14 Apr DID YOU AGREE THE FOX COULD GUARD THE HEN HOUSE? – Arbitrators to decide their own jurisdiction if their rules say so.
Matthew M. BuschiCounsel
Texas Supreme Court holds, though not unanimously, that incorporating into an arbitration clause that the parties “agree to arbitrate their controversies in accordance with the rules of” the arbitration forum is a de facto clear and unmistakable agreement that the arbitrator (rather than the court) will decide whether a controversy is subject to the arbitration agreement if the rules of that arbitration forum contain a rule that the arbitrator shall decide its own jurisdiction.
On April 14, 2023, the Texas Supreme Court issued its opinion in TotalEnergies E&P USA, Inc. v. MP Gulf of Mexico, LLC, No. 21-0028 answering the question of whether including language in an arbitration clause that states that the arbitration will be arbitrated in accordance with whatever Arbitration medium’s rules (here the AAA) acts as an agreement to allow the arbitrator to decide whether a given controversy falls under the arbitration clause. Spoiler alert: it does…if the rules of that Arbitration body has a mandatory provision (such as “shall decide” as opposed to “may decide”) that gives authority to the arbitrator to decide its own jurisdiction. Thus, even if the parties do not expressly grant the power to an arbitrator to decide whether a controversy falls under the arbitration agreement, those parties have made such a de facto agreement by agreeing to arbitrate in accordance with that arbitration association’s rules where those rules give the power to an arbitrator to decide such questions.
In what can only be described as a “contract salad,” the parties to TotalEnergies owned interests in a group of oil and gas leases in the Gulf of Mexico known as the Chinook Unit, with MP Gulf of Mexico owning 2/3 interest and TotalEnergies owning a 1/3 interest. To govern the relationship of the parties and provide for the terms of operations, costs, etc. the parties entered into three contracts, each governing some aspect of the overall relationship.
The Chinook Operating Agreement governed the parties’ relationship as co-owners; the System Operating Agreement governed the operation of the Common System which was for processing, storing, and transporting the lease production; and the Cost Sharing Agreement governed cost allocations. Of course, each of these three agreements had differing agreements on dealing with controversies: The Chinook Operating Agreement had an arbitration clause requiring arbitration of certain controversies with the International Institute, The System Operating Agreement had an arbitration clause requiring arbitration with the AAA of certain controversies and where it would be arbitrated in accordance with the AAA rules, and The Cost Sharing Agreement had no arbitration clause and gave exclusive jurisdiction to the Harris County District Courts of certain controversies. This resulted in three separate proceedings before three separate tribunals, based on three different dispute-resolution clauses. TotalEnergies moved to stay the AAA proceeding in the Harris County District Court proceeding, which was granted by the Court and the Court also denied a motion to compel arbitration by MP. The Court of Appeals reversed and rendered, and the Texas Supreme Court granted review.
The Court found that it had not previously answered the question of whether agreeing to arbitrate in accordance with the rules of an arbitration tribunal where such a tribunal has a rule that gives the power to the arbitrator to decide its own jurisdiction acts as a “clear and unmistakable” agreement to delegate the decision of whether a controversy was subject to the arbitration provision to the arbitrator. Such a delegation of jurisdictional decision-making can only be done by a clear and unmistakable agreement to do so. The interesting twist to this case is that here, and in similar situations, there is no explicit agreement to allow the arbitrator to decide if a certain controversy is subject to arbitration. Thus, a party could potentially be agreeing to something without expressly stating it. And that is precisely what the Court determined. If the parties to a contract include an arbitration provision and (a) that provision states that the arbitration will be arbitrated in accordance with the rules of a given tribunal and (b) the rules of that given tribunal provide that the arbitrator shall decide issues of its own jurisdiction1, then the parties have made a clear and unmistakable agreement to delegate the authority to decide if a given controversy is subject to the arbitration agreement to the arbitrator, not the courts. The terms “will be” and “shall decide” are highlighted here because the Court’s reasoning hinged on such absolute terms. The Court left room for a different outcome if a tribunal’s rules say something like the arbitrator may decide issues of its own jurisdiction.
The Court went even further in its decision, and added to its reasoning that even where an arbitration clause explicitly carves out certain types of claims or causes of action such as injunctive relief, the decision of whether that even obviously carved-out claim is subject to arbitration still remains with the arbitrator if conditions (a) and (b) in the paragraph above are met. This is because, as the Court explained, courts “must carefully distinguish between ‘the question of who decides arbitrability’ and ‘the separate question of who prevails on arbitrability.’” Thus, even if it is obvious on the face of the contract that a given issue is not arbitrable, if the parties have given down authority for questions of arbitrability to be decided by the arbitrator, either explicitly in the contract, or as shown above, as a result of agreeing to rules of a tribunal that give the arbitrator that unilateral authority, then it must be the arbitrator who decides that, not a court.
The takeaway from this TotalEnergies case would first and foremost be to be wary of what the language of an arbitration clause says. If the proposed clause states that it will follow the rules of a particular tribunal, it would be wise to review the rules of that tribunal before agreeing to it, as the rules of that tribunal may include processes or delegations of decision-making that you did not intend to give.
ABOUT THE AUTHOR: Matthew M. Buschi serves as Counsel at Rapp & Krock, PC in the Firm’s Litigation/Creditor Rights Group, where he represents parties in business litigation matters in trial and appellate courts as well as arbitration.
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