThis Agreement shall be governed

Apache tendered its 50% interest in the two by and construed in accordance with the laws of

blocks to Texaco, although Texaco demanded the State of New York, United States of Am-

compliance and refused to accept the tender. erica. [ the“Choice of Law Clause”]

(continued...)

2

Apache had fundamentally breached its com- Apache raises two principal arguments for

mitment to Texaco in reckless indifference to vacation of the award. First, it contends that

Texaco’s interests. He invalidated the Excul- the arbitrator exceeded his powers by vitiating

patory Clause as void under New York law the exculpatory clause under New York law

and awarded Texaco over $71 million dollars, and awarding consequential damages in the

of which about $20 million represented conse- face of the parties’ clear contrary intentions.

quential damages for Texaco’s loss of a 50% Second, it contends the arbitrator manifestly

interest in Block 9/18, and about $26 million disregarded New York law by awarding con-

represented direct damages for the cost of sequential and cost-of-drilling damages and by

drilling the three wells Apache was obligated failing to credit Apache for Texaco’s success-

to drill. The arbitrator did not reduce Texa- ful mitigation.

co’s recovery by any alleged gains Texaco had

received from the renegotiated deal with A.

CNOOC. The district court confirmed the “Arbitration is a matter of contract”: The

award. powers of an arbitrator are “dependent on the

provisions under which the arbitrators were

II. appointed.” Brook v. Peak Int’l, 294 F.3d

We review a district court’s confirmation of 668, 672 (5th Cir. 2002). Where arbitrators

an award de novo, but the review of the act “contrary to express contractual provi-

underlying award is “exceedingly deferential.” sions,” they have exceeded their powers. Del-

Brabham v. A.G. Edwards & Sons, Inc., 376 ta Queen Steamboat Co. v. AFL-CIO, 889

F.3d 377, 380 (5th Cir. 2004). We vacate an F.2d 599, 604 (5th Cir. 1989). If the contract

award only for certain statutory grounds, in- creates a plain limitation on the authority of an

cluding “where the arbitrators exceeded their arbitrator, we will vacate an award that ig-

powers,” 9 U.S.C. § 10(a)(4), or under narrow nores the limitation.3

common law exceptions, such as “manifest

disregard for the law” or “contrary to public Where limitations on the arbitrator’s au-

policy.”2 An award may not be set aside for a thority are uncertain or ambiguous, however,

mere mistake of fact or law. Id. “they will be construed narrowly.” Action In-

dus., Inc. v. U.S. Fid. & Guar. Co., 358 F.3d

337, 343 (5th Cir. 2004). “A reviewing court

1

(...continued) examining whether arbitrators exceeded their

§ 15.02SSAny dispute arising out of or relat- powers must resolve all doubts in favor of ar-

ing to this Agreement, including any question bitration.” Id.; Brook, 294 F.3d at 672. In

regarding its existence, validity, or termination, Action Industries, the contract precluded con-

which cannot be amicably resolved between the sequential damages in connection with installa-

Parties shall be settled in New York, New York

in accordance with the American Arbitration

Association arbitration procedures. [the “Arbi-

3

tration Clause”] See Smith v. Transp. Workers Union of Am.,

374 F.3d 372 (5th Cir. 2004). In Smith, where an

2

See, e.g., Kergosien v. Ocean Energy, Inc., arbitrator ignored a contractual limitation that “the

390 F.3d 346, 353 (5th Cir. 2004); Trans Chem. parties shall not have a right to seek correction of

Ltd. v. China Nat’l Mach. Import & Export Corp., the award,” we vacated the arbitrator’s modifica-

