One of the top business cases being heard by the Texas Supreme Court this term offers the court an opportunity to weigh in on the recurring and key issue of whether a contract’s incorporation of standard arbitration rules shows “clear and unmistakable” evidence of intent to arbitrate.
The arbitration dispute is over a $41 million claim by MP Gulf of Mexico against Total E&P USA over common interests in offshore oil and gas leases in the Gulf of Mexico. In 2017, MP, as operator of the Chinook leases, proposed to Total that a well be reentered. Total elected not to participate. MP proceeded and in 2019 billed Total, which disagreed with the billed amounts and refused to pay. After a failed mediation, the arbitration dispute ensued. The 165th District Court in Harris County denied MP’s motion to compel arbitration.
In December 2020, the Twelfth Court of Appeals reversed the trial court’s order and compelled arbitration, finding for MP “clear and unmistakable evidence that the parties intended for the arbitrator to decide arbitrability based on the parties’ express incorporation” of American Arbitration Association rules. The Supreme Court agreed to hear Total’s appeal. Justices Evan A. Young and Rebecca Aizpuru Huddle are not participating in the review.
In arguments during the court’s opening week, Total’s lawyer, John F. Bash of Quinn Emanuel Urquhart & Sullivan, said the court could essentially eliminate litigation in lower courts about the gateway issue by adopting a broad holding that referencing arbitration rules is never enough on its own to prove delegation.
“They have to explicitly say ‘We delegate,’” said Bash. He said the need for clear language is to avoid having “the arbitrator deciding the scope of his or her own power.”
The two companies’ shared interests were governed by separate agreements for system operations and cost sharing. Bash pointed to language in the cost sharing agreement that “in all legal proceedings applicable to this agreement, the parties consent to the exclusive jurisdiction of the courts of Harris County.”
“If you read the contracts together, it’s very obvious the parties agreed to send disputes to different forums,” he said.
Justice Jimmy Blacklock asked: “What does precedent say you do when the two agreements have diametrically opposed dispute resolution?”
“If the parties consciously chose as they did in this case to divide up judicial review in this way then you give effect to the parties’ contract,” Bash replied. “You have to give effect to the fact that the parties intended cost-sharing disputes to go to court.”
Bash added that MP, a subsidiary of Murphy Oil Corporation, has not offered this court any suggestion to clarify the issue for the courts of appeals, which have offered differing interpretations.
MP in its briefs called the split “a mirage” that is “the ordinary judicial work of applying a single rule to different facts, which sometimes generates different outcomes.”
Stephanie F. Cagniart of Baker Botts, arguing for Murphy, focused on AAA Rule 7(a), which states: “The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.”
“What we have is a party that entered into negotiation that made a conscious choice to use ‘Triple A’ rules,” said Cagniart. “Courts agree, Rule 7a is as clear as it gets, it delegates arbitrability.”
Justice Brett Busby said he was having trouble seeing how the contract language was clear and unmistakable, the standard set by the U.S. Supreme Court in 1995 in First Options of Chicago v. Kaplan. “So clear and unmistakable refers to how courts have interpreted language rather than what the language itself says?” he asked.
Cagniart: “It does not. It of course means what the language says, and this court will be the arbiter of what the language says.”
Cagniart cautioned the court against making Texas an outlier from federal courts on the gateway issue.
“I would urge the court not to adopt a rule or a ruling that would circumvent so much of the purpose of arbitration, which is precisely to avoid having to try the case twice potentially,” she said. “The purpose of having something like Rule 7a is that you go immediately to arbitration if it’s deemed to be within the scope.”
Murphy received support for its position in amicus briefs from the Texas Civil Justice League and three professors who have taught arbitration at the University of Texas School of Law.
“It is no secret that a good many trial courts across the state do not like arbitration agreements and are reluctant to enforce them,” said George S. Christian in the TCJL brief. “But intermediate appellate courts and this Court, as amply illustrated by MP’s briefing, have appropriately corrected them time and time again.”
The professors – Alan S. Rau, James L. Loftis and Timothy J. Tyler – said Total’s position would break with the law in every federal circuit that has addressed the question. Rau is the Mark G. and Judy G. Yudof Chair Emeritus in Law who has published extensively in the area of arbitration. Loftis and Tyler are adjunct professors who practice at Vinson & Elkins.
“If this Court were to accept Petitioner’s invitation to break with the law accepted in every federal circuit to address the question, Texas’s commercial-arbitration law would become more fragmented, discordant, and uncertain,” said Tyler.
Columbia Law School Professor George A. Bermann, director of the Center for International Commercial and Investment Arbitration, sided in his amicus brief with Total’s position that the question of arbitrability is an issue for judicial determination unless the parties clearly and unmistakable provide otherwise.
“Under a delegation, the arbitrability of a dispute ends up being determined, not by a court, but exclusively by a body whose authority stems from the very arbitration agreement whose existence, validity, or applicability is in question,” said the brief written by Chicago lawyer Robert C. Owen and J. Samuel Tenenbaum of the Bluhm Legal Clinic at Northwestern Pritzker School of Law.
The case number is 21-0028.