TotalEnergies E&P U.S., Inc. v. MP Gulf of Mex., LLC
| Docket Number | 21-0028 |
| Decision Date | 14 April 2023 |
| Parties | TotalEnergies E&P USA, Inc., Petitioner, v. MP Gulf of Mexico, LLC, Respondent |
| Court | Texas Supreme Court |
Argued September 20, 2022.
(Corrected opinion issued June 9, 2023).
On Petition for Review from the Court of Appeals for the Twelfth District of Texas.
Huddle, Justice and Young, Justice did not participate in the decision.
Jeffrey S. Boyd, Justice.
The parties in this case dispute whether their contracts require them to resolve their controversies through arbitration, but they also clash over whether they agreed that an arbitrator, rather than the courts, must resolve that dispute. We hold that (1) the parties clearly and unmistakably delegated arbitrability issues to the arbitrator by agreeing to arbitrate their controversies in accordance with the AAA Commercial Rules; (2) the fact that the parties may have agreed to arbitrate only some controversies while carving out others does not affect the clear and unmistakable delegation of the arbitrability decision to the arbitrator; and (3) in accordance with these parties' agreements, the courts must defer to the arbitrator to decide whether this controversy falls within the arbitration agreement's scope. Based on these holdings, we affirm the court of appeals' judgment.
MP Gulf of Mexico owns a two-thirds interest in a group of oil-and-gas leases in the Gulf of Mexico known as the Chinook Unit, and TotalEnergies E&P USA owns the remaining one-third.[1] A written contract referred to as the Chinook Operating Agreement governs the parties' relationship as the Unit's co-owners. MP Gulf also owns all of the interest in a nearby group of leases known as the Cascade Unit. To reduce costs and promote efficiency, MP Gulf and Total E&P agreed to construct a Common System to jointly process, store, and transport production from all the leases in both Units. MP Gulf serves as the operator of both Units and of the Common System.
To establish the Common System, the parties entered into two separate written contracts. The first, called the System Operating Agreement, "govern[s] the operation of the Common System," but it does so "subject to the requirements of" the second, called the Cost Sharing Agreement. The System Operating Agreement requires MP Gulf, as the system operator, to advance all costs of operating the Common System and then collect those costs from the interest owners "as provided in the Cost Sharing Agreement." If the Cost Sharing Agreement does not allocate particular costs, the System Operating Agreement requires each party to "pay those Costs in proportion to its Equity Interest" in the Common System. As the owner of a one-third interest in one of the two Units that equally owned the Common System, Total E&P's Equity Interest in the Common System was 16.665 percent.
Ten years after the parties created the Common System, MP Gulf proposed to re-enter the Chinook No. 6 well, which had previously been shut in. Exercising their respective rights under the Chinook Operating Agreement, Total E&P elected not to participate in that project, and MP Gulf elected to re-enter the well without Total E&P's participation. Later, MP Gulf demanded that Total E&P pay about $41 million, which MP Gulf asserts represents 16.665 percent of the Common System costs related to the Chinook No. 6 well.
Total E&P refused to pay the $41 million, contending that the Cost Sharing Agreement specifically allocates the disputed costs and thus does not require the owners to cover the costs based on their equity interests. Specifically, Total E&P asserted that the costs qualify as either "Fixed Operating Expenses" or "Variable Operating Expenses," both of which the Cost Sharing Agreement expressly allocates "to each Unit" equally, so the Chinook Unit and the Cascade Unit each owe fifty percent of the costs. As to the Chinook Unit's share, Total E&P argued the Chinook Operating Agreement relieves it of any obligation to pay any portion of the expenses because it elected not to participate in the project. Instead, according to Total E&P, the Chinook Operating Agreement required MP Gulf to cover all of the Chinook Unit's share of the Common System costs and recover those expenses from the returns Total E&P would have received had it elected to participate in the re-entry of the well.
MP Gulf disagreed and demanded that Total E&P participate in negotiations and mediation as required under the System Operating Agreement. Total E&P objected, arguing that the System Operating Agreement's dispute-resolution provisions did not apply to this controversy because the Chinook Operating Agreement governs its obligations to pay costs allocated to the Chinook Unit. It nevertheless agreed to participate in the negotiations and mediation while reserving that objection.
After the negotiations and mediation were unsuccessful, Total E&P filed this suit in a Harris County district court, seeking a declaration construing the Cost Sharing Agreement. Specifically, Total E&P sought the court's confirmation that, because the Cost Sharing Agreement allocates the disputed costs to "each Unit," the Chinook Operating Agreement governs any liability Total E&P may have as a co-owner of the Chinook Unit. To support its right to file this suit, Total E&P noted that the Cost Sharing Agreement does not contain an arbitration clause and instead grants exclusive jurisdiction over all legal disputes to the courts in Harris County, Texas.
Although Total E&P asked the court to declare that the Cost Sharing Agreement required MP Gulf to look to the Chinook Operating Agreement (as opposed to the System Operating Agreement) to resolve the parties' controversy over the $41 million demand, it did not ask the court to actually determine the parties' rights under the Chinook Operating Agreement. This is because the Chinook Operating Agreement includes an arbitration clause requiring that "any dispute or controversy [that] 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" must "be submitted to arbitration" before the International Institute for Conflict Prevention and Resolution. So on the same day it filed this suit, Total E&P initiated an arbitration proceeding with the International Institute, asking it to determine the parties' rights under the Chinook Operating Agreement.
Less than two weeks later, MP Gulf initiated an arbitration proceeding before the American Arbitration Association, asserting that Total E&P breached the System Operating Agreement by refusing to pay the $41 million and seeking a declaration as to how the Cost Sharing Agreement allocates those Common System expenses. MP Gulf initiated the AAA arbitration because article 16.16.1 of the System Operating Agreement provides that, "[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 AAA and the provisions in this Article 16.16." And article 16.16.2 provides that the "procedure of the arbitration proceedings shall be in accordance with the Commercial Rules of the AAA, as may be modified by the panel of arbitrators."
In summary, the parties' controversy over whether Total E&P owes MP Gulf $41 million resulted in three separate proceedings before three separate tribunals, based on three different dispute-resolution clauses in the parties' three written agreements:
MP Gulf argues that the System Operating Agreement's arbitration clause applies to the parties' controversy because MP Gulf's authority to bill the costs and Total E&P's obligation to pay them arise from the System Operating Agreement, which is "integrated into" the Cost Sharing Agreement. According to MP Gulf, the two Agreements "operate together as a single, unified instrument" to govern how the Common System costs must be allocated among the parties. MP Gulf specifically alleged that Total E&P's "decision not to participate in the re-entry phase of the Chinook No. 6 well had no bearing on its ownership of the Common System or its obligation to pay its Equity Interest share of Common System costs." And because the dispute "arises . . . out of" the System Operating Agreement and Total E&P's failure to perform under that Agreement, MP Gulf asserted that article 16.16 of the System Operating Agreement required the parties to resolve their controversy through AAA arbitration and in accordance with the AAA rules and procedures.
Total E&P, however, filed a motion asking the trial court to...
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