161 F.3d 314, 319 (5th Cir. 1998) (per curiam). tion of the award. Id. at 375.

3

tion, use, or failure of equipment but was silent Clause, and he exceeded his powers by consid-

as to damage limitations for design defects. ering the issue.4

Finding the contract ambiguous, we upheld an

award of consequential damages for a design

4

flaw against a claim that the award exceeded The jurisdiction of an arbitrator is a question

the arbitrators’ powers. Id. for the court in the first instance, Gen. Motors

Corp. v. Pamela Equities Corp., 146 F.3d 242,

The farm-in contracts contain a broad arbi- 251 (5th Cir. 1998), although “[t]he court may on-

ly determine whether the parties intended the par-

tration clause covering “any dispute” arising

ticular issue to be resolved by arbitration, the court

out of the contract, including any questions of

cannot rule on the potential merits of the underly-

validity. Where parties have included broad ing claim,” Smith Barney Shearson, Inc. v. Boone,

arbitration clauses, we have upheld awards 47 F.3d 750, 752 (5th Cir. 1995) (citing AT&T

that invalidated contractual provisions. See Techs., Inc. v. Comm. Workers of Am., 475 U.S.

Dole Ocean Liner Express v. Ga. Vegetable 643, 649 (1986)). Texaco claims that Apache

Co., 84 F.3d 772, 774-75 (5th Cir. 1996). In waived the jurisdictional argument by failing to

Dole, the agreement stated that “[a]ny dispute, raise it in front of the arbitrator or the district

controversy or claim, arising out of or relating court.

to this Contract or a breach thereof, shall be

finally resolved by arbitration.” Id. at 773 n.2. “If a litigant desires to preserve an argument for

The arbitrator, relying on a Mississippi choice- appeal, the litigant must press and not merely inti-

of-law clause, decided that the liquidated mate the argument during the proceedings before

damages provision was unenforceable under the district court. If an argument is not raised to

such a degree that the district court has an oppor-

Mississippi law. In reviewing the claim that

tunity to rule on it, we will not address it on ap-

the arbitrator exceeded his powers by in- peal.” Belt v. EmCare, Inc., 444 F.3d 403 (5th

validating the provision, we concluded that be- Cir.), cert. denied, 127 S. Ct. 349 (2006). Apa-

cause “the determination of whether the liqui- che’s failure to raise the jurisdictional issue before

dated damages provision was legally en- the arbitrator can be explained by the fact that jur-

forceable was left to the arbitration panel un- isdictional issues were decided by the district court

der the contract, the arbitrators did not before the arbitration, so “it would be a harsh

‘exceed their powers’ by finding, as a matter result to hold jurisdictional challenges waived by

of law, that it was void.” Id. at 775. failure to present the jurisdictional issue to the

arbitrators.” Int’l Bhd. of Elec. Workers, Local

Apache argues that the first seven words of Union No. 545 v. Hope Elec. Corp., 380 F.3d

the Exculpatory Clause, “notwithstanding any 1084 (8th Cir. 2004).

other provision in this agreement,” take the

awarding of consequential damages out of the Apache’s cryptic references to its jurisdictional

argument in its motion to vacate in district court

jurisdiction of the arbitrator. Apache claims

are more troubling, however. Although Apache did

that this language creates a supremacy clause, present broad allegations that the arbitrator “ex-

meant to override all other contractual provi- ceeded his powers” and that the award “failed to

sions, including the choice-of-law and arbitra- draw its essence from the agreement,” Apache nev-

tion clauses. Thus, the arbitrator has no juris- er specifically alleged that the Exculpatory Clause

diction to consider whether New York law overrode the Arbitration and Choice-of- Law

would vitiate the effect of the Exculpatory Clauses, thereby stripping the arbitrator of jur-

(continued...)

4

Apache seeks support in ASOMA Corp. v. carved out a set of claims and provided an al-

M/V Seadaniel, 971 F. Supp. 140 (S.D.N.Y. ternative governing law and decisionmaker.

