TotalEnergies E&P v. MP Gulf of Mexico
Arbitration clauses in Texas are as common as hot summer days. Yet, despite their widespread use, how they are interpreted and whether they are enforceable still get a fair amount of attention in the legal system. Before you are party to another arbitration clause or you decide to draft your own, you’ll find a few key elements below.
When $41 million is on the line, the legal process can get complicated and muddied. To resolve whether Total E&P owed MP Gulf $41 million, “three separate proceedings before three separate tribunals, based on three different dispute-resolution clauses in the parties’ three written agreements” were filed. Texas Supreme Court Opinion That’s a few piles of paperwork.
The two companies owned interests in oil-and-gas leases in the Chinook Unit in the Gulf of Mexico. MP Gulf also owned an interest in a nearby group of leases, so the two parties agreed to enter into another agreement to jointly process, store and transport production (Common System).
Things seemed to be okay for ten years, although at some point the Chinook Number Six well was shut in. When MP Gulf proposed to start up the project again, Total E&P declined to participate. “Later MP Gulf demanded that Total E&P pay the $41 million” which purportedly was MP Gulf’s proportionate share of costs associated with the reopening of the well. If owed, that’s a costly “no thank you.”
When negotiations failed, E&P filed suit. One issue was which contract applied, as one of the contracts did not have an arbitration clause. Two weeks later, MP Gulf initiated an arbitration under a separate agreement. The trial court ordered a motion to stay the arbitration, but the court of appeals reversed, compelling arbitration.
Next up, the Texas Supreme Court. Interestingly, at the Supreme Court, two justices didn’t participate in the decision, one concurred and one dissented. Another indication that legal minds differ.
Can An Arbitrator Determine How Much Power He Has?
Spoiler alert, in this case the Texas Supreme Court said yes, upholding the Court of Appeals. The question of “arbitrability” starts with the Court reviewing whether a court or the arbitrator decides if the merits of the case must be resolved through arbitration or at the court house.
In Texas, arbitration is a contractual matter requiring consent of the signing parties. One item that is often dispositive of whether arbitration is enforceable is a well-drafted and well-placed severability clause. “A contractual agreement to arbitrate controversies is severable from a broader contract that contains it, and courts must consider the two separately.” Texas Supreme Court Opinion This becomes an issue with exceptions or modifications to the arbitration clause are not within the clause itself.
Further, parties can agree to delegate “arbitrability” to the arbitrator. However, “. . . courts will only enforce an agreement to delegate arbitrability to the arbitrator if that agreement is ‘clear and unmistakable’. . .” Texas Supreme Court Opinion
Holding that the American Arbitration Association rules were binding, the Court quoted language in the System Operation Agreement, including “. . . arbitration must be conducted ‘in accordance with the rules of the AAA.” The Court further noted that the AAA rules “provide that the arbitrator ‘shall have the power to rule on his or her own jurisdiction, . . .” The Court found the word “shall” meant the Arbitrator’s authority was mandatory. Texas Supreme Court Opinion
“We thus hold that, as a general rule, an agreement to arbitrate disputes in accordance with rules providing that the arbitrator ‘shall have the power’ to determine ‘the arbitrability of any claim’ incorporates those rules into the agreement and clearly and unmistakably demonstrates the parties’ intent to delegate arbitrability issues to the arbitrator.” Texas Supreme Court Opinion
The Court recognized several possible issues like severability and which Agreement applied to the matter in dispute. However, they did not reach any holdings regarding these matters. There is an extensive, well cited discussion. In the end, the Court said it was for the arbitrator to decide these matters, not the Court.
In dicta (not a part of the case facts in front of the court), the Court explored exceptions from other court decisions to the “arbitrability” clause that could find authority with the Court, rather than the Arbitrator. Such exceptions have been found for an unsophisticated party, in a class action setting and appropriately legally carved out exceptions.
The question of which version of the AAA rules applies can also arise. As of September 1, 2022, the American Arbitration Association revised the rule [Commercial Rule 7(a)] under dispute in this case. The new provision added language specifically “providing that the arbitrator shall have the power to rule on his or her own jurisdiction and on any objection to the arbitrability of any claim or counterclaim ‘without any need to refer such matters first to a court.’” Texas Supreme Court Opinion However, this case was decided under the prior rule.
Which version of the rule applies to a contract will be governed by the language in the arbitration agreement. If you wonder why agreements get so detailed and long, or how parties’ interpretations often differ, this example provides a small window into a case and controversy.
Some agreements call for the current version of the rule to apply in a dispute. Other agreements are silent. Even if an agreement provides for the current version of the rule be applied, is that at the time of litigation, arbitration or time of dispute? This is why a simple yes or no answer is sometimes difficult to come by in the law.
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If you have a question about the enforceability of an arbitration agreement, or you would like to discuss a commercial transaction dispute, what the appropriate legal action is or how long it will take to resolve a legal matter, that’s when the experience of a commercial lawyer and breach of contract attorney come in handy. Whether you want to avoid expensive, lengthy litigation matters or you need aggressive representation, we are ready to put our decades of winning experience to work for you.
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