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