1997). The factual setting and analysis in that ASOMA’s holding, that parties can restrict ar-

case are helpful, but not in support of Apa- bitral jurisdiction by designating alternate deci-

che’s claim. sionmakers for subsets of claims, is in accord

with a line of our cases regarding labor

In ASOMA, the parties had signed a limita- contracts.

tion of liability clause providing as follows:

In Delta Queen, we confronted a collective

Notwithstanding any other provision in this bargaining agreement that provided the com-

contract, any claims for damage or loss to pany with the sole responsibility to discipline

cargo shall be governed by Hague-Visby and discharge for proper cause. Because the

Rules, and any other clause herein repug- arbitrator had exceeded his mandate to deter-

nant to the Hague-Visby Rules shall be null mine whether the company had proper cause

and void and of no force and effect as re- and had proposed to alter the disciplinary de-

spect to cargo claims. . . . Any arbitration cision, we affirmed the district court’s vacation

clause in this contract shall not apply to of that portion of the arbitrator’s decision.

claims for cargo loss or damage but such Delta Queen, 889 F.2d at 604. Later cases

claims shall be brought in the United States interpreting Delta Queen have echoed the fol-

District Court for the Southern District of lowing logic: If an arbitrator is limited to de-

New York, to which jurisdiction Owners termining whether an employer showed proper

hereby consent. cause for dismissal, and authority to determine

discipline is either vested in the company or is

Id. at 142. The court observed that the provi- non-discretionary, the arbitrator exceeds his

sion removed the issue of cargo claims from powers by fashioning an alternative discipline.5

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 pro- 5

See E.I. duPont de Nemours & Co. v. Local

vision at issue in ASOMA was not primarily a 900 of the Int’l Chem. Workers Union, 968 F.2d

supremacy clause, but a forum-selection and 456, 459 (5th Cir. 1992) (holding arbitrator ex-

choice-of-law clause. The parties in ASOMA ceeded authority where submission limited issue to

finding proper cause); Am. Eagle Airlines, Inc. v.

Air Line Pilots Ass’n, Int’l, 343 F.3d 401, 410-11

(5th Cir. 2003) (“[I]f the relevant bargaining agree-

4

(...continued) ment requires just cause for dismissal, an arbitrator

isdiction to award consequential damages. See acts beyond his jurisdiction by fashioning an alter-

Magistrate Judge’s Memorandum and Recommen- nate remedy once it has concludedSSimplicitly or

dation, at 48 (“Nothing suggests that [the arbi- otherwiseSSthat an employee’s conduct constitutes

trator] exceeded his powers or failed to rationally just cause for dismissal”). See also Weber Air-

infer the essence of the contract.”). Although Apa- craft, Inc. v. Gen. Warehousemen & Helpers Un-

che’s conduct in this litigation has made it a close ion Local 767, 253 F.3d 821 (5th Cir. 2001) (hold-

issue, we conclude that Apache has sufficiently ing that arbitrator had authority to choose between

preserved the argument that we will address it on suspension and termination where the authority

the merits. was vested in the company to “suspend and/or dis-

5

As in ASOMA, in the cases in which we found did not designate an alternate forum to deter-

an arbitrator had exceeded his powers, he had mine the clause’s validity; there is no indica-

intruded on an issue that was reserved for an tion that the parties contemplated any judicial

alternative decisionmaker or was removed involvement in the contract; and neither party

from anyone’s discretion under the contract.6 consented to any court’s jurisdiction. The

farm-in agreement included a very broad arbi-

In the Exculpatory Clause in the farm-in tration clause covering “any dispute” arising

agreement there is no indication that the par- from the agreement, including “any question

ties did not intend to arbitrate the validity of regarding its . . . validity.”

the Exculpatory Clause.7 Texaco and Apache

The face of the contract suggests that the

parties intended to have the issue of the en-

5

(...continued)

forceability of the Exculpatory Clause handled

charge”). by arbitration. Given the requirement that lim-

itations on an arbitrator’s authority must be

6

New York, like most states, is an at-will em- plain and unambiguous and that we resolve all

ployment regime providing no public policy against doubts in favor of arbitration, we will not read

terminating an employee for any reason or no rea- a clause that refers neither to arbitration nor to

son at all. Murphy v. Am. Home Prods. Corp., any other method of dispute resolution as pre-

