Court Opinion

ID: 4645001
Source: CourtListenerOpinion
Date Created: 2020-12-21 08:21:20.347535+00
Date Added: 2024-06-11T08:00:49.032392
License: Public Domain

NO. 12-20-00180-CV

                               IN THE COURT OF APPEALS

                  TWELFTH COURT OF APPEALS DISTRICT

                                            TYLER, TEXAS

MP GULF OF MEXICO, LLC,                                   §       APPEAL FROM THE 165TH
APPELLANT

V.                                                        §       JUDICIAL DISTRICT COURT

TOTAL E&P USA, INC.,
APPELLEE                                                  §       HARRIS COUNTY, TEXAS

                                        MEMORANDUM OPINION
       MP Gulf of Mexico, LLC (MP) appeals the denial of its motion to compel arbitration and
the granting of Total E&P USA, Inc.’s (Total) motion to stay arbitration. MP presents three
issues on appeal. We reverse and render.

                                                 BACKGROUND
       MP and Total are parties to a series of oil and gas contracts. In 1996, Total and MP
acquired working interests in offshore oil and gas leases in the Gulf of Mexico from the
Department of Interior’s Minerals Management Service (MMS). The parties later dedicated the
group of leases to a drilling unit referred to as the “Chinook Unit.” The MMS approved the
Chinook Unit effective May 1, 2006. The Chinook Operating Agreement was created to govern
the parties’ Chinook Unit drilling operations. A similar situation occurred between MP and
Devon Energy Production to create the “Cascade Unit.” 1
       Originally, the parties contemplated that the Chinook Unit and the Cascade Unit would
develop their own production systems. However, the working interest owners later decided that
it would be efficient for both units to share a common production system to process, transport,

       1
           The Cascade Unit and its corresponding agreement are not subject to this appeal.

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and store the hydrocarbons extracted from both units, creating the “Common System.” As a
result, the parties executed the Common System Operating Agreement (SOA) and the Cost
Sharing Agreement (CSA) in January 2007. The SOA and CSA operate together and govern all
aspects of the Common System.
         In 2017, MP, as operator of the Chinook Unit, proposed to Total that a well in the
Chinook Unit be re-entered. Total, within its rights under the Chinook OA, elected to not
participate in the proposed operation. MP proceeded with the proposed work on the Chinook
Well No. 6 and in 2019, issued joint interest billing statements to Total, assessing Common
System costs of more than $41,000,000. Total took the position that MP should have billed and
calculated the amounts owed via the Chinook Operating Agreement instead of the CSA and
SOA. As a result, Total refused to pay the invoices.
         In September 2019, MP notified Total of a dispute over its failure to pay the invoices and
demanded payment. In December, the parties met in an unsuccessful attempt to resolve the
dispute. On January 10, 2020, MP initiated the mediation process pursuant to the dispute
resolution procedure found in the SOA. Mediation on May 11 was also unsuccessful, and MP
filed its demand for arbitration against Total on May 26.
         On May 15, Total filed a declaratory judgment action seeking a declaration that the CSA
allocates fixed operating expenses and variable operating expenses to the Chinook Unit and that
the allocation of such expenses must be done in accordance with the Chinook Operating
Agreement.       It also filed an arbitration in accordance with the arbitration provision in the
Chinook Operating Agreement. 2 On June 5, Total filed a motion to stay the arbitration initiated
by MP. On June 29, MP filed a motion to compel arbitration and a response to the motion to
stay. Following a hearing, the trial court denied the motion to compel and granted the motion to
stay. This appeal followed. 3

                                    MOTION TO COMPEL ARBITRATION

        2
          The Chinook Operating Agreement contains an arbitration provision requiring arbitration proceedings “in
accordance with the Center for Public Resources Rules for Non-Administered Arbitration of Business Disputes.”
         3
          The appeal was originally filed in the 1st District Court of Appeals in Houston but was transferred to this
Court by order of the Texas Supreme Court, dated July 30, 2020.

