Apache Bohai Corp, et al v. Texaco China BV

United States Court of Appeals
Fifth Circuit
F I L E D
February 27, 2007
Charles R. Fulbruge III
Clerk
In the
United States Court of Appeals
for the Fifth Circuit
_______________
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
STEWART, Circuit Judges.
JERRY E. SMITH, Circuit Judge:
Apache Bohai Corporation and Apache
China Corporation (collectively “Apache”)
appeal a judgment confirming an arbitration
award in favor of Texaco China (“Texaco”).
Apache argues that the arbitrator exceeded his
powers by invalidating an exculpatory clause
in the parties’ agreement and manifestly disre-
garded the law by awarding consequential and
cost-of-drilling damages and by failing to apply
mitigation principles to reduce the award. Be-
cause the arbitration clause granted the ar-
bitrator sufficient authority to consider the val-
idity of the exculpatory clause, and because
the arbitrator did not ignore any plainly gov-
erning principles of applicable law, we affirm.

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2
I.
In the mid-1990’s Texaco entered into pro-
duction sharing contracts (“PSC’s”) with the
Chinese National Offshore Oil Corporation
(“CNOOC”) under which Texaco agreed to
explore, develop, and produce petroleum from
Blocks 9/18 and 11/19 in the Bohai Bay of
China in exchange for a share of any petroleum
produced. The PSC’s divided the exploration
period into three phases, each of which re-
quired drilling commitments from Texaco. At
the end of each phase, Texaco had to elect ei-
ther to relinquish its entire interest in a block
or to continue exploring and relinquish only a
portion of its interest.
Texaco had until January 31, 1999, to make
an election for Block 9/18 and until June 30,
1999, for Block 11/19. To help meet its drill-
ing commitments, Texaco entered into two
farm-in agreements with Apache Bohai’s pre-
decessor-in-interest in which Apache agreed to
assume Texaco’s drilling commitments in re-
turn for a 50% share of any future oil pro-
duction. Apache committed to drill three ex-
ploration wells: one on each of Blocks 9/18
and 11/19 and a third on the block of Apache’s
choice.
In January 1999 Apache and Texaco elect-
ed to enter the next phase of exploration on
Block 9/18. In March, Apache proposed an
area of Block 11/19 to be relinquished so that
exploration on it could continue. On June 14,
Apache informed Texaco that it was with-
drawing from the agreements and would not
drill any of the three wells. Texaco had only
sixteen days remaining to make an election on
Block 11/19 and was saddled with the recently
acquired drilling commitment on Block 9/18.
Apache tendered its 50% interest in the two
blocks to Texaco, although Texaco demanded
compliance and refused to accept the tender.
While searching without success for a re-
placement farm-in company, Texaco secured
two three-month extensions of the election
deadlines for Block 11/19. During the exten-
sions, Texaco learned from CNOOC that oil
had been discovered on a block adjacent to
Block 11/19 and that seismic data indicated
that the oilfield extended onto Block 11/19. In
November 1999 Texaco and CNOOC nego-
tiated a new deal with the following condi-
tions: The exploration well for Block 9/18
could be shifted to Block 11/19; a portion of
Block 9/18 containing the oil field was shifted
to Block 11/19; a one-year extension was
granted for Texaco to decide whether to con-
tinue exploring Block 11/19; Texaco released
all remaining acreage of Block 9/18; if Texaco
chose to continue exploring Block 11/19, it
would not be forced to relinquish any further
acreage. In December 1999 Texaco accepted
Apache’s 50% interest in the blocks so it could
complete the new deal.
Texaco initiated arbitration proceedings
against Apache as provided in the farm-in
agreements.1 The arbitrator determined that
1 The agreements contained the following rele-
vant provisions:
§ 4.03SSNotwithstanding any other provision
of the Agreement, neither party shall in any cir-
cumstance be liable to the other Party under,
arising out of or in any way connected with this
Agreement or the Deed of Assignment for any
consequential loss or damage whether arising in
contract or tort (including negligence).” [the
“Exculpatory Clause”]
§ 15.01SSThis Agreement shall be governed
by and construed in accordance with the laws of
the State of New York, United States of Am-
erica. [ the“Choice of Law Clause”]
(continued...)