448 N.E.2d 86, 87 (N.Y. 1983). Under an at-will cluding arbitral jurisdiction to consider the val-

regime, there is nothing remarkable about removing idity of the clause.8 The arbitrator did not ex-

discretion from any decisionmaker to review an ceed his powers by considering the validity of

employer’s decision to fire an employee, so long as the Exculpatory Clause under New York law.

the employee has no contractual claim. The same

cannot be said for review of a contractual limita-

Contrary to Apache’s assertion that this

tion on consequential damages, where New York

public policy finds some such provisions unen- reading renders the Exculpatory Clause mean-

forceable. See Kalisch-Jarcho, Inc. v. New York, ingless, we interpret “notwithstanding any oth-

448 N.E.2d 413 (N.Y. 1983). er provision” to control the substantive terms

of the contract rather than to designate a de-

7

Apache properly admitted at argument that a cisionmaker for questions of validity. It is a

state court or district court reviewing this contract strained interpretation to suggest that the Ex-

would have the authority to consider the validity of culpatory Clause language was evidence of the

the Exculpatory Clause. Absent plain contractual parties’ intention to have a different decision-

limitations, arbitrators have the authority to grant

any relief that can be given by a court. See Mas-

trobuono v. Shearson Lehman Hutton, Inc., 514 7

(...continued)

U.S. 52 (1995) (upholding punitive damages vers to award the same varieties and forms of dam-

despite New York law that allowed courts, but not ages or relief as a court would be empowered to

arbitrators, to award such damages, and stating award”).

that “it would seem sensible to interpret the ‘all

8

disputes’ and ‘any remedy or relief’ phrases to in- Cf. Buckeye Check Cashing, Inc. v. Carde-

dicate . . . an intention to resolve through arbi- gna, 126 S. Ct. 1204 (2006) (upholding arbitra-

tration any dispute that would otherwise be settled tor’s jurisdiction to arbitrate a claim that an entire

in a court, and to allow the chosen dispute resol- contract, including the arbitration clause, was void

(continued...) for illegality).

6

maker rule on consequential damages. ‘manifest disregard’ of the law” (citing First

Options, Inc. v. Kaplan, 514 U.S. 938, 942

Apache raises the alternative claim that the (1995)). Judicial review under the manifest

award of consequential damages fails to draw disregard standard is “extremely limited,”

its “essence” from the contract. The “essence” however, in line with “our well-established de-

test is an application of the inquiry into wheth- ference to arbitration as a favored method of

er arbitrators have “exceeded their powers;” it settling disputes when agreed to by the par-

requires that “the award must, in some logical ties.” Prestige Ford v. Ford Dealer Computer

way, be derived from the wording or purpose Servs., Inc., 324 F.3d 391, 395 (5th Cir.

of the contract.” Kergosien, 390 F.3d at 353 2003). Manifest disregard “clearly means

(citing Executone Info. Sys. v. Davis, 26 F.3d more than error or misunderstanding with re-

1314, 1324 (5th Cir. 1994)). Under the spect to the law.” Id.

“essence” test, the “single question is whether

the award, however arrived at, is rationally in- As the Supreme Court has explained,

ferable from the contract.” Executone, 26

F.3d at 1325. plenary review by a court on the merits

would make meaningless the provisions

In section 14.05 of the farm-in contract, the that the arbitrator's decision is final, for in

parties contemplated that they would be enti- reality it would almost never be final. . . .

tled to all remedies arising by law. Once the [I]t is the arbitrator’s construction which

arbitrator determined that the clause was un- was bargained for; and so far as the arbitra-

enforceable, there was no longer any barrier to tor's decision concerns construction of the

awarding consequential damages where they contract, the courts have no business over-

are allowable under New York law.9 This re- ruling him because their interpretation of

sult is rationally inferable from the contract, so the contract is different than his.

the award satisfies the “essence” test.

