judicial-activistFirst, a promise: I won’t report on another arbitration case until there is more to say than “business as usual”. Second, an opinion: Arbitration is still the right forum in many situations. Third, remember: An award and a result, not litigation, was what Venoco says it bargained for.

That said, knowing only that Denbury Onshore v. Texcal Energy South Texas is an appeal of an arbitration award in Texas, you can predict the outcome. The award was confirmed.

How to vacate an award

The bases for vacating awards are similar under the federal and the Texas arbitration acts. Generally an award must have been procured by:

  • corruption, fraud or undue means,
  • evident partiality or corruption,
  • arbitrator misconduct (willful misbehavior),
  • refusing to postpone the hearing for sufficient cause,
  • refusing to hear material evidence,
  • other misbehavior that prejudices a party’s rights, or
  • the arbitrators exceeded their powers or so imperfectly executed them that a final and definite award was not made.

I’m conflating the two statutes.  They aren’t identical but the result is the same: vacating an award is difficult.

The dispute

Denbury had an option to purchase Venoco’s interests in the Hastings Field. After Denbury achieved payout, Venoco would receive a 25% back-in. Payout was dependent on Denbury’s “CO2 costs”, the direct costs of acquiring (commodity costs) and delivering (transportation costs) CO2.

A three arbitrator panel unanimously declared the meaning of the disputed language of the agreement and issued an award in Venoco’s favor.

Denbury sued to modify and vacate the award for:

  • insufficient evidence,
  • the arbitrators exceeded their authority by making an incorrect value judgment on the contract clause,
  • manifest disregard of the law (in essence, they construed the contract incorrectly), and
  • the parties had contracted for judicial review.

Denbury’s hurdles

All reasonable preferences are indulged in favor of the award, and review of an award is extraordinarily narrow.

Denbury argued that the parties contracted to expand judicial review for reversible error: “An appeal from an order or judgment of the panel shall be taken in the manner and to the same extent as some orders or judgment in civil cases under Texas law.” This was not a clear enough agreement to invoke the appellate process to correct reversible error by the panel.

Did Denbury get what it bargained for?

Under the TAA and FAA an arbitrator exceeds his authority only when he disregards the contract and dispenses his own idea of justice or when he strays from the delegated task of interpreting the contract, not that he performs that task poorly. The panel’s 13-page detailed award satisfied the contractual requirement that the award provide evidentiary references. The award was not so irrational or devoid of authority that the panel was merely dispensing its own idea of justice.

The court concluded that Denbury’s complaint was nothing more than a dispute as to the correctness of the panel’s construction of the provision and an effort to re-argue the merits of the case. Don’t be so sure. I could believe that Denbury believed it could appeal but failed to write the provision clearly enough.  Think about that the next time you write such a provision Better yet: why arbitrate if you can appeal?

A proposal

Let’s criminalize vacuous and inept cultural appropriation. If we were to do that, here is a victim and a misdemeanor. And here is a victim and a major felony. Write your Congressperson.

omegaAre Louisiana courts as enamored with arbitration as their Texas counterparts? Looks like it. East of the Sabine, submitting your dispute to arbitration means you are pretty much saying adieu, farewell and bye-bye to a judicial mulligan.

In ExPert Oil & Gas, LLC v. Mack Energy Co., et al an arbitrator’s mistaken calculation did not nullify an arbitration award.

Round one

ExPert was the operator under a participation agreement and JOA. An audit of the joint account found that some expenditures were unauthorized and should be repaid. Neither party agreed with the auditor’s report and the matter was arbitrated. After an eight day hearing the arbitrator rendered a reasoned award ordering ExPert to credit $1.5 million to the joint account.  The district court, First Circuit, and Louisiana Supreme Court confirmed the arbitration award.

The real issue

After the Supreme Court affirmed the judgment confirming the award, the arbitrator revealed “that he committed gross professional negligence when performing the calculation of three categories of credits in the arbitration award” (so said ExPert). Those credits totaled $434,000. Never shirking a good fight, ExPert sued, alleging that the judgment was a relative nullity because of “ill practices”, referring to the arbitrator’s admission of his mistake. Accepting all facts in the petition as true, the question was whether ExPert was legally entitled to relief.  A judgment may be annulled by fraud or ill practices but not for mere error. La. Code Civ. P. 2004(B) is sufficiently broad to encompass all situations in which a judgment is rendered through an improper practice or procedure.

“Ill” practices?

