The Texas Supreme Court issued an important ruling a couple of weeks ago in Forest Oil Corp. v. El Rucio Land and Cattle Company.  [Read full opinion here.]  This case addresses important issues regarding a landowner’s right to sue an oil and gas company for contamination on his or her property and offers a good reminder that parties agreeing to arbitration need to carefully consider and understand what rights they give up in making that agreement.

Background

James McAllen owns the McAllen Ranch, consisting of over 27,000 acres.  The minerals on about 1,500 acres have been leased to and held by Forest Oil Corporation for over 30 years and they produce natural gas and operate a processing plant on about 5.75 acres.

In the 1990’s there was a dispute between McAllen and Forest, that was eventually settled.  A settlement agreement signed between the parties provided that Forest would not bring any hazardous materials onto the land and that they agreed to remove any hazardous materials as required by law, to perform remedial work where it needed to be done, and to comply with state and federal law in performing such work.  The Settlement Agreement also contained an arbitration clause, requiring that any claims arising from the agreement be arbitrated, rather than go to court.  It also provided that the case would be heard by a three-person arbitration panel, and that each of the parties could select one arbitrator and that those two could agree on a third arbitrator, or one could be appointed by a judge.

In 2004, a former Forest employee told McAllen that Forest had, in fact, contaminated his property and that some tubing the company gave to McAllen to build a rhinoceros pen, was also contaminated.  When McAllen lost a portion of his leg due to cancer, he blamed Forest’s alleged contamination.

Upon learning about this, McAllen filed suit against Forest for environmental contamination, improper disposal of hazardous materials on the ranch, and maliciously donating the contaminated pipe.  Forest moved to compel arbitration and was successful.  The parties selected the arbitrators. Forest chose Mr. Bristow and McAllen chose Mr. Ramos.  These two were unable to agree on a third arbitrator, so Forest asked a judge to appoint one from a list of proposed candidates.  The judge appointed Hoover, who had been put on the list by McAllen.

Meanwhile, in 2007, McAllen contacted the Texas Railroad Commission (the agency in charge of oil and gas regulation in Texas), requesting an investigation into contamination on his ranch.  The RRC referred Forest to its voluntary “Operator Clean Up Program.”  Forest has prepared proposals for how to remediate soil and groundwater conditions, some of which have been approved by the RRC.

An arbitration hearing was held and two of the three arbitrators (Ramos and Hoover) found in favor of McAllen.  They issued a damage award of $15 million for actual damages to the land, $500,000 for exemplary damages, over $6.7 million for attorney’s fees, and $500,000 for personal injury damages.  They also issued declarations requiring Forest to perform all remedial work to remove hazardous and non-hazardous materials no longer used on the ranch, and to reimburse McAllen for any future expenses in investigating contamination on the ranch.  The third arbitrator (Bristow) issued a 40-page dissent.

Not surprisingly, Forest sought to vacate the arbitration award on numerous grounds.  First, Forest argued that it was the Railroad Commission, rather than the courts, who had exclusive or primary jurisdiction over McAllen’s claims, which precluded the arbitration.  Second, Forest argued the arbitration award should be set aside for numerous reasons: undisclosed bias on the part of Arbitrator Ramos; damages in disregard of Texas law, and the parties agreed to expanded judicial review of the arbitration award.

The trial court denied Forest’s motion, thereby upholding the arbitration award.  The Houston (1st) Court of Appeals affirmed.  Forest appealed to the Texas Supreme Court, which granted his petition.

Supreme Court Opinion

The Texas Supreme Court affirmed the lower courts, finding that the RRC did not have exclusive or primary jurisdiction over the claims and that none of the arguments for vacating the arbitration award were valid.

RRC Jurisdiction

Both parties agreed that the RRC has extensive authority to regulate contamination from oil and gas operations.  Where they disagree, however, is that Forest argues that this jurisdiction is either exclusive or primary, thereby preventing a court from hearing this type of claim.