United Steelworkers of Am. v. Enter. Wheel &

B. Car Corp., 363 U.S. 593, 598-99 (1960). Al-

Apache’s alternate ground for vacating the though the Court in that case was considering

award is its claim that the arbitrator manifestly arbitration under a collective bargaining agree-

disregarded the law. We recognized “manifest ment and the Labor Management Relations

disregard for the law” as a non-statutory Act, we have found its analysis and rationale

ground for vacating an arbitrator’s decision in applicable to our FAA decisions and to an

Williams v. Cigna Fin. Advisors Corp., 197 arbitrator’s interpretation of the law. See Ker-

F.3d 752, 759 (5th Cir. 1999): “[P]arties [are] gosien, 390 F.3d at 352 n.2, 357-58.

bound by [an] arbitrator’s decision not in

There are two steps in the manifest-disre-

gard analysis. First, “the error must have been

9

See Jacada (Europe), Ltd. v. Int’l Mktg. obvious and capable of being readily and in-

Strategies, Inc., 401 F.3d 701, 712-13 (6th Cir.) stantly perceived by the average person qual-

(upholding award in excess of a damage limitation ified to serve as an arbitrator.” Id. at 355.

under the “essence” test where the arbitrator had Furthermore, “the term ‘disregard’ implies that

plausibly determined it was unenforceable), cert. the arbitrator appreciates the existence of a

denied, 126 S. Ct. 735 (2005).

7

clearly governing principle but decides to ig- tracts,11 in two later cases the New York

nore or pay no attention to it.” Id. The gov- Court of Appeals considered its application

erning law must be “well-defined, explicit, and outside that context.

clearly applicable.” Prestige Ford, 324 F.3d at

395. For the second step, “before an ar- In Sommer v. Fed. Signal Corp., 593

bitrator’s award can be vacated, the court N.E.2d 1365, 1368 (N.Y. 1992), that court

must find that the award resulted in a signifi- considered an exculpatory clause in a contract

cant injustice.” Kergosien, 390 F.3d at 355. that limited liability for any “losses or damages

. . . caused by performance or non-perform-

The parties agree that, in accordance with ance of obligations imposed by this contract or

the choice-of-law provision in their contract, by negligent acts or omissions.” Plaintiff had

the arbitration is governed by New York law. contracted with defendant to obtain fire-alarm

Apache argues that the arbitrator manifestly monitoring service and sued after defendant

disregarded New York law by awarding con- had failed to report a fire signal. The trial

sequential damages in light of the Exculpatory court dismissed the case on summary

Clause. The arbitrator found that clause unen- judgment, concluding that the event was a

forceable as against public policybecause Apa- “misadventure” that did not rise to the

che (1) acted with reckless disregard for standard of gross negligence. The Court of

Texaco’s rights; (2) intentionally abandoned Appeals concluded that there was a triable is-

the contract; and (3) breached a fundamental sue of fact and discussed the public policy

obligation of the contract. Apache argues that standard as follows:

none of these reasons is sufficient under New

York law to find the Exculpatory Clause un- It is the public policy of this state . . . that

enforceable. a party may not insulate itself from dam-

ages caused by grossly negligent conduct.

“[P]arties to a contract have the power to . . . . Gross negligence, when invoked to

specifically delineate the scope of their liability pierce an agreed upon limitation of liability

at the time the contract is formed,” and New in a commercial contract, must “smack[] of

York courts regularly enforce limitations on intentional wrongdoing.” It is conduct that

liability provisions. Bd. of Educ. v. Sargent, evinces a reckless indifference to the rights

Webster, Crenshaw & Folley, 71 N.Y.2d 21, of others. . . .