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3
Apache had fundamentally breached its com-
mitment to Texaco in reckless indifference to
Texaco’s interests. He invalidated the Excul-
patory Clause as void under New York law
and awarded Texaco over $71 million dollars,
of which about $20 million represented conse-
quential damages for Texaco’s loss of a 50%
interest in Block 9/18, and about $26 million
represented direct damages for the cost of
drilling the three wells Apache was obligated
to drill. The arbitrator did not reduce Texa-
co’s recovery by any alleged gains Texaco had
received from the renegotiated deal with
CNOOC. The district court confirmed the
award.
II.
We review a district court’s confirmation of
an award de novo, but the review of the
underlying award is “exceedingly deferential.”
Brabham v. A.G. Edwards & Sons, Inc., 376
F.3d 377, 380 (5th Cir. 2004). We vacate an
award only for certain statutory grounds, in-
cluding “where the arbitrators exceeded their
powers,” 9 U.S.C. § 10(a)(4), or under narrow
common law exceptions, such as “manifest
disregard for the law” or “contrary to public
policy.”2 An award may not be set aside for a
mere mistake of fact or law. Id.
Apache raises two principal arguments for
vacation of the award. First, it contends that
the arbitrator exceeded his powers by vitiating
the exculpatory clause under New York law
and awarding consequential damages in the
face of the parties’ clear contrary intentions.
Second, it contends the arbitrator manifestly
disregarded New York law by awarding con-
sequential and cost-of-drilling damages and by
failing to credit Apache for Texaco’s success-
ful mitigation.
A.
“Arbitration is a matter of contract”: The
powers of an arbitrator are “dependent on the
provisions under which the arbitrators were
appointed.” Brook v. Peak Int’l, 294 F.3d
668, 672 (5th Cir. 2002). Where arbitrators
act “contrary to express contractual provi-
sions,” they have exceeded their powers. Del-
ta Queen Steamboat Co. v. AFL-CIO, 889
F.2d 599, 604 (5th Cir. 1989). If the contract
creates a plain limitation on the authority of an
arbitrator, we will vacate an award that ig-
nores the limitation.3
Where limitations on the arbitrator’s au-
thority are uncertain or ambiguous, however,
“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
examining whether arbitrators exceeded their
powers must resolve all doubts in favor of ar-
bitration.” Id.; Brook, 294 F.3d at 672. In
Action Industries, the contract precluded con-
sequentialdamages in connection with installa-
1(...continued)
§ 15.02SSAny dispute arising out of or relat-
ing to this Agreement, including any question
regarding its existence, validity, or termination,
which cannot be amicably resolved between the
Parties shall be settled in New York, New York
in accordance with the American Arbitration
Association arbitration procedures. [the “Arbi-
tration Clause”]
2 See, e.g., Kergosien v. Ocean Energy, Inc.,
390 F.3d 346, 353 (5th Cir. 2004); Trans Chem.
Ltd. v. China Nat’l Mach. Import & Export Corp.,
161 F.3d 314, 319 (5th Cir. 1998) (per curiam).
3 See Smith v. Transp. Workers Union of Am.,
374 F.3d 372 (5th Cir. 2004). In Smith, where an
arbitrator ignored a contractual limitation that “the
parties shall not have a right to seek correction of
the award,” we vacated the arbitrator’s modifica-
tion of the award. Id. at 375.

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4
tion, use, or failure of equipment but was silent
as to damage limitations for design defects.
Finding the contract ambiguous, we upheld an
award of consequential damages for a design
flaw against a claim that the award exceeded
the arbitrators’ powers. Id.
The farm-in contracts contain a broad arbi-
tration clause covering “any dispute” arising
out of the contract, including any questions of
validity. Where parties have included broad
arbitration clauses, we have upheld awards
that invalidated contractual provisions. See
Dole Ocean Liner Express v. Ga. Vegetable
Co., 84 F.3d 772, 774-75 (5th Cir. 1996). In
Dole, the agreement stated that “[a]ny dispute,
controversy or claim, arising out of or relating
to this Contract or a breach thereof, shall be
finally resolved by arbitration.” Id. at 773 n.2.
