In TotalEnergies E&P USA, Inc. v. MP Gulf of Mexico LLC. the Supreme Court of Texas resolved the chaos created by conflicting dispute resolution regimes in three contracts for ownership and operation of an offshore unit and gathering system. The essential question: Did the parties agree that an arbitrator, rather than the courts, must determine the arbitrability of the disputes.
The Court held that the parties clearly and unmistakably allocated arbitrability issues to the arbitrator when they agreed to arbitrate their controversies in accordance with the AAA Commercial Rules, and their agreement to arbitrate some controversies but not others did not affect the delegation of the arbitrability decision to the arbitrator.
There were three contracts: the Chinook Unit Operating Agreement, a System Operating Agreement, and a Cost-Sharing Agreement for a common system to secure and transport production from the Chinook Unit and another unit. There were three procedings:
- TotalEnergies sued in district court for a declaration construing the Cost-Sharing Agreement, which had no arbitration clause. That dispute required the court to look at the Chinook Operating Agreement but no one asked the court to determine the parties’ rights under the Chinook Operating Agreement,
- TotalEnergies initiated an arbitration seeking determination of the parties’ rights under the Chinook Operating Agreement, which required arbitration of any controversy arising between the parties.
- MP Gulf initiated an arbitration under the American Arbitration Association Commercial Rules, alleging that TotalEnergies breached the System Operating Agreement, which required arbitration of any controversy arising out of the agreement
The Court summarized the state of arbitration law in Texas:
- Arbitration is a creature of contract, not coercion. Parties will not be forced to arbitrate unless they agreed to it.
- When a party challenges the validity of a contract, but not of an arbitration agreement within the contact, the courts must enforce the arbitration agreement and require the arbitrator to decide the challenge to the broader contact. …
- But when a party challenges the scope of the arbitration agreement, the courts must resolve that challenge ….
- UNLESS the parties agree that the arbitrator will decide.
- Courts will enforce an agreement to delegate arbitrability to the arbitrator if that agreement is “clear and unmistakable”.
- The general rule is that an agreement to arbitrate under the AAA rules is a “clear and unmistakable” agreement that the arbitrator is the one to decide whether the disputes must be resolved through arbitration.
The Court referred to American Arbitration Association Rule 7(a). As it existed at the time the arbitrations were initiated the rule empowered arbitrators to “rule on his or her own jurisdiction.” The rule changed in September 2022 to specifically designate the arbitrator as the arbiter of the scope of the arbitration.
What about a contractual carve-out of issues? It didn’t matter. Delegation to arbitrability to the arbitrator included the decision on the scope of the issues to be arbitrated and those that would not be. … That is, unless the parties agreed more specifically than in this situation what would be arbitrated and what would not be.
Interested in the history of Texas, federal and other state court decisions on this subject? You are invited to read the opinion, all 50 pages of it. These meager 500+ words cannot do justice to all of that history. And you don’t want a treatise anyway, so we are in accord.
Your mid-Jazz Fest musical interlude.