29 (1987). Under announced New York pub-

lic policy, however, limitations of liability “will

not apply to exemption of willful or grossly 11

negligent acts.”10 Although the public policy See id. at 416; Corinno Civetta Constr.

was first announced in a series of cases Corp. v. City of New York, 493 N.E.2d 905, 910

(N.Y. 1986) (noting that “[E]ven with such a

considering delay clauses in construction con-

clause, damages may be recovered for: (1) delays

caused by the contractee’s bad faith or its willful,

malicious, or grossly negligent conduct, (2) un-

10

Kalisch-Jarcho, Inc. v. New York, 448 contemplated delays, (3) delays so unreasonable

N.E.2d 413, 416-18 (N.Y. 1983) (holding that a no that they constitute an intentional abandonment of

damage-for-delay clause would be unenforceable the contract by the contractee, and (4) delays re-

where a party had acted with “bad faith and with sulting from the contractee’s breach of a funda-

deliberate intent”). mental right of contract”).

8

[The Exculpatory clause] cannot restrict contract was intended by the parties to sub-

Holmes’ liability for conduct evincing a sume conduct which is tortious in nature

reckless disregard for its customers’ rights. i.e., wrongful conduct in which defendant

.... willfully intends to inflict harm on plaintiff

at least in part through the means of

[P]ublic policy precludes enforcement of breaching the contract between the parties.

contract clauses exonerating a party from As thus defined, limiting defendant’s lia-

its reckless indifference to the rights of oth- bility for consequential damages to injuries

ers, whether or not termed gross to plaintiff caused by intentional misrepre-

negligence. sentations, willful acts and gross negligence

does not offend public policy. As we said

Id. at 1371 & n.3 (citing Kalisch-Jarcho, 448 in Sommer, the conduct necessary to pierce

N.E.2d at 416). The court then remanded for an agreed-upon limitation of liability in a

a jury trial on the issue of whether defendant’s commercial contract, must smack of

conduct was recklessly indifferent. Id. intentional wrongdoing.

Two years later, the court revisited the is- Id. at 508-09 (citations omitted). The court

sue. The contract limited defendant’s liability then concluded that plaintiff’s proof showed

for nonperformance but exempted “willful acts that defendant’s acts were motivated exclu-

or gross negligence.” Metro. Life Ins. Co. v. sively by economic self-interest, which was in-

Noble Lowndes Int’l, Inc., 643 N.E.2d 504, sufficient as a matter of law to vitiate the lim-

505-06 (N.Y. 1994). A jury found that defen- itation-of-liability provision.

dant’s actsSSdemanding a contract adjustment

and then withdrawing from the contractSSwere The arbitrator in the instant case, interpret-

“malicious, i.e., the intentional perpetration of ing these decisions, drew support from Som-

a wrongful act injuring plaintiff without mer and concluded that “acting with ‘reckless

justification;” the jury awarded damages. Id. disregard’ is sufficient under New York law to

at 506. The intermediate appellate court vitiate the effect of an exemption clause.” Fur-

reduced the award and concluded that the will- ther, he interpreted Metropolitan Life as con-

ful-act exception in the contract required acts tinuing to recognize gross negligence, in-

constituting a tort. Metro. Life Ins. Co. v. No- cluding reckless disregard, as a ground for

ble Lowndes Int’l, Inc., 600 N.Y.S.2d 212, voiding a limitation on liability. The prominent

216 (App. Div. 1993). The Court of Appeals, positive citation of Sommer in Metropolitan

on review of that decision, concluded that Life suggests that the court in the later case

agreed with the earlier opinion’s reasoning.

the phrase “willful acts” should be inter-

preted here as referring to conduct similar The arbitrator’s interpretation is not so

in nature to the “intentional misrepresenta- plainly incorrect as to be “obvious and capable

tion” and “gross negligence” with which it of being readily and instantly perceived by the

was joined as exceptions to defendant’s average person qualified to serve as an arbitra-

general immunity from liability for conse- tor.” The arbitrator, whose factual findings

quential damages. We, therefore, conclude

that the term willful acts as used in this

9

are unreviewable,12 determined that Apache nate or valueless, the value of “the work and

withdrew from the contract in reckless indif- labor which the defendant was to perform.”

