Texas Supreme Court Discusses Primary Jurisdiction For Environmental Contamination Claims

On April 28, the Texas Supreme Court, affirming the Court of Appeals of Texas, First District, sitting in Houston, issued a unanimous ruling in the case of Forest Oil Corporation v. El Rucio Land and Cattle Company, Inc., et al. This case involves claims for environmental contamination caused by oil and gas operations on the land of the McAllen Ranch, whether the Texas Railroad Commission (TRC) has primary jurisdiction to respond to these claims, and whether the court should overturn the decision of an arbitration panel the parties earlier agreed to in order to resolves their disputes. The Texas Supreme Court held that there is nothing in the Texas Water Code and other statutory provisions that gives the TRC primary jurisdiction over oil and gas contamination disputes if the parties exercise their common law remedies in court. This decision is an important statement of the Texas Supreme Court’s views on primary agency jurisdiction when the courts themselves have broad jurisdiction to decide these matters.

In the 1990s, the parties agreed to settle the McAllen’s claims for underpayment of royalties and the underproduction of the leases with a “Settlement Agreement” which incorporated an arbitration agreement. In 2007, McAllen asked the TRC to investigate contamination of the 27,000-plus-acre McAllen Ranch (the Ranch) by the Forest Oil Corporation (Forest), and the TRC referred Forest to the TRC’s voluntary Operator Cleanup Program. Forest proposed cleanup plans to the TRC, but the TRC has yet to approves Forest’s final remediation plans. Forest also moved to compel arbitration, and a three person panel was selected by the parties. However, the arbitration panel, in a divided ruling, refused to abate the proceedings pending final action by the TRC, and then awarded the McAllen interests $15 million for actual damages, $500,000 for exemplary damages, $6.7 million in attorney fees, and James McAllen personally $500,000 for personal injury actual damages. The arbitration panel also ordered Forest to provide McAllen with a $10 million bond to assure performance of Forest’s continuing cleanup obligations. Forest then moved to vacate the award, arguing that the TRC has exclusive or primary jurisdiction, precluding the disputed arbitration, and that there was evidence that one of the arbitrators selected to serve on the panel had a conflict of interest.

The courts, including the Texas Supreme Court, have vacated the $10 million bond requirement, but have rejected all the other arguments of Forest.