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Texas Jurisdiction of Oil and Gas Contamination Damages

The Texas Supreme Court recently ruled in the case of Forest Oil Corporation v. El Rucio Land and Cattle Co. The Court originally denied the review of the Corpus Christi Appeals Court decision affirming a $15 million dollar arbitration award against Forest Oil Corporation (now Sabine Oil & Gas), however, after a motion for rehearing the Court granted the petition for review. The primary issue is who has jurisdiction of a landowner’s claim against an oil and gas company for the contamination of a landowner’s property.

Background

Forest Oil leased roughly 1500 acres from McAllen Ranch (owned by James McAllen) in the mid-1980’s, where it has been producing and processing natural gas. About a decade after the lease was signed, McAllen Ranch and Forest Oil entered into another agreement in which Forest agreed to remove and clean up any hazardous materials from the lease site. The parties agreed that any disputes would be resolved by arbitration rather than by going to court.

In 2004, an ex-employee from Forest Oil told James McAllen that Forest Oil had been contaminating the property. McAllen believed this contamination caused his cancer. McAllen filed a lawsuit against Forest Oil for the contamination on his property, and the unlawful disposal of hazardous materials on his property. Among the allegations, McAllen claimed that Forest Oil knowingly donated contaminated piping to McAllen for personal use. The claim went to arbitration.

Two of the three arbitrators ruled in favor of McAllen. They awarded McAllen $500,000 in exemplary damages, $500,000 for personal injury damages, $6.7 million in attorney’s fees, and $15 million in damages for the land. They also declared that Forest Oil must clean up the remaining contamination to the land and remove any potentially hazardous materials. Further, the arbitrators ordered that Forest Oil reimburse McAllen for any future expense related to the contamination.

Forest moved to vacate the arbitration awards on the grounds that Texas Railroad Commission and not the courts had jurisdiction over these issues. Forest Oil argued that the arbitrator’s rulings were not authorized by Texas law and also that the arbitrators had an undisclosed bias. However, the trial court was not persuaded by Forest’s arguments and affirmed the arbitration decision. The Court of Appeals in Houston affirmed the trial court’s ruling.

Texas Supreme Court

The Supreme Court of Texas affirmed the previous decisions and held that the Texas Railroad Commission did not have jurisdiction over the dispute. The Court found that there was no clear indication that the state legislature had given the Railroad Commission exclusive jurisdiction which would preclude a court from hearing the claim. The Court noted that McAllen’s claims were based on common law and so were inherently judicial. The Court also held that the alleged bias of the arbitrators was not apparent and there was no evidence to suggest that anything prevented the arbitrators from rendering a fair decision. 

It’s interesting to note that Forest Oil requested arbitration in the first place, and then when they did not like the decision of the arbitrators, sought to vacate the award!

The Texas Railroad Commission is the state agency that regulates oil and gas operations, however, the Commission has never gotten involved in private causes of action. The arguments of Forest Oil in this case, that the Commission has exclusive jurisdiction over claims of damage due to environmental contamination, were based on Section 26.131(a)(1) of the Texas Water Code, which states that the Commission “is solely responsible for the control and disposition of waste and the abatement and prevention of pollution of surface and subsurface water resulting from . . . activities associated with the exploration, development, and production of oil or gas . . . “. However, Court found that this legislative authority in no way gave to Commission jurisdiction of common law trespass or damage claims.