ference to the interests of Texaco; the arbitra- Id. at 572. On the unique facts of the case,

tor concluded that finding sufficient to vitiate however, the court stated that “[t]he point to

the Exculpatory Clause. He did not manifestly be considered is, whether the plaintiff in any

disregard the law by failing to enforce the Ex- sense, actual or legal, has lost by the default of

culpatory Clause and awarding consequential the defendant a sum equal to the expense of

damages to Texaco. digging the well.” Id. at 572. The court

stressed that under the specific facts, the plain-

C. tiff was to have no interest in the well. Id. at

Apache argues that the arbitrator manifestly 573. Moreover, “[t]he defendant was not paid

disregarded New York law by awarding Tex- for digging a well for the plaintiff on the prem-

aco cost-of-drilling damages: the cost that ises.” Id.

Apache would have spent drilling three explor-

atory wells. Apache claims that the proper The arbitrator in the present case concluded

measure of Texaco’s expectancy damages is that this matter is distinguishable from Cham-

the value of the information the wells would berlain, noting that Texaco would have had a

have yielded. continued interest in the three wells and that

Apache’s receipt of a 50% interest in the

In Chamberlain v. Parker, 45 N.Y. 569, blocks was payment for drilling the wells. The

571 (1871), defendant breached his covenant arbitrator then looked to other jurisdictions for

to build a well on plaintiff’s land. The trial guidance.13 Finding a Louisiana case that he

court awarded the plaintiff the cost of drilling believed was directly on point, the arbitrator

the well, an intermediate court reversed, and elected to adopt that case’s measure of

the New York Court of Appeals affirmed. Id. damages. In Fite v. Miller, 200 So. 285 (La.

at 570, 574. The court’s analysis began with 1940), plaintiff assigned a one-half interest in

the general rule that, where a party contracts his mineral estate to defendant as considera-

to have a structure built, the measure of dam- tion for defendant’s promise to build a well on

ages for breach is the loss of value of the

structure or, when that amount is indetermi-

13

Apache also argues that the arbitrator exceed-

ed his powers by relying on law outside the state of

12

See Major League Baseball Players Ass’n v. New York in contravention of the Choice of Law

Garvey, 532 U.S. 504, 509-10 (“When an arbi- Clause. The arbitrator looked to caselaw outside

trator resolves disputes regarding the application of New York as persuasive authority after concluding

a contract, and no dishonesty is alleged, the arbi- that no New York case squarely controlled. Courts

trator’s improvident, even silly, factfinding does are generally free to look to the decisions of other

not provide a basis for a reviewing court to refuse jurisdictions in determining uncertain or ambiguous

to enforce the award. In discussing the courts’ lim- questions of New York law. Elliott Assocs., LP v.

ited role in reviewing the merits of arbitration Banco de la Nacion, 194 F.3d 363, 370 (2d. Cir.

awards, we have stated that courts have no busi- 1999). Arbitrators “should apply the basic princi-

ness weighing the merits of the grievance or con- ples of contract law to which the parties have re-

sidering whether there is equity in a particular ferred” in their choice of law clause. 1 DOMKE ON

claim.”) (citations omitted); Kergosien, 390 F.3d COMMERCIAL ARBITRATION § 30:5, at 30-7 (Larry

at 358 (same). Edmonson 3d ed. 2005).

