In another case in which TCJL participated as amicus curiae, SCOTX has held that an arbitration provision in a contract between oil and gas producers that explicitly incorporates the “Commercial Rules of the American Arbitration Association” delegates the determination of the arbitrator’s jurisdiction to the arbitrator, not to a court in the first instance. AAA Commercial R-7(a) gives the arbitrator “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 the arbitrability of any claim or counterclaim.”
Total E&P USA, Inc. v. MP Gulf of Mexico, LLC (No. 21-0028) involved, among other things, a disagreement over the allocation of costs in an operating agreement. Total initiated the litigation after MP assessed costs to Total of more than $41 million under common system agreements whereby the parties agreed to share processing, transportation, and storage costs extracted from two units, the Chinook Unit (operated by MP) and the Cascade Unit (originally operated by Devon). Total asserted that it did not owe MP anything because it had declined to participate in re-entering a well in the Chinook Unit as permitted by a separate operating agreement for the unit entered into prior to the common system agreements. Total sought a declaratory judgment. After an unsuccessful effort to mediate the dispute, MP filed a demand for arbitration under the AAA rules, as provided by the common system agreement. Total filed a motion to stay arbitration, which MP answered with a motion to compel. The trial court denied MP’s motion and granted the motion to stay. MP appealed.
The Tyler Court of Appeals reversed and remanded, holding that the arbitration provision incorporating the AAA rules clearly and unmistakably evinced the parties’ intent to delegate arbitrability to the arbitrator (citing numerous intermediate appellate court decisions and the Fifth Circuit). Total argued that the broad clause does not apply because the dispute over allocation of costs arose out of the prior Chinook operating agreement, not the sharing agreement. The court of appeals, however, found that the plain language of the arbitration provision, which stated that it applied to “any dispute or controversy [that] arises between the Parties out of this Agreement [i.e., the sharing agreement], the alleged breach thereof, or any tort in connection therewith, or out of the refusal to perform the whole or any part thereof,” was much broader than Total asserted. The court further found no evidence that the parties excluded any claims from the arbitration provision, either in the pertinent contracts or otherwise. The trial court thus erred in denying MP’s motion to compel and granting Total’s motion to stay. Total sought review, which SCOTX granted. TCJL’s brief supported MP’s position that the arbitration agreement clearly delegated arbitrability to the arbitrator.
In an opinion by Justice Boyd, SCOTX affirmed the court of appeals. Noting that the Court had yet to resolve this issue, Justice Boyd conducted an exhaustive review of federal and state court authority (which anyone interested in the state of the law on delegation in an arbitration agreement should take a look at). Based on this review, he concluded that the substantial majority of jurisdictions follow the “general rule” that “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.”
The question then became whether the arbitration agreement carved out certain claims for arbitration, while leaving others to the Harris County district courts, as Total argued. The Court found it unnecessary to wade into the parties’ dispute about the scope of the arbitration agreement, which was separate and distinct from the delegation of arbitrability issue. Thus, having determined that the agreement delegated arbitrability through the incorporation of the AAA Commercial Rules, the scope question would have to be decided after the arbitrator determined his or her own jurisdiction. Though the Court agree “that parties can contractually limit their delegation of arbitrability issues to only certain claims and controversies, we do not agree that the arbitration clause contained within the Systems Operating Agreement accomplishes that result.”
It appears to us that the Court was looking for a bright line rule that would greatly reduce the opportunity for satellite litigation over the scope of arbitration agreements and found it in the decisions of most jurisdictions that had decided the issue. As Justice Boyd pointed out, taking the position that any exclusions to the scope of an arbitration agreement requires the court, not the arbitrator, to decide which claims were subject to arbitration in the first instance “would render [Rule 7a] essentially meaningless. . . A rule that requires arbitrators to determine arbitrability only after a court has already determined arbitrability essentially has no effect at all.” More importantly, the Justice Boyd observed, that position “conflates the parties’ agreement to arbitrate disputes with their agreement to delegate arbitrability issues to the arbitrator.” Again, those issues are distinct, and if parties want to limit delegation of arbitrability, they have to be crystal clear about doing that and not leave it to the courts to sort it out.
Justice Busby wrote a vigorous dissent that, among other things, took issue with the majority’s reading of Rule 7(a) as giving the arbitrator exclusive authority to determine his or her own jurisdiction. Noting that Rule 7(a) was amended in 2022 to, at least arguably, reflect the non-exclusivity of the arbitrator’s power (the rule now says that the arbitrator determines arbitrability “without any need to refer such matters first to a court”), Justice Busby would have allowed the trial court to decide which issues the parties agreed to arbitrate and which they did not.
In any event, the Court’s decision gives parties negotiating a contract with an arbitration provision a pretty clear roadmap when it comes to delegation of arbitrability. An agreement that broadly incorporates the AAA rules but limits the scope of the arbitration agreement will not down the road get one of the parties out of arbitration, at least until the arbitrator decides jurisdiction and which claims are arbitrable. We will be curious to see what the effect of this decision might be (if any) on the future of arbitration in complex business deals. Given the current disillusion with the expense of arbitration in some quarters of the business community, perhaps we might see much more limited arbitration provisions that constrain both the delegation and scope issues. After all, we have courts businesses are already paying for. Why pay for both, unless there is a very specific reason to do so?