The arbitrator, relying on a Mississippi choice-
of-law clause, decided that the liquidated
damages provision was unenforceable under
Mississippi law. In reviewing the claim that
the arbitrator exceeded his powers by in-
validating the provision, we concluded that be-
cause “the determination of whether the liqui-
dated damages provision was legally en-
forceable was left to the arbitration panel un-
der the contract, the arbitrators did not
‘exceed their powers’ by finding, as a matter
of law, that it was void.” Id. at 775.
Apache argues that the first seven words of
the Exculpatory Clause, “notwithstanding any
other provision in this agreement,” take the
awarding of consequential damages out of the
jurisdiction of the arbitrator. Apache claims
that this language creates a supremacy clause,
meant to override all other contractual provi-
sions, including the choice-of-law and arbitra-
tion clauses. Thus, the arbitrator has no juris-
diction to consider whether New York law
would vitiate the effect of the Exculpatory
Clause, and he exceeded his powers by consid-
ering the issue.4
4 The jurisdiction of an arbitrator is a question
for the court in the first instance, Gen. Motors
Corp. v. Pamela Equities Corp., 146 F.3d 242,
251 (5th Cir. 1998), although “[t]he court may on-
ly determine whether the parties intended the par-
ticular issue to be resolved by arbitration, the court
cannot rule on the potential merits of the underly-
ing claim,” Smith Barney Shearson, Inc. v. Boone,
47 F.3d 750, 752 (5th Cir. 1995) (citing AT&T
Techs., Inc. v. Comm. Workers of Am., 475 U.S.
643, 649 (1986)). Texaco claims that Apache
waived the jurisdictional argument by failing to
raise it in front of the arbitrator or the district
court.
“If a litigant desires to preserve an argument for
appeal, the litigant must press and not merely inti-
mate the argument during the proceedings before
the district court. If an argument is not raised to
such a degree that the district court has an oppor-
tunity to rule on it, we will not address it on ap-
peal.” Belt v. EmCare, Inc., 444 F.3d 403 (5th
Cir.), cert. denied, 127 S. Ct. 349 (2006). Apa-
che’s failure to raise the jurisdictional issue before
the arbitrator can be explained by the fact that jur-
isdictional issues were decided by the district court
before the arbitration, so “it would be a harsh
result to hold jurisdictional challenges waived by
failure to present the jurisdictional issue to the
arbitrators.” Int’l Bhd. of Elec. Workers, Local
Union No. 545 v. Hope Elec. Corp., 380 F.3d
1084 (8th Cir. 2004).
Apache’s cryptic references to its jurisdictional
argument in its motion to vacate in district court
are more troubling, however. Although Apache did
present broad allegations that the arbitrator “ex-
ceeded his powers” and that the award “failed to
draw its essence from the agreement,” Apache nev-
er specifically alleged that the Exculpatory Clause
overrode the Arbitration and Choice-of- Law
Clauses, thereby stripping the arbitrator of jur-
(continued...)

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5
Apache seeks support in ASOMA Corp. v.
M/V Seadaniel, 971 F. Supp. 140 (S.D.N.Y.
1997). The factual setting and analysis in that
case are helpful, but not in support of Apa-
che’s claim.
In ASOMA, the parties had signed a limita-
tion of liability clause providing as follows:
Notwithstanding any other provision in this
contract, any claims for damage or loss to
cargo shall be governed by Hague-Visby
Rules, and any other clause herein repug-
nant to the Hague-Visby Rules shall be null
and void and of no force and effect as re-
spect to cargo claims. . . . Any arbitration
clause in this contract shall not apply to
claims for cargo loss or damage but such
claims shall be brought in the United States
District Court for the Southern District of
New York, to which jurisdiction Owners
hereby consent.
Id. at 142. The court observed that the provi-
sion removed the issue of cargo claims from
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-
vision at issue in ASOMA was not primarily a
supremacy clause, but a forum-selection and
choice-of-law clause. The parties in ASOMA
carved out a set of claims and provided an al-
ternative governing law and decisionmaker.
ASOMA’s holding, that parties can restrict ar-
bitral jurisdiction bydesignating alternate deci-
sionmakers for subsets of claims, is in accord
with a line of our cases regarding labor
contracts.
