Who decides whether a dispute is properly brought in court or arbitration? The Texas Supreme Court recently weighed in on this issue, holding that a contract referencing a standard set of arbitration rules evidences the parties’ intent to delegate the issue of “arbitrability” to an arbitrator.

In Totalenergies E&P USA, Inc. v. MP Gulf of Mexico, LLC, MP Gulf and Total owned an oil-and-gas processing system servicing a group of oil-and-gas leases in the Gulf of Mexico. The parties agreed to create a “Common System” wherein the parties executed contracts governing multiple facets of their business.  Two such agreements  were an Operating Agreement and a Cost Sharing Agreement. The Operating Agreement governed the operation of the Common System but was “subject to the requirements of” the Cost Sharing Agreement.

The Cost Sharing Agreement required controversies be resolved in State Court. In contrast, the Operating Agreement contained provisions requiring controversies be decided through arbitration.  The Operating Agreement stated, “[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,” and if the parties are unable to resolve that dispute or controversy through negotiations or mediation, the dispute or controversy “shall be submitted to arbitration . . . in accordance with the rules of the [American Arbitration Association] AAA.” The Operating Agreement further required that, “procedure of the arbitration proceedings shall be in accordance with the Commercial Rules of the AAA.”

A dispute arose related to certain costs incurred by MP Gulf.  MP Gulf asserted that, in accordance with the Cost Sharing Agreement, Total was responsible for paying those costs. Total refused and sued MP Gulf in Court, asking for a declaration construing the Cost Sharing Agreement. In turn, MP Gulf initiated an arbitration proceeding with the AAA asserting Total breached the Operating Agreement and seeking a declaration as to how the Cost Sharing Agreement allocated costs. MP Gulf argued that the arbitration provision in the Operating Agreement, which incorporates the AAA rules, required the AAA arbitrator to decide whether the parties agreed to submit their controversy to arbitration – not the State Court.

The trial court ruled in Total’s favor, granting their motion to stay MP Gulf’s arbitration proceeding while the case proceeded in state court. MP Gulf appealed, and the court of appeals reversed, holding that by agreeing to arbitrate before the AAA and in accordance with the AAA rules, the parties delegated the authority to the issue of arbitrability to the arbitrator. The Texas Supreme Court affirmed the court of appeals’ ruling.

The Texas Supreme Court noted that while courts usually determine the validity or scope of an arbitration agreement in a contract, parties can agree to delegate those disputes to arbitrators. In making this ruling, Texas joins many other courts in holding that, as a general rule, an agreement to arbitrate in accordance with AAA or similar rules constitutes clear and unmistakable evidence the parties agreed to delegate issues of arbitrability to the arbitrator. As the Operating Agreement, the governing contract in the dispute, incorporated the AAA rules and nothing in that Agreement limited the scope of that delegation, the Court held that the parties had delegated the decision of arbitrability to the arbitrator.

Although this case specifically addresses AAA Commercial Rules, the ruling will likely apply to agreements referencing other AAA rules, such as to AAA Construction Rules, the more commonly used rules in construction contracts.  The holding will also cause some parties to negotiate and include contractual provisions specifying whether a court or arbitrator is to decide the issue of arbitrability.

The attorneys in our Austin and Dallas offices  are available to answer any questions you may have regarding construction and design disputes.  Please contact us at info@gstexlaw.com if you have any questions.

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