Texas Supreme Court Holds that Choosing Rules Clearly and Unmistakably Delegates Arbitrability Decision to Arbitrator, not Courts

The decision in TotalEnergies E&P USA, Inc. v. MP Gulf of Mexico, LLC (“Total”) is a long-awaited decision for arbitration practitioners in the State. Total had resulted from controversies before three separate tribunals — a Harris County district court, and two arbitration proceedings, one before the International Institute for Conflict Prevention and Resolution, and the other before the American Arbitration Association (“AAA”). Total involved a series of contracts related to ownership of interests in a set of oil and gas leases between TotalEnergies E&P USA, Inc. (“Total E&P”) and MP Gulf of Mexico, LLC (“MP Gulf”). There is also a nearby unit of leases owned by MP Gulf. The parties agreed to construct a “Common System” to jointly process, store, and transport production from both sets of leases. Three agreements were at issue, including (as relevant here) a System Operating Agreement and a Cost Sharing Agreement. After Total E&P chose not to participate in a certain drilling project, a dispute arose when MP Gulf demanded $41 million for costs associated with the operation of the project’s well. Total E&P refused to pay.

Total E&P sued MP Gulf in Harris County district court, seeking a declaration that the Cost Sharing Agreement allocated the cost of the project’s well to MP Gulf. Total E&P argued that the Cost Sharing Agreement had no arbitration clause, but rather, granted exclusive jurisdiction over legal disputes to courts in Harris County. MP Gulf disagreed. Moving to dismiss and compel arbitration, MP Gulf argued that the System Operating Agreement’s arbitration clause governed:

“[i]f any dispute or controversy arises between the Parties out of this Agreement, the alleged breach thereof, or any tort in connection therewith, or out of the refusal to perform the whole or any part thereof, . . . [that controversy] shall be submitted to arbitration . . . in accordance with the rules of the AAA”.

MP Gulf asserted that the System Operating Agreement’s arbitration clause applied because, read together with the Cost Sharing Agreement, the two agreements operated as a “single, unified instrument.” Most important, the System Operating Agreement’s choice of the AAA’s Commercial Arbitration Rules delegated the issue of arbitrability to an arbitrator, not a court. AAA Rule 7(a) — MP Gulf contended — gave the arbitrator the authority to decide its own jurisdiction, including the threshold question of whether the controversy was arbitrable.

Both the Court of Appeals and the Texas Supreme Court agreed with MP Gulf. Rejecting Total E&P’s argument that their agreement to arbitrate in accordance with the AAA Commercial Arbitration Rules did not create an enforceable agreement to delegate arbitrability questions to the arbitrator — and even if it did, according to Total E&P, the controversy did not “arise out of” their agreement — the Texas Supreme Court ruled that the parties “clearly and unmistakably delegated arbitrability issues to the arbitrator.” In other words, a reference to the AAA Commercial Arbitration Rules generally was sufficient to incorporate the specific rules of the AAA, including Rule 7(a)’s grant of primary authority to the arbitrator to decide issues of arbitrability.

The Court’s decision brings the State in line with every federal court of appeals that has addressed this issue, as well as apex courts of other states. As Professor Alan S. Rau, James L. Loftis and Timothy James Tyler¹ noted in their amicus brief, a contrary result could have required Texas-specific language to delegate arbitrability exclusively to arbitrators instead of simply incorporating rules like the AAA Commercial Arbitration Rules and similarly worded rules. This inefficient and cumbersome result has been avoided.

With Justice Boyd writing for the majority, Justice Bland concurring, and Justice Busby dissenting, Total E&P and MP Gulf are likely heading back to arbitration.

¹ Note that Mr. Loftis and Mr. Tyler practice with Vinson & Elkins LLP in Houston, but submitted their amicus brief in their personal capacities.