In Delta Queen, we confronted a collective
bargaining agreement that provided the com-
pany with the sole responsibility to discipline
and discharge for proper cause. Because the
arbitrator had exceeded his mandate to deter-
mine whether the company had proper cause
and had proposed to alter the disciplinary de-
cision, we affirmed the district court’s vacation
of that portion of the arbitrator’s decision.
Delta Queen, 889 F.2d at 604. Later cases
interpreting Delta Queen have echoed the fol-
lowing logic: If an arbitrator is limited to de-
termining whether an employer showed proper
cause for dismissal, and authority to determine
discipline is either vested in the company or is
non-discretionary, the arbitrator exceeds his
powers by fashioning an alternative discipline.5
4(...continued)
isdiction to award consequential damages. See
Magistrate Judge’s Memorandum and Recommen-
dation, at 48 (“Nothing suggests that [the arbi-
trator] exceeded his powers or failed to rationally
infer the essence of the contract.”). Although Apa-
che’s conduct in this litigation has made it a close
issue, we conclude that Apache has sufficiently
preserved the argument that we will address it on
the merits.
5 See E.I. duPont de Nemours & Co. v. Local
900 of the Int’l Chem. Workers Union, 968 F.2d
456, 459 (5th Cir. 1992) (holding arbitrator ex-
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-
ment requires just cause for dismissal, an arbitrator
acts beyond his jurisdiction by fashioning an alter-
nate remedy once it has concludedSSimplicitly or
otherwiseSSthat an employee’s conduct constitutes
just cause for dismissal”). See also Weber Air-
craft, Inc. v. Gen. Warehousemen & Helpers Un-
ion Local 767, 253 F.3d 821 (5th Cir. 2001) (hold-
ing that arbitrator had authority to choose between
suspension and termination where the authority
was vested in the company to “suspend and/or dis-

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6
As in ASOMA, in the cases in which we found
an arbitrator had exceeded his powers, he had
intruded on an issue that was reserved for an
alternative decisionmaker or was removed
from anyone’s discretion under the contract.6
In the Exculpatory Clause in the farm-in
agreement there is no indication that the par-
ties did not intend to arbitrate the validity of
the Exculpatory Clause.7 Texaco and Apache
did not designate an alternate forum to deter-
mine the clause’s validity; there is no indica-
tion that the parties contemplated any judicial
involvement in the contract; and neither party
consented to any court’s jurisdiction. The
farm-in agreement included a very broad arbi-
tration clause covering “any dispute” arising
from the agreement, including “any question
regarding its . . . validity.”
The face of the contract suggests that the
parties intended to have the issue of the en-
forceability of the Exculpatory Clause handled
by arbitration. Given the requirement that lim-
itations on an arbitrator’s authority must be
plain and unambiguous and that we resolve all
doubts in favor of arbitration, we will not read
a clause that refers neither to arbitration nor to
any other method of dispute resolution as pre-
cluding arbitral jurisdiction to consider the val-
idity of the clause.8 The arbitrator did not ex-
ceed his powers by considering the validity of
the Exculpatory Clause under New York law.
Contrary to Apache’s assertion that this
reading renders the Exculpatory Clause mean-
ingless, we interpret “notwithstanding any oth-
er provision” to control the substantive terms
of the contract rather than to designate a de-
cisionmaker for questions of validity. It is a
strained interpretation to suggest that the Ex-
culpatory Clause language was evidence of the
parties’ intention to have a different decision-
5(...continued)
charge”).
6 New York, like most states, is an at-will em-
ployment regime providing no public policy against
terminating an employee for any reason or no rea-
son at all. Murphy v. Am. Home Prods. Corp.,
448 N.E.2d 86, 87 (N.Y. 1983). Under an at-will
regime, there is nothing remarkable about removing
discretion from any decisionmaker to review an
employer’s decision to fire an employee, so long as
the employee has no contractual claim. The same
cannot be said for review of a contractual limita-
tion on consequential damages, where New York
public policy finds some such provisions unen-
forceable. See Kalisch-Jarcho, Inc. v. New York,
448 N.E.2d 413 (N.Y. 1983).
7 Apache properly admitted at argument that a
state court or district court reviewing this contract
would have the authority to consider the validity of
the Exculpatory Clause. Absent plain contractual
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
U.S. 52 (1995) (upholding punitive damages
despite New York law that allowed courts, but not
arbitrators, to award such damages, and stating
that “it would seem sensible to interpret the ‘all
disputes’ and ‘any remedy or relief’ phrases to in-
dicate . . . an intention to resolve through arbi-
tration any dispute that would otherwise be settled
in a court, and to allow the chosen dispute resol-
(continued...)
