One of the top business cases being heard by the Texas Supreme Court this term was decided Friday as the court held that including standard arbitration rules in a contract shows the parties intended to arbitrate a dispute over a drilling cost-sharing agreement.
In deciding the arbitration dispute, the court said it was joining many federal circuit courts and state supreme courts that had decided the issue. The ruling is expected to reduce litigation in lower courts on the arbitration gateway issue.
A dissenting justice said the ruling will hamper the ability of parties to restrict what types of disputes will be arbitrated.
The appeal concerns a $41 million claim by MP Gulf of Mexico against TotalEnergies E&P USA (formerly Total E&P USA) over common interests in offshore oil and gas leases in the Gulf of Mexico that were executed in 2007. Ten years later, MP Gulf, as operator of the Chinook leases, proposed to Total that a well be reentered. Total elected not to participate. MP Gulf 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 Gulf’s motion to compel arbitration. In December 2020, the Twelfth Court of Appeals reversed the trial court’s order and compelled arbitration, finding “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 affirmed in an opinion by Justice Jeff Boyd. He was joined by Chief Justice Nathan Hecht and Justices Debra Lehrmann, John Devine, Jimmy Blacklock and Jane Bland. Justice Brett Busby authored a dissenting opinion. Justices Evan A. Young and Rebecca Aizpuru Huddle did not participate in the review.
AAA rules provide that 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.”
Total argued that this rule merely authorizes but does not independently grant exclusive power or deprive courts of that power.
In his opinion, Boyd focused on the rule’s use of the verb “shall” as evidence of the mandatory nature of the duty imposed.
“We conclude that, by providing that the arbitrator ‘shall have the power’ to determine the arbitrability of any claim, the rule clearly and unmistakably delegates that decision exclusively to the arbitrator,” Boyd said.
In his dissent, Busby focused on language in the leases that set certain preconditions on the scope of what claims are arbitrable. “The parties did not clearly and unmistakably delegate to arbitrators the power to decide whether the preconditions are met,” he said.
Busby warned contracting parties that if they agree to arbitrate a limited set of disputes under AAA rules, “you are stripping courts of power to decide whether a particular dispute falls outside the scope of that agreement.”
“Like glitter, the AAA rules cannot be constrained if the parties use them to any extent,” Busby said.
The majority held that “the fact that the parties may have agreed to arbitrate only some controversies while carving out others does not affect the clear and unmistakable delegation of the arbitrability decision to the arbitrator.” The “courts must defer to the arbitrator to decide whether this controversy falls within the arbitration agreement’s scope,” Boyd said.
Justice Bland, in a concurring opinion, said she would also affirm on the ground that the parties agreed to arbitrate the underlying controversies. “Because the agreements require arbitration of this dispute either way and the court of appeals properly compelled it, the Court and the dissent’s alternative paths lead to the same destination,” she said.
Stephanie F. Cagniart of Baker Botts argued the case for MP Gulf. John F. Bash of Quinn Emanuel Urquhart & Sullivan argued for Total.
The case is No. 21-0028.