The Texas Supreme Court will hear oral arguments in September in a case likely to be of significant interest to TCJL members. Total E&P USA, Inc. v. MP Gulf of Mexico, LLC (No. 21-0028) involves, among other things, the interpretation of an arbitration provision in a contract between oil and gas producers that explicitly incorporates the Commercial Rules of the American Arbitration Association. R-7(a) of these rules 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.” The parties disagree about whether this broad arbitration clause applies to a dispute over the assessment of costs under operating and sharing agreements governing oil and gas production from certain offshore wells.
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 states that it applies 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,” is much broader than Total asserts. 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.
It appears to us that the Tyler Court of Appeals got it right. Whether the dispute “arises out of” the Chinook agreement or the common system agreement looks like a red herring because Total’s refusal to pay the assessment may constitute a breach of the common system agreements that incorporate the AAA rules. Regardless of how SCOTX looks at it, however, the important issue from our standpoint is the necessity of enforcing an arbitration agreement that clearly assigns arbitrability to the arbitrator, as this one does. The Court has a long history of enforcing contracts as they stand, particularly where sophisticated entities are concerned. That certainly seems to be the case here.