7(...continued)
vers to award the same varieties and forms of dam-
ages or relief as a court would be empowered to
award”).
8 Cf. Buckeye Check Cashing, Inc. v. Carde-
gna, 126 S. Ct. 1204 (2006) (upholding arbitra-
tor’s jurisdiction to arbitrate a claim that an entire
contract, including the arbitration clause, was void
for illegality).

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7
maker rule on consequential damages.
Apache raises the alternative claim that the
award of consequential damages fails to draw
its “essence” from the contract. The “essence”
test is an application of the inquiry into wheth-
er arbitrators have “exceeded their powers;” it
requires that “the award must, in some logical
way, be derived from the wording or purpose
of the contract.” Kergosien, 390 F.3d at 353
(citing Executone Info. Sys. v. Davis, 26 F.3d
1314, 1324 (5th Cir. 1994)). Under the
“essence” test, the “single question is whether
the award, however arrived at, is rationally in-
ferable from the contract.” Executone, 26
F.3d at 1325.
In section 14.05 of the farm-in contract, the
parties contemplated that they would be enti-
tled to all remedies arising by law. Once the
arbitrator determined that the clause was un-
enforceable, there was no longer any barrier to
awarding consequential damages where they
are allowable under New York law.9 This re-
sult is rationally inferable from the contract, so
the award satisfies the “essence” test.
B.
Apache’s alternate ground for vacating the
award is its claim that the arbitrator manifestly
disregarded the law. We recognized “manifest
disregard for the law” as a non-statutory
ground for vacating an arbitrator’s decision in
Williams v. Cigna Fin. Advisors Corp., 197
F.3d 752, 759 (5th Cir. 1999): “[P]arties [are]
bound by [an] arbitrator’s decision not in
‘manifest disregard’ of the law” (citing First
Options, Inc. v. Kaplan, 514 U.S. 938, 942
(1995)). Judicial review under the manifest
disregard standard is “extremely limited,”
however, in line with “our well-established de-
ference to arbitration as a favored method of
settling disputes when agreed to by the par-
ties.” Prestige Ford v. Ford Dealer Computer
Servs., Inc., 324 F.3d 391, 395 (5th Cir.
2003). Manifest disregard “clearly means
more than error or misunderstanding with re-
spect to the law.” Id.
As the Supreme Court has explained,
plenary review by a court on the merits
would make meaningless the provisions
that the arbitrator's decision is final, for in
reality it would almost never be final. . . .
[I]t is the arbitrator’s construction which
was bargained for; and so far as the arbitra-
tor's decision concerns construction of the
contract, the courts have no business over-
ruling him because their interpretation of
the contract is different than his.
United Steelworkers of Am. v. Enter. Wheel &
Car Corp., 363 U.S. 593, 598-99 (1960). Al-
though the Court in that case was considering
arbitration under a collective bargaining agree-
ment and the Labor Management Relations
Act, we have found its analysis and rationale
applicable to our FAA decisions and to an
arbitrator’s interpretation of the law. See Ker-
gosien, 390 F.3d at 352 n.2, 357-58.
There are two steps in the manifest-disre-
gard analysis. First, “the error must have been
obvious and capable of being readily and in-
stantly perceived by the average person qual-
ified to serve as an arbitrator.” Id. at 355.
Furthermore, “the term‘disregard’ implies that
the arbitrator appreciates the existence of a
9 See Jacada (Europe), Ltd. v. Int’l Mktg.
Strategies, Inc., 401 F.3d 701, 712-13 (6th Cir.)
(upholding award in excess of a damage limitation
under the “essence” test where the arbitrator had
plausibly determined it was unenforceable), cert.
denied, 126 S. Ct. 735 (2005).

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8
clearly governing principle but decides to ig-
nore or pay no attention to it.” Id. The gov-
erning law must be “well-defined, explicit, and
clearly applicable.” Prestige Ford, 324 F.3d at
395. For the second step, “before an ar-
bitrator’s award can be vacated, the court
must find that the award resulted in a signifi-
cant injustice.” Kergosien, 390 F.3d at 355.