                                                         2
       In its first issue, MP argues that the trial court erred in deciding the threshold issue of
arbitrability. MP urges that, per the terms of the arbitration agreement, the arbitrator should
determine which issues are covered under the arbitration clause.
Standard of Review and Applicable law
       We review the denial of a motion to compel arbitration for abuse of discretion. See
Okorafor v. Uncle Sam & Assocs., Inc., 295 S.W.3d 27, 38 (Tex. App.—Houston [1st Dist.]
2009, pet. denied). When an appeal from such an order turns on a legal determination, we apply
a de novo standard. Forest Oil Corp. v. McAllen, 268 S.W.3d 51, 55 & n.9 (Tex. 2008).
       The law often applies a presumption favoring arbitration; however, on questions of
delegation, this presumption is reversed. First Options of Chicago, Inc. v. Kaplan, 514 U.S.
938, 944-45, 115 S. Ct. 1920, 1924, 131 L. Ed. 2d 985 (1995). As a result, a presumption favors
adjudication of arbitrability by the courts absent clear and unmistakable evidence of the parties’
intent to submit that matter to arbitration. Jody James Farms, JV v. Altman Grp., Inc., 547
S.W.3d 624, 631 (Tex. 2018).
       A party moving to compel arbitration must establish (1) the existence of a valid,
enforceable arbitration agreement and (2) that the claims asserted fall within the scope of that
agreement. In re Rubiola, 334 S.W.3d 220, 223 (Tex. 2011) (orig. proceeding) (addressing
movant’s burden under the Federal Arbitration Act (FAA)); In re AdvancePCS Health L.P., 172
S.W.3d 603, 605 (Tex. 2005) (orig. proceeding) (per curiam). Both Texas and federal law
require the enforcement of valid agreements to arbitrate. 9 U.S.C. § 2; TEX. CIV. PRAC. & REM.
CODE ANN. § 171.021 (West 2019). If the movant establishes that an arbitration agreement
governs the dispute, the burden then shifts to the party opposing arbitration to establish a defense
to the arbitration agreement. In re Provine, 312 S.W.3d 824, 829 (Tex. App.—Houston [1st
Dist.] 2009, orig. proceeding). A party may defend against the enforceability of the agreement
only on a ground that exists at law or in equity for the revocation of a contract. See 9 U.S.C. § 2;
TEX. CIV. PRAC. & REM. CODE ANN. § 171.001(b) (West 2019).
       Our state supreme court has made clear that there are three distinct ways to challenge the
validity of an arbitration clause: (1) challenging the validity of the contract as a whole; (2)
challenging the validity of the arbitration provision specifically; and (3) challenging whether an
agreement exists at all. RSL Funding, LLC v. Newsome, 569 S.W.3d 116, 124 (Tex. 2018); In
re Morgan Stanley & Co., 293 S.W.3d 182, 187 (Tex. 2009) (orig. proceeding). The arbitrator