Ill practices includes any improper practice or procedure which operates, even innocently, to deprive a litigant of a legal right. There are two criteria to determine whether a judgment was obtained by actionable fraud or ill practices:

  • The circumstances under which the judgment was rendered showed the deprivation of legal rights of the litigant seeking relief; and
  • Enforcement of the judgment would be unconscionable and inequitable.

The punch line

The court declined to vacate the award: By substituting arbitration for litigation, the parties are presumed to accept the risk of procedural and substantive mistakes by the arbitrator of either fact or law, which are not reviewable by the courts. ExPert failed to state a cause of action for nullity of the original judgment.

Questions, observations and one thing to ponder

  • Would the result have been different if the error had been presented during round one? The reasoning suggests it would not, but the court doesn’t say.
  • Could the error been discovered sooner, especially with a reasoned award?
  • If the amount in controversy allows, go with three arbitrators for a better chance of an error-free award.
  • Despite this unfortunate result, arbitration has its advantages.
  • Should Mack have just acknowledged the injustice and agreed to return the $435,000? Would you?

A musical interlude for the case.

And one for Christmas Advent.

chess2The lessons in Craddick Partners Ltd. v. EnerSciences Holdings, LLC are three: Parties who have not signed an agreement to arbitrate have standing to compel arbitration; artful pleading to avoid arbitration won’t work; and Texas courts remain eager to send cases to arbitration.

EnerSciences’ two subsidiaries sell products in the oil field. Tom Craddick approached EnerSciences to sell products to Craddick’s Permian Basin clients. EnerSciences created PB Ventures as a subsidiary through which Craddick would sell their products.

A sales agreement between Craddick Partners and PB Ventures compelled arbitration of all disputes, excluding claims “brought by either party seeking injunctive, declaratory or preliminary relief”.

Pardon me while I digress

Some parties agree to litigate some claims and arbitrate others. Why? Don’t do it. It only complicates matters, potentially increasing the cost of the dispute by fighting it in two different places. And injunctive relief is addressed by the courts and the rules of the arbitration bodies.

The dispute

Craddick Partners sued PB Ventures, EnerSciences, and its two subs, asserting negligent misrepresentation, negligence, and tortious interference (all of which are torts), and seeking a declaration that the sales agreement had terminated.

The defendants, no doubt seeking to avoid a generous portion of hometown justice, sought arbitration, alleging that Craddick artfully pleaded tort actions to avoid arbitration and that the claims were really for breach of contract. Craddick said the EnerSciences parties were non-signatories to the sales agreement and thus lacked standing.

“Direct-benefits estoppel”?

The doctrine permits a non-signatory to compel arbitration of a signatory’s claim “if liability arises solely from the contract and must be determined by reference to it”.  Said the court, a “meddlesome stranger” cannot compel arbitration by merely pleading a claim that quotes someone else’s contract. A party can’t have it both ways:  on one hand seek to hold the non-signatory liable for duties imposed by an agreement with an arbitration provision, but on the other hand deny arbitration because a defendant did not sign it.

The court denied Craddick’s argument that its claims arose from general obligations imposed by law (the tort claims). All of Craddick’s claims depended on the existence of the sales agreement. The claims not only made reference to or presumed the existence of the agreement but relied upon it for viability. EnerSciences had no obligations to Craddick other than those arising out of the contract.

A factor in the tortious interference claim was that the non-signatories were so close to the contract that they were an integral component of it; they were affiliates, and not strangers to the agreement.  Craddick could not avoid arbitration by recasting its claims as tortious interference. That claim also relied on the sales agreement for viability.  If PB Ventures had not breached the sales agreement there would be no tortious interference.

Fancy pleading doesn’t help

The court concluded that the declaratory judgment request was merely an artfully pleaded breach of contract claim. To render a declaratory judgment the court would have had to determine whether PB Ventures breached the sales agreement.

To appreciate today’s musical interludes, consider what early 1950’s  mainstream radio sounded like. Along came Chess Records with Chester BurnettMcKinley Morganfield and plenty of others.

So, Phil Chess RIP.

pete fountainCo-author Michael Kelsheimer

Thinking about changing an employee policy in Texas? Kubala v. Supreme Production Services, Inc. says you can do it (almost) whenever you want. Want to make employees arbitrate their disputes? You can do that too.

Kubala’s employer Supreme announced a new policy requiring employees to arbitrate employment disputes, including Fair Labor Standards Act claims.  Continued employment was conditioned on acceptance of the agreement, which delegated to the arbitrator the power to make gateway determinations as to the arbitrability of any given claim.  Kubala did not sign that agreement after the meeting but continued his employment and accepted payment for his work.

The new policy was announced two days after Kubala had filed a FLSA collective action against Supreme but, as far as the court knew, before Supreme received notice of the suit.