The parties agree that, in accordance with
the choice-of-law provision in their contract,
the arbitration is governed by New York law.
Apache argues that the arbitrator manifestly
disregarded New York law by awarding con-
sequential damages in light of the Exculpatory
Clause. The arbitrator found that clause unen-
forceable as against public policybecause Apa-
che (1) acted with reckless disregard for
Texaco’s rights; (2) intentionally abandoned
the contract; and (3) breached a fundamental
obligation of the contract. Apache argues that
none of these reasons is sufficient under New
York law to find the Exculpatory Clause un-
enforceable.
“[P]arties to a contract have the power to
specifically delineate the scope of their liability
at the time the contract is formed,” and New
York courts regularly enforce limitations on
liability provisions. Bd. of Educ. v. Sargent,
Webster, Crenshaw & Folley, 71 N.Y.2d 21,
29 (1987). Under announced New York pub-
lic policy, however, limitations of liability “will
not apply to exemption of willful or grossly
negligent acts.”10 Although the public policy
was first announced in a series of cases
considering delay clauses in construction con-
tracts,11 in two later cases the New York
Court of Appeals considered its application
outside that context.
In Sommer v. Fed. Signal Corp., 593
N.E.2d 1365, 1368 (N.Y. 1992), that court
considered an exculpatory clause in a contract
that limited liability for any “losses or damages
. . . caused by performance or non-perform-
ance of obligations imposed by this contract or
by negligent acts or omissions.” Plaintiff had
contracted with defendant to obtain fire-alarm
monitoring service and sued after defendant
had failed to report a fire signal. The trial
court dismissed the case on summary
judgment, concluding that the event was a
“misadventure” that did not rise to the
standard of gross negligence. The Court of
Appeals concluded that there was a triable is-
sue of fact and discussed the public policy
standard as follows:
It is the public policy of this state . . . that
a party may not insulate itself from dam-
ages caused by grossly negligent conduct.
. . . . Gross negligence, when invoked to
pierce an agreed upon limitation of liability
in a commercial contract, must “smack[] of
intentional wrongdoing.” It is conduct that
evinces a reckless indifference to the rights
of others. . . .
10 Kalisch-Jarcho, Inc. v. New York, 448
N.E.2d 413, 416-18 (N.Y. 1983) (holding that a no
damage-for-delay clause would be unenforceable
where a party had acted with “bad faith and with
deliberate intent”).
11 See id. at 416; Corinno Civetta Constr.
Corp. v. City of New York, 493 N.E.2d 905, 910
(N.Y. 1986) (noting that “[E]ven with such a
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-
contemplated delays, (3) delays so unreasonable
that they constitute an intentional abandonment of
the contract by the contractee, and (4) delays re-
sulting from the contractee’s breach of a funda-
mental right of contract”).

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9
[The Exculpatory clause] cannot restrict
Holmes’ liability for conduct evincing a
reckless disregard for its customers’ rights.
. . . .
[P]ublic policy precludes enforcement of
contract clauses exonerating a party from
its reckless indifference to the rights of oth-
ers, whether or not termed gross
negligence.
Id. at 1371 & n.3 (citing Kalisch-Jarcho, 448
N.E.2d at 416). The court then remanded for
a jury trial on the issue of whether defendant’s
conduct was recklessly indifferent. Id.
Two years later, the court revisited the is-
sue. The contract limited defendant’s liability
for nonperformance but exempted “willful acts
or gross negligence.” Metro. Life Ins. Co. v.
Noble Lowndes Int’l, Inc., 643 N.E.2d 504,
505-06 (N.Y. 1994). A jury found that defen-
dant’s actsSSdemanding a contract adjustment
and then withdrawing from the contractSSwere
“malicious, i.e., the intentional perpetration of
a wrongful act injuring plaintiff without
justification;” the jury awarded damages. Id.
at 506. The intermediate appellate court
reduced the award and concluded that the will-
ful-act exception in the contract required acts
constituting a tort. Metro. Life Ins. Co. v. No-
ble Lowndes Int’l, Inc., 600 N.Y.S.2d 212,
216 (App. Div. 1993). The Court of Appeals,
on review of that decision, concluded that
the phrase “willful acts” should be inter-
preted here as referring to conduct similar
in nature to the “intentional misrepresenta-
tion” and “gross negligence” with which it
was joined as exceptions to defendant’s
general immunity from liability for conse-
quential damages. We, therefore, conclude
that the term willful acts as used in this
contract was intended by the parties to sub-
sume conduct which is tortious in nature
i.e., wrongful conduct in which defendant
willfully intends to inflict harm on plaintiff
at least in part through the means of
breaching the contract between the parties.