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decides the first type of challenge as a matter of law.              Buckeye Check Cashing, Inc. v.
Cardegna, 546 U.S. 440, 446, 126 S. Ct. 1204, 1209, 163 L. Ed. 2d 1038 (2006); RSL Funding,
569 S.W.3d at 124. The second type of challenge generally must be resolved by the court. Rent-
A-Ctr., W., Inc. v. Jackson, 561 U.S. 63, 70, 130 S. Ct. 2772, 2778, 177 L. Ed. 2d 403 (2010);
Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 402-04, 87 S. Ct. 1801, 1805-
806, 18 L. Ed. 2d 1270 (1967); Longoria v. CKR Prop. Mgmt., LLC, 577 S.W.3d 263, 267 (Tex.
App.—Houston [14th Dist.] 2018, pet. denied). However, as parties have the right to contract as
they see fit, they may delegate to the arbitrator questions concerning validity or enforceability of
an arbitration agreement, and we enforce such clauses when the delegation is clear and
unmistakable. Henry Schein, Inc. v. Archer & White Sales, Inc., __U.S.__, 139 S. Ct. 524, 527,
202 L. Ed. 2d 480 (2019); Rent-A-Ctr., 561 U.S. at 69-70, 130 S. Ct. at 2777-78; RSL Funding,
569 S.W.3d at 121; Longoria, 577 S.W.3d at 268; Dow Roofing Sys., LLC v. Great Comm’n
Baptist Church, No. 02-16-00395-CV, 2017 WL 3298264, at *6-7 (Tex. App.—Fort Worth
Aug. 3, 2017, pet. denied) (mem. op.); Firstlight Fed. Credit Union v. Loya, 478 S.W.3d 157,
164 (Tex. App.—El Paso 2015, no pet.); IHS Acquisition No. 171, Inc. v. Beatty-Ortiz, 387
S.W.3d 799, 807 (Tex. App.—El Paso 2012, no pet.); see also In re Weekley Homes, L.P., 180
S.W.3d 127, 130 (Tex. 2005) (orig. proceeding). The United States Supreme Court has been very
clear that arbitrators are competent to decide any legal or factual issues the parties commit to
their determination, including threshold issues of arbitrability such as whether an enforceable
arbitration agreement exists. See 14 Penn Plaza LLC v. Pyett, 556 U.S. 247, 268-69, 129 S. Ct.
1456, 1471, 173 L. Ed. 2d 398 (2009); RSL Funding, 569 S.W.3d at 121; see Rent-A-Ctr., 561
U.S. at 69-70, 130 S. Ct. at 2777-78.
Analysis
       MP contends that the underlying dispute falls within the arbitration provision contained
in the SOA. Total urges that the dispute arises under the CSA, which does not contain an
arbitration provision. Regardless of the dispute over which document controls, MP further urges
that the decision as to scope was not for the trial court to decide because the parties agreed to
have the arbitrator decide issues of arbitrability. We agree.
       The arbitration provision in the SOA states, in pertinent part:

       16.16 Dispute Resolution Procedure. Any dispute between the Parties concerning this Agreement
       (other than Claims by a third party under which a Party hereto is claiming indemnity, and such

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       third party Claim is in litigation) shall be resolved under the mediation and binding arbitration
       procedures of this Article 16.16. . . . The Disputing Parties shall then attempt in good faith to
       resolve the dispute by mediation in Houston, Texas, in accordance with the Commercial Rules of
       the American Arbitration Association (“AAA”), as such procedure may be modified by agreement
       of the Disputing Parties. . . . If the dispute has not been resolved pursuant to mediation within
       sixty (60) days after initiating the mediation process, the dispute shall be resolved through binding
       arbitration, as follows:

       16.16.1 Selection of Arbitrators: If 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 the Parties are unable to agree with respect to
       the matter or matters in dispute or controversy, the same shall be submitted to arbitration before a
       panel of three (3) arbitrators in accordance with the rules of the AAA and the provisions in this
       Article 16.16. . . .

       16.16.2 Arbitration Proceedings: The panel of arbitrators so chosen shall proceed promptly to hear
       and determine the matter or matters in dispute, after giving the Disputing Parties due notice of
       hearing and a reasonable opportunity to be heard. 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. . . .