10

the land. Id. at 286. When defendant failed to The arbitrator acknowledged that under

perform, plaintiff was awarded cost-of-drilling New York law, if any benefit accrues “to the

damages. Id. at 288. The ideal measure of plaintiff because of the breach, a balance must

damages would be the lost profits yielded from be struck between benefit and loss, and the de-

the well, but the court held that such damages fendant is only chargeable with the net loss.”

were too speculative to be proven. Id. at 287. See Stern v. Satra Corp., 539 F.2d 1305, 1312

(2d Cir. 1976). The arbitrator then pointed to

The facts of Fite are distinguishable; there G&R Corp. v. Am. Sec. & Trust Co., 523 F.2d

the plaintiff never accepted the return of de- 1164, 1174 (D.C. Cir. 1975), which holds that

fendant’s interest in the land. Id. at 289. The for a defendant to be entitled to mitigation, his

Fite court implied, and we have held, that if a breach must have made possible a new, favor-

plaintiff has accepted the return of his consid- able transaction, and the profits from that

eration he cannot sue for damages.14 Under transaction must not be more fairlyattributable

the manifest disregard standard, Apache must to the business acumen of the plaintiff. Adher-

point to a controlling case with a clear rule ig- ing to that decision, the arbitrator refused to

nored by the arbitrator. Chamberlain is suffi- reduce the award in light of the information

ciently distinguishable that it is not on point, Texaco received or the new deal Texaco nego-

and caselaw from other jurisdictions, even if tiated, because the arbitrator determined that

squarely on point, is not controlling but only any benefit Texaco gained was more

persuasive. The arbitrator did not manifestly attributable to Texaco’s efforts than to Apa-

disregard the law in awarding cost-of-drilling che’s breach.

damages.

Apache cites no New York authority that

D. conclusively shows that G&R is contrary to

Apache urges that the arbitrator manifestly New York law. Apache has not demonstrated

disregarded New York law by failing to apply that the arbitrator manifestly disregarded New

mitigation principles to reduce Texaco’s York law in refusing to reduce Texaco’s

award. The arbitrator did not reduce the award by the value of Texaco’s mitigation.

award by the value of any of the following: the

knowledge of a discovery extending onto The arbitrator refused to reduce the award

Block 11/19 that Texaco gained from the data in light of the return of Apache’s interest in the

provided by CNOOC; the renegotiated deal blocks, because he found that the interest had

with CNOOC, which would not have been no inherent worth at the time it was returned.15

possible had Apache not reassigned its inter-

ests to Texaco; or the interest in the blocks

Apache returned. Apache maintains that it 15

Apache argues that this finding creates a logi-

should have received credit for each of these

cal impossibility in the award. It claims that if

items. Texaco is entitled to $20 million in consequential

damages for the loss of its 50% interest in Block

9/18, then Apache’s 50% interest should also be

14

Fite, 200 So. at 289-90; Cockburn v. O’Mea- valued at $20 million, and Texaco’s damages

ra, 141 F.2d 779 (5th Cir. 1944) (applying Louisi- should be offset by that amount.

ana law and declining to follow Fite where plaintiff

had accepted return of the land). (continued...)

11

An arbitrator’s finding of fact must be accept-

ed as true. Manville Forest Prods. Corp. v.

United Paperworkers Int’l Union, AFL-CIO,

831 F.2d 72, 74 (5th Cir. 1987). Because we

must defer to his factual conclusion, we cannot

say that the arbitrator manifestly disregarded

the law in refusing to reduce Texaco’s award

because Apache had returned its interest in the

blocks.

The judgment confirming the arbitration

award is AFFIRMED.

15

(...continued)

This contention is flawed: The sum of $20 mil-

lion is the value of the interest had Apache per-

formed; it is therefore a measure of Texaco’s loss.

By the time it was returned, the interest was

worthless; there is no logical impossibility.

Apache also makes the catch-all argument that

the award left Texaco in a better position than it

would have been in had Apache performed. Apa-

che avers that Texaco should not be able to recover

restitution as well as direct and consequential dam-

ages. Again, Apache’s reasoning rests on the as-

sumption that Apache’s interest in the blocks had

the same value when Apache received it as it did

when Apache reassigned it. The arbitrator, how-

ever, found that the interest in the blocks was

worthless by the time Apache reassigned it. Tex-

aco did not receive restitution by accepting the re-

assignment of the blocks, and Apache therefore has

failed to demonstrate that Texaco was left in a bet-

ter position than it would have been in had Apache

performed.

12