As thus defined, limiting defendant’s lia-
bility for consequential damages to injuries
to plaintiff caused by intentional misrepre-
sentations, willful acts and gross negligence
does not offend public policy. As we said
in Sommer, the conduct necessary to pierce
an agreed-upon limitation of liability in a
commercial contract, must smack of
intentional wrongdoing.
Id. at 508-09 (citations omitted). The court
then concluded that plaintiff’s proof showed
that defendant’s acts were motivated exclu-
sively by economic self-interest, which was in-
sufficient as a matter of law to vitiate the lim-
itation-of-liability provision.
The arbitrator in the instant case, interpret-
ing these decisions, drew support from Som-
mer and concluded that “acting with ‘reckless
disregard’ is sufficient under New York law to
vitiate the effect of an exemption clause.” Fur-
ther, he interpreted Metropolitan Life as con-
tinuing to recognize gross negligence, in-
cluding reckless disregard, as a ground for
voiding a limitation on liability. The prominent
positive citation of Sommer in Metropolitan
Life suggests that the court in the later case
agreed with the earlier opinion’s reasoning.
The arbitrator’s interpretation is not so
plainly incorrect as to be “obvious and capable
of being readily and instantly perceived by the
average person qualified to serve as an arbitra-
tor.” The arbitrator, whose factual findings

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10
are unreviewable,12 determined that Apache
withdrew from the contract in reckless indif-
ference to the interests of Texaco; the arbitra-
tor concluded that finding sufficient to vitiate
the Exculpatory Clause. He did not manifestly
disregard the law by failing to enforce the Ex-
culpatory Clause and awarding consequential
damages to Texaco.
C.
Apache argues that the arbitrator manifestly
disregarded New York law by awarding Tex-
aco cost-of-drilling damages: the cost that
Apache would have spent drilling three explor-
atory wells. Apache claims that the proper
measure of Texaco’s expectancy damages is
the value of the information the wells would
have yielded.
In Chamberlain v. Parker, 45 N.Y. 569,
571 (1871), defendant breached his covenant
to build a well on plaintiff’s land. The trial
court awarded the plaintiff the cost of drilling
the well, an intermediate court reversed, and
the New York Court of Appeals affirmed. Id.
at 570, 574. The court’s analysis began with
the general rule that, where a party contracts
to have a structure built, the measure of dam-
ages for breach is the loss of value of the
structure or, when that amount is indetermi-
nate or valueless, the value of “the work and
labor which the defendant was to perform.”
Id. at 572. On the unique facts of the case,
however, the court stated that “[t]he point to
be considered is, whether the plaintiff in any
sense, actual or legal, has lost by the default of
the defendant a sum equal to the expense of
digging the well.” Id. at 572. The court
stressed that under the specific facts, the plain-
tiff was to have no interest in the well. Id. at
573. Moreover, “[t]he defendant was not paid
for digging a well for the plaintiff on the prem-
ises.” Id.
The arbitrator in the present case concluded
that this matter is distinguishable from Cham-
berlain, noting that Texaco would have had a
continued interest in the three wells and that
Apache’s receipt of a 50% interest in the
blocks was payment for drilling the wells. The
arbitrator then looked to other jurisdictions for
guidance.13 Finding a Louisiana case that he
believed was directly on point, the arbitrator
elected to adopt that case’s measure of
damages. In Fite v. Miller, 200 So. 285 (La.