With regard to exclusive jurisdiction, an agency possesses this when “the Legislature gives the agency alone the authority to make the initial determination in a dispute.”  A statute conferring exclusive jurisdiction must clearly indicate the Legislature’s intent to abrogate common law rights.  The Court held that none of the statutory provisions offered by Forest exhibited this type of clear indication.  Section 26.131 of the Water Code provides that the RRC is solely responsible for the control and disposition of waste and abatement and prevention of pollution resulting from the production of oil and gas, but the Court found that this language was added by the Legislature to make clear it was the RRC, rather than the TCEQ who had regulatory authority.  It does not speak to the authority of the RRC versus a court.  Similarly, Section 401.415 of the Health and Safety Code gives the RRC the “sole authority” to regulate the disposal of oil and gas NORM waste, like that which contaminated the ranch.  But again, the Court held that this section, when taken in context, describes authority among agencies, rather than excluding judicial authority.  Forest also argued that Section 85.321 of the Natural Resources Code providing that a landowner may file suit for statutory, rule, and order violations, implies that these rights are exclusive of any common law right to sue.  The Court said this was a possible, but certainly not a necessary interpretation of the rule.

With regard to primary jurisdiction, both a court and an agency can have jurisdiction over similar issues, but an agency is given primary jurisdiction to hear an initial dispute when the agency is staffed with experts trained in handling the issue and a great benefit comes from having the agency interpret its own laws, ruled, and regs at issue.  The primary jurisdiction does not, however, apply to claims that are “inherently judicial.”  The Court held that McAllen’s claims were inherently judicial due to there being a number of common law claims that are not dependent on regulatory compliance.

Forest also argued that if landowners can seek remediation of contamination from the RRC and a court, they can essentially recover twice for the same injury by requiring operators to remediate the land and to pay damages for the same property that they remediate.  The court noted that this is a problem within the operator’s control, as they can reduce or eliminate damage awards in court by remediating the property and eliminating the landowner’s claimed damages.

Vacating Arbitration Award

Next, the Court considered Forest’s arguments to vacate the arbitration award.  One ground for vacating an arbitration award is “evident partiality by an arbitrator” towards one party.  Parties are required to disclose material facts that might show evidence of bias but are not required to disclose trivial facts.  Thus, there may be some circumstances or relationships to insignificant to indicate bias and justify vacating an award.  Here, Forest argued that because McAllen had objected to Ramos serving as an arbitrator in another, unrelated case, and failing to disclose that fact, bias existed.  The Supreme Court upheld the trial court’s finding that there was no evidence that Ramos knew about the objection and this was a trivial fact that did not prevent him from serving impartially.

The Court also rejected Forest’s argument that the award violates the Settlement Agreement by awarding damages not permitted by Texas law.  But the Court found that all of the monetary awards and instructions were within the scope of the damages allowed to be awarded under the Settlement Agreement.

Finally, Forest argued that their arbitration agreement allowed for expanded judicial review.  This type of judicial review is allowed only where the parties clearly agreed to judicial review of an arbitration award.  There was no such clear intent included in the arbitration clause in this case.

Takeaways

First, this case is important in that it makes clear that Texas landowners are able to make common law claims in court against oil and gas companies for contamination, and are not required to solely rely upon the RRC.  This is an important ruling confirming legal rights for injured landowners.

Second, this case is a great example of the ways that an arbitration agreement can limit one’s rights.  These agreements mean that rather than a judge, a person’s case will be heard by arbitrators and, absent very limited circumstances, that arbitration award is final and may not be reviewed.  It is extremely difficult for a party to prove the level of bias necessary to have a court set aside an arbitration award.  This is not to say arbitration cannot be extremely useful–it can allow folks to have disputes resolved quicker and cheaper than a full-blown lawsuit.  However, parties need to understand that with those benefits, they give up their right to have their case decided by a jury.