|
In upholding a $71 million arbitration award, the Fifth Circuit Court of Appeals held that the arbitration agreement allowed the arbitrator to rule on the enforceability of an exculpatory clause in the underlying agreement.
In Apache Bohai Corp. LDC v. Texaco China BV, No. 05-20413, 2007 WL 587233 (5th Cir. Feb. 27, 2007), Apache and Texaco entered into an agreement whereby Apache agreed to assume Texaco's drilling commitments in exchange for a share of future oil production.
With the drilling deadline fast approaching, Apache withdrew from the agreement, forcing Texaco to seek an extension from the party that requested the drilling. Subsequently, Texaco initiated arbitration proceedings against Apache in accordance with the agreement.
The arbitrator concluded that the agreement's exculpatory clause was void under New York law and awarded Texaco damages in excess of $71 million. The district court confirmed the award.
On appeal, Apache argued that the arbitrator exceeded his powers by awarding damages in spite of the agreement's exculpatory clause. In rejecting this argument, the Court found that the arbitrator had authority to rule on the enforceability of the exculpatory clause because the arbitration agreement applied to "any dispute" arising out of the agreement.
Moreover, as the Court noted, Apache conceded that a court would have authority to invalidate the exculpatory clause, and it is well-established that in the absence of contractual limitations, arbitrators have authority to grant any relief that would be available in court.
In the alternative, Apache argued that the arbitrator acted with manifest disregard for the law in determining that the exculpatory clause was unenforceable. In addressing this argument, the Court first explained that judicial review under the manifest disregard standard is "extremely limited" in fidelity to the "well-established deference to arbitration as a favored method of settling disputes when agreed to by the parties."
Reviewing the arbitrator's award under this limited standard, the Court concluded that the arbitrator did not act with manifest disregard for the law by invalidating the exculpatory clause because the arbitrator found that Apache withdrew from the contract with reckless indifference to Texaco's rights, and under New York law, a party cannot insulate itself from liability for gross negligence.
As the Court indicated, the parties could have limited the arbitrator's authority to void the exculpatory clause by expressing the limitation in plain and unambiguous language. A capable example of a plain and unambiguous limitation can be found in Gueyffier v. Ann Summers, Ltd., 50 Cal.Rptr.3d 294 (Cal. Ct. App. 2006), review granted, 150 P.3d 693 (Cal. 2007).
In Gueyffier, the court held that the arbitrator exceeded his powers by excusing noncompliance with a notice and cure requirement where the underlying contract stated that the requirement was a material term that could "not be modified or changed by any arbitrator in an arbitration proceeding or otherwise."
Subscribe to a free weekly update on ADR case law and
legislation
|