1940), plaintiff assigned a one-half interest in
his mineral estate to defendant as considera-
tion for defendant’s promise to build a well on
12 See Major League Baseball Players Ass’n v.
Garvey, 532 U.S. 504, 509-10 (“When an arbi-
trator resolves disputes regarding the application of
a contract, and no dishonesty is alleged, the arbi-
trator’s improvident, even silly, factfinding does
not provide a basis for a reviewing court to refuse
to enforce the award. In discussing the courts’ lim-
ited role in reviewing the merits of arbitration
awards, we have stated that courts have no busi-
ness weighing the merits of the grievance or con-
sidering whether there is equity in a particular
claim.”) (citations omitted); Kergosien, 390 F.3d
at 358 (same).
13 Apache also argues that the arbitrator exceed-
ed his powers by relying on law outside the state of
New York in contravention of the Choice of Law
Clause. The arbitrator looked to caselaw outside
New York as persuasive authority after concluding
that no New York case squarely controlled. Courts
are generally free to look to the decisions of other
jurisdictions in determining uncertain or ambiguous
questions of New York law. Elliott Assocs., LP v.
Banco de la Nacion, 194 F.3d 363, 370 (2d. Cir.
1999). Arbitrators “should apply the basic princi-
ples of contract law to which the parties have re-
ferred” in their choice of law clause. 1 DOMKE ON
COMMERCIALARBITRATION § 30:5, at 30-7 (Larry
Edmonson 3d ed. 2005).

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11
the land. Id. at 286. When defendant failed to
perform, plaintiff was awarded cost-of-drilling
damages. Id. at 288. The ideal measure of
damages would be the lost profits yielded from
the well, but the court held that such damages
were too speculative to be proven. Id. at 287.
The facts of Fite are distinguishable; there
the plaintiff never accepted the return of de-
fendant’s interest in the land. Id. at 289. The
Fite court implied, and we have held, that if a
plaintiff has accepted the return of his consid-
eration he cannot sue for damages.14 Under
the manifest disregard standard, Apache must
point to a controlling case with a clear rule ig-
nored by the arbitrator. Chamberlain is suffi-
ciently distinguishable that it is not on point,
and caselaw from other jurisdictions, even if
squarely on point, is not controlling but only
persuasive. The arbitrator did not manifestly
disregard the law in awarding cost-of-drilling
damages.
D.
Apache urges that the arbitrator manifestly
disregarded New York law by failing to apply
mitigation principles to reduce Texaco’s
award. The arbitrator did not reduce the
award by the value of any of the following: the
knowledge of a discovery extending onto
Block 11/19 that Texaco gained from the data
provided by CNOOC; the renegotiated deal
with CNOOC, which would not have been
possible had Apache not reassigned its inter-
ests to Texaco; or the interest in the blocks
Apache returned. Apache maintains that it
should have received credit for each of these
items.
The arbitrator acknowledged that under
New York law, if any benefit accrues “to the
plaintiff because of the breach, a balance must
be struck between benefit and loss, and the de-
fendant is only chargeable with the net loss.”
See Stern v. Satra Corp., 539 F.2d 1305, 1312
(2d Cir. 1976). The arbitrator then pointed to
G&R Corp. v. Am. Sec. & Trust Co., 523 F.2d
1164, 1174 (D.C. Cir. 1975), which holds that
for a defendant to be entitled to mitigation, his
breach must have made possible a new, favor-
able transaction, and the profits from that
transaction must not be more fairlyattributable
to the business acumen of the plaintiff. Adher-
ing to that decision, the arbitrator refused to
reduce the award in light of the information
Texaco received or the new deal Texaco nego-
tiated, because the arbitrator determined that
any benefit Texaco gained was more
attributable to Texaco’s efforts than to Apa-
che’s breach.
Apache cites no New York authority that
conclusively shows that G&R is contrary to
New York law. Apache has not demonstrated
that the arbitrator manifestly disregarded New
York law in refusing to reduce Texaco’s
award by the value of Texaco’s mitigation.
The arbitrator refused to reduce the award
in light of the return of Apache’s interest in the
blocks, because he found that the interest had
no inherent worth at the time it was returned.15
14 Fite, 200 So. at 289-90; Cockburn v. O’Mea-
ra, 141 F.2d 779 (5th Cir. 1944) (applying Louisi-
ana law and declining to follow Fite where plaintiff
had accepted return of the land).
15 Apache argues that this finding creates a logi-
cal impossibility in the award. It claims that if
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
valued at $20 million, and Texaco’s damages
should be offset by that amount.
(continued...)

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12
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.

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