below, the instant case does not fit within the narrow limits of the "manifest disregard" doctrine, and the arbitration award is accordingly confirmed.
Tesoro has asserted three arguments in its attempt to establish "manifest disregard;" each of these arguments revolves around the application of the "no greater estate" principle of Texas law to the underlying dispute between the parties. In short, Tesoro maintains that the "no greater estate" principle demands that a reserved overriding royalty not endure longer than the underlying mineral interest from which it is carved; applied to this case, the royalty provision of the 1971 FOA cannot extend beyond the term of the 1968 TAC.
A. The Acknowledged "Force" of the Principle.
In recognition of its burden under the standard of "manifest disregard," Tesoro argues that the arbitrators in fact recognized the applicability of the "no greater estate" principle but nevertheless decided to ignore the principle in determining the duration of the overriding royalty. In support of this proposition, Tesoro cites the arbitrators' statement that "we do not doubt the force of [Tesoro's] evidence [regarding the "no greater estate" principle] so far as it relates to Texas mineral leases." Reasons at 6.
Rather than apply the "no greater estate" principle, however, the arbitrators distinguished it from this dispute. As noted above, the arbitrators considered the "no greater estate" principle to relate primarily to Texas mineral leases and found that "the authorities on Texas mineral leases, which deal with property rights, are not precisely analogous to the situation we have to consider." Reasons at 6.
In fact, the parties had presented arguments to the arbitrators regarding the applicability of the "no greater estate" principle to oil-and-gas farmout agreements. Apparent from their decision, the arbitrators found the "no greater estate" principle inapplicable because they considered the 1971 FOA to convey contract rights and not property rights. Reasons at 6. Tesoro claimed unsuccessfully before the arbitrators that this distinction did not affect the bearing of the "no greater estate" principle upon the 1971 FOA. Accordingly, the language cited by Tesoro to demonstrate the arbitrators' acknowledgement of the "no greater estate" principle actually reveals the arbitrators' determination finding the principle inapplicable.
B. The Purported Exclusion of the Only Applicable Law.
Tesoro further asserts that the arbitrators effectively ignored the only law which could possibly govern the dispute when they construed the 1971 FOA under principles of Texas contract law rather than the "no greater estate" principle. Tesoro contends that the arbitrators, by looking only to the four corners of the contract instead of the "no greater estate" principle, set aside any consideration of the only Texas law addressing the subject at hand -- the duration of an overriding royalty in an oil-and-gas farmout agreement.
Tesoro's argument fails because the 1971 FOA did not require that the arbitrators apply the "no greater estate" principle, or any other portion of Texas law, to the agreement. Rather, the 1971 FOA stated that Texas law governed the agreement (P 13) leaving the application of that law to the arbitrators. Furthermore, Tesoro itself recognizes that "Texas 'contract law' is seamlessly intertwined with Texas oil-and-gas law." Mem. of Tesoro in Opp'n to Pet. to Confirm Arbitration Award, at 16. Thus, although Tesoro has disputed the arbitrators' application of Texas law, it has failed to demonstrate "manifest disregard" -- the arbitrators' disavowal of a principle of law found clearly to govern.
Moreover, the arbitrators stated that they would have found in favor of Asamera even if they had applied the "no greater estate" principle to the dispute. Reasons at 6-7. Although Tesoro also contests this finding of the arbitrators,
in so doing, Tesoro merely asserts an error in the arbitrators' application of the law -- also insufficient to rise to the level of "manifest disregard." Wilko v. Swan, 346 U.S. 427, 436-37, 98 L. Ed. 168, 74 S. Ct. 182 (1953).
C. The Claim of a Pretextual Finding by the Arbitrators.
Lastly, Tesoro argues that the arbitrators' outward reliance upon Texas contract law in making the award and the arbitrators' related differentiation of the "no greater estate" principle were a mere pretext used by the arbitrators in order to decide the dispute according to their own notions of "industrial justice."
The only basis for Tesoro's contention appears to be its conviction that the arbitrators decided the dispute wrongly in not adopting Tesoro's arguments.
If the Court were to adopt Tesoro's argument that an arbitration award can be overturned on the mere assertion that the arbitrators' stated basis for the award is a pretext, the efficacy of arbitration as a means of alternative dispute resolution would be called into question. A party seeking vacatur of an arbitration award would be equipped with an unfettered means of challenging any award on the assertion that it was pretextual. For this reason, it has been long recognized that "when arbitrators explain their conclusions . . . in terms that offer even a barely colorable justification for the outcome reached, confirmation of the award cannot be prevented by litigants who merely argue, however persuasively, for a different result." Andros Compania Maritima v. Marc Rich & Co., A.G., 579 F.2d 691, 704 (2d Cir. 1978).
Although unnecessary in order for the Court to reject Tesoro's argument, it is noteworthy that the arbitrators' basis for differentiating the "no greater estate" principle -- an argument which Tesoro contends the arbitrators adopted as a "pretext" for the award -- in fact had some support in the testimony presented to the arbitrators by Tesoro's own expert. Professor Lowe conceded that differences exist between the 1968 TAC and a typical oil-and-gas lease and that the 1968 TAC related to contract rights as opposed to property rights. Tr. at 978, 1033-34. Because this testimony -- given by Tesoro's witness -- shows that there is not just one body of law which could possibly govern the dispute, it undermines Tesoro's present contention that the award lacked any possible foundation.
Tesoro has failed to demonstrate that the arbitrators appreciated the existence of clearly applicable law yet failed to implement it. In fact, the arbitrators' summary of reasons for their decision reveals that the arbitrators gave weighty consideration to the principle of law advocated by Tesoro but nevertheless rejected it. Accordingly, Asamera's petition to confirm the arbitration award is granted; its request for sanctions against Tesoro is denied.
Dated: New York, New York
December 9, 1992
Loretta A. Preska, U.S.D.J.