Texas Supreme Court Clarifies Questions of Arbitrability with Recent Decision

TotalEnergies E&P USA, Inc., v. MP Gulf of Mexico, LLC, 667 S.W.3d 694 (Tex. April 14, 2023).

The Texas Supreme Court determined that parties’ choice of the AAA Commercial Arbitration Rules, which assign to the arbitrators the power to rule on their jurisdiction, clearly and unmistakably delegates arbitrability decisions to arbitrators and withdraws them from courts in the first instance.  The TotalEnergies E&P USA, Inc., v. MP Gulf of Mexico, LLC decision resolves issues that had been unclear in recent decisions in the Texas Supreme Court and the appellate courts, providing guidance on how to resolve these types of disagreements.

The Texas Supreme Court reviewed TotalEnergies E&P USA, Inc., v. MP Gulf of Mexico, LLC to determine whether parties who incorporate the American Arbitration Association (“AAA”) rules into their contract, delegate the question of arbitrability to the arbitrator.  Id. at 697. 

MP Gulf Mexico (“MP Gulf”) and Total Energies E&P USA (“Total Energies”) owned an interest in a group of oil and gas leases in the Gulf of Mexico.  Governing the parties’ relationship as co-owners was a written contract referred to as the Chinook Operating Agreement.  In order to reduce costs and efficiency, the two owners agreed to construct a common system to handle production from all the leases and entered into two additional contracts to establish the common system: (1) the System Operating Agreement; and (2) Cost Sharing Agreement.  Id.  The Chinook Operating Agreement contained an arbitration provision and the Cost Sharing Agreement had no such provision.  Id. at 699.

Ten years after developing the common system, MP Gulf demanded Total Energies pay certain costs under the Cost Sharing Agreement.  Id. at 698.  Following an unsuccessful mediation, Total Energies sued in State court, seeking a declaration construing the Cost Sharing Agreement.  Id at 698–99.  Total Energies initiated an arbitration the same day, seeking a determination of the parties’ rights under the Chinook Operating Agreement.  Id.  MP Gulf then initiated arbitration proceedings alleging Total Energies breached the Chinook Operating Agreement by failing to pay and seeking a declaration concerning the allocation of costs under the Cost Sharing Agreement.  The parties’ dispute thus resulted in three separate proceedings before three separate tribunals, based on three different dispute-resolution clauses contained in the parties’ three agreements.

The Texas Supreme Court held that basic contract law governs our resolution of whether a court or arbitrator decides whether the merits of a dispute must be resolved through arbitration or court proceedings.  Id. at 701.  The Court reasoned that because arbitration is a matter of contract, that parties cannot be compelled to arbitrate any controversy unless they have contractually agreed to do so.  Id.  Generally, a contractual agreement to arbitrate controversies is severable from a broader contract containing the provision, and courts must consider the two separately.  Id.  When a party challenges the validity of the broad contract but not of an arbitration agreement contained therein, courts must enforce the arbitration agreement and require the arbitrator to decide the challenge to the broader contract.  Id.  However, there is an exception to the severability rule.  Id.  That is when the parties did not agree to submit the arbitrability question itself to arbitration the court should decide that question just as it would decide any other question the parties did not submit to arbitration.  Id. 

Beyond the severability rule, the Courts will enforce an agreement to delegate arbitrability to the arbitrator if that agreement is clear and unmistakable.

In this case, the Court determined that the Chinook Operating Agreement specifically states that the parties agree to arbitrate their disputes “in accordance with the rules of the AAA.”  Id. at 702. MP Gulf points to AAA Rule 7(a)—which provides 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” to argue that the parties agreed to arbitrate disputes over whether their claims must be arbitrated  Id.  Finding no precedent from the Supreme Court of Texas or the Supreme Court of the United States, the Court looked to other jurisdictions and Texas courts of appeals before agreeing “with the vast majority of courts that, as a general rule, an agreement to arbitrate in accordance with the AAA or similar rules constitutes clear and unmistakable agreement that the arbitrator must decide whether the parties’ disputes must be resolved through arbitration.”  Id. at 703–08.  The Court clarified that express language indicating that arbitration is to be conducted in accordance with the rules of the AAA incorporates the AAA rules into the parties’ arbitration agreement, whereas language merely referring to the AAA rules or permitting the parties to request guidance from the AAA does not.  Id. at 708–09.

Total Energies argued that the parties’ decision to limit certain disputes to arbitration and carve out others as opposed to broadly agreeing to arbitrate any and all disputes indicates that the parties did not intend to apply the AAA rules to all disputes.  Id. at 712.  The provisions requiring arbitration, however, are severable from the provisions delegating arbitrability issues to an arbitrator.  Id. at 718.  Accordingly, courts must distinguish disputes over (1) the scope of disputes the parties intend to arbitrate and (2) the delegation of whether a court or arbitrator is to decide the scope of the arbitration provision.  Id.  The Court concluded that the fact an arbitration agreement covers some but not all disputes between the parties does not alter the parties’ unequivocal agreement to have an arbitrator determine whether a dispute is to be arbitrated.  Id. 

The key takeaway from TotalEnergies E&P USA, Inc. v. MP Gulf of Mexico is the importance of clarity regarding who determines the arbitrability of an agreement.  As the contracting parties, if the goal is to have the arbitrator to make that determination, it is insufficient to merely reference the AAA Commercial Arbitration Rules in your arbitration agreements to incorporate the specific rules of the AAA.  Additional clarity can be achieved by explicitly including and citing AAA Commercial Arbitration Rule 7(a), which grants the arbitrator primary authority to decide issues of arbitrability.  Conversely, if the goal is to have a court determine the arbitrability of a dispute under the agreement, the practitioner should avoid language incorporated the AAA rules or that indicates an arbitration is to be conducted in accordance with the rules of the AAA.