The agreement to arbitrate

The first question was whether there was an agreement to arbitrate any set of claims, such as pre-existing disputes. Kubala’s obligation to arbitrate claims was imposed while he was already employed on an at-will basis.  Thus, the question:  Was there was a valid modification of the terms of his employment?

Arbitration agreements between employers and their employees are broadly enforceable in Texas. To demonstrate a modification of the terms of at-will employment, the proponent must demonstrate that the other party received notice of the change and accepted the change.

The court deemed that acceptance need not be more complicated than continuing to show up for work and accepting wages in return for work. Supreme satisfied this requirement by providing notice at a meeting where the policy was explained. Kubala knew the policy was a condition of continued employment.  He continued to work.  It doesn’t matter that he didn’t sign the agreement.

The delegation clause 

Was there was a valid delegation clause? Yes. The court was not opining on whether the agreement required that the merits of Kubala’s claim be arbitrated.  The only issue was who answers that question. The court concluded that it was plainly the right and responsibility of the arbitrator to determine his or her own jurisdiction.

Doubts

Judge Higginbotham’s cautionary concurring opinion addressed an employer’s ability to impose arbitration after the employee had filed suit. The result could be that the employer could coerce the plaintiff-employee into relinquishing his FLSA-given right to sue. Judge Higginbotham was concerned about “a regime of contracting out justice”.  Supreme’s saving grace was that it was unaware of Kubala’s suit until after the arbitration agreement became effective.

Worried about the presidential election?

Don’t be:

“Democracy is the worst form of government except for all the others that have been tried.”  Winston Churchill.

Be:

“The best argument against democracy is a five-minute conversation with the average voter.” Winston Churchill.

Remember the campaign ad about the 3:00 a.m. phone call? Let Gary Clark, Jr. answer it.

Great New Orleans musician Pete Fountain RIP.

You are negotiating a master service agreement, exploration agreement, farmout, or other oil-field contract, and the other side proposes that all disputes be resolved by arbitration. Should you agree? 

The answer? It depends. I try lawsuits, advocate in arbitrations, and preside as an arbitrator, so I’m often asked this question. The answer isn’t the same in every case. It depends on the circumstances, but there are factors to consider.

The Advantages

  • It is private. If a lawsuit has ever been used against you as a tool to embarrass and intimidate, you know what I’m talking about. Generally, statements in pleadings and testimony by witnesses are privileged against claims for defamation – not perjury, but that is entirely another matter. Salacious or scandalous assertions, no matter how untrue or irrelevant, that slither their way into the court’s files are public, and can cause major extra-judicial harm to the receiving party. If you want privacy, arbitration is the way to go.
  • No extra innings. You file your papers, conduct your discovery, have your hearing, and it’s over. No new trials, appeals, cross appeals, or petitions for review.
  • It’s quicker and cheaper (in theory, anyway).  If at least one party is willing and the arbitrator is strong, reasonable limits on the manner and amount of pre-hearing discovery can lower the cost of the process.
  • It is beneficial when the subject is arcane. I once represented an operator in a lengthy arbitration over gas plant accounting. Try to explain that to a jury of 12 “regular people” in a rural Texas county. Our panel was a landman, a future FERC commissioner, and a gas-plant accountant. They got it right (code for “we won”). A jury might have done the same, but I’m not sure they would have understood why, and the odds weren’t as good.

Before we continue, Opening Day is around the corner; that bleak and wintry interval between the end of college football and the beginning of baseball is over. Rejoice.  

The Disadvantages

  • No instant replay. If the arbitrator gets it wrong there is no appeal; you are waiving the full judicial process afforded to parties in litigation, which includes protections against a bad ruling. A wacky legal analysis that a court of appeal would laugh at? Too bad; it’s over. An “out of control” monetary award? Ditto. It’s not hopeless; there are a few limited bases for overturning an arbitrator’s ruling, but it’s difficult.
  • It is not necessarily more efficient. If the parties and their lawyers allow it, the costs, hassles and delays can rival those of litigation.
  • The arbitrator is a professional. Why is this a disadvantage? A party having a claim with high emotional appeal – think “jury appeal” – will want a jury. Say the smell of sulfur follows your opponent when he enters the room. “The jury will hate him” you say. You want a jury, the other side won’t, especially if he as good legal bases for resisting your claim. It is generally considered that an arbitrator, usually a trial lawyer who has seen worse, is more immune than a jury to the emotional component.

In the end, whether to arbitrate depends on what you are trying to accomplish. Seek legal advice before deciding.