Accordingly, the SOA incorporates the American Arbitration Association (“AAA”) rules. The
AAA rules specifically empower the arbitrator to decide issues of arbitrability, including the
validity or enforceability of the arbitration agreement. See Am. Arbitration Ass’n, Commercial
Arbitration Rules & Mediation Procedures, R-7(a) (amended and effective Oct. 1, 2013) (“The
arbitrator shall have 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 to the arbitrability
of     any      claim        or       counterclaim.”)          (emphasis          added),        available     at
https://adr.org/sites/default/files/CommercialRules_Web.pdf.
       Several of our sister courts have held that when a broad arbitration agreement exists
between the parties, and that agreement incorporates arbitration rules specifically empowering
the arbitrator to decide issues of arbitrability, then the incorporation of those rules constitutes
clear and unmistakable evidence of the parties’ intent to delegate arbitrability to the arbitrator.
See Trafigura Pte. Ltd. v. CNA Metals Ltd., 526 S.W.3d 612, 616-18 (Tex. App.—Houston
[14th Dist.] 2017, no pet.); Gilbert v. Rain & Hail Ins., No. 02-16-00277-CV, 2017 WL 710702,
at *4 (Tex. App.—Fort Worth Feb. 23, 2017, pet. denied) (mem. op.); Schlumberger Tech.
Corp. v. Baker Hughes Inc., 355 S.W.3d 791, 803 (Tex. App.—Houston [1st Dist.] 2011, no
pet.); Saxa Inc. v. DFD Architecture Inc., 312 S.W.3d 224, 229-31 (Tex. App.—Dallas 2010,
pet. denied); Rio Grande Xarin II, Ltd. v. Wolverine Robstown, L.P., Nos. 13-10-00115-CV &

                                                        5
13-10-00116-CV, 2010 WL 2697145, at *8-9 (Tex. App.—Corpus Christi July 6, 2010, pet.
dism’d) (mem. op.); see also Dow Roofing Sys., LLC v. Great Comm’n Baptist Church, No.
02-16-00395-CV, 2017 WL 3298264, at *6-7 (Tex. App.—Fort Worth Aug. 3, 2017, pet.
denied) (mem. op.) (holding that challenge to unconscionability of arbitration provision was
delegated to arbitrator); Firstlight Fed. Credit Union, 478 S.W.3d at 164. The Fifth Circuit and
other federal appellate courts have reached the same conclusion.            See Petrofac, Inc. v.
DynMcDermott Petroleum Operations Co., 687 F.3d 671, 675 (5th Cir. 2012) (stating “We
agree with most of our sister circuits that the express adoption of [the AAA] rules presents clear
and unmistakable evidence that the parties agreed to arbitrate arbitrability,” and collecting
cases); see also Crawford Prof’l Drugs, Inc. v. CVS Caremark Corp., 748 F.3d 249, 262-63
(5th Cir. 2014) (concluding “that whether the Plaintiffs’ claims are subject to arbitration must be
decided in the first instance by the arbitrator, not a court,” when the arbitration agreement
expressly incorporates the AAA rules).
       Nevertheless, Total argues that the arbitration agreement is narrow because it applies to
disputes “arising out of” the SOA and does not contain language applying the arbitration clause
to disputes that “relate to,” are “in connection with,” or “concern” the contract. Total argues that
a broad clause would “cover any dispute arising between the parties regardless of the subject
matter.” However, contrary to Total’s argument, the arbitration provision at issue here is not
limited to only disputes “arising out of” the agreement. The arbitration provision specifically
states that it applies to “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.” Thus, by its plain language, the arbitration provision
is much broader than Total claims. See In re Houston Progressive Radiology Assocs., PLLC,
474 S.W.3d 435, 445-46 (Tex. App.—Houston [1st Dist.] 2015, orig. proceeding); Greystone
Multi-Family Builders, Inc. v. Tes Electric, LP, No. 01-15-00640-CV, 2016 WL 3362208, at *5
(Tex. App.—Houston [1st Dist.] June 16, 2016, no pet.) (“The clause does not contain any
express limitations on its scope, and applies to ‘any particular dispute, claim, or question’ that
Greystone requests to arbitrate.”).
       We do note that, in some cases, courts recognized the majority rule, but found that it did
not apply because other evidence suggested that the parties did not intend to refer all disputes to
arbitration. See, e.g., Lucchese Boot Co. v. Solano, 473 S.W.3d 404, 412-14 (Tex. App.—El

                                                 6
Paso 2015, no pet.) (incorporation of TAMS rules—which allow arbitrator to determine
arbitrability—was not clear and unmistakable evidence that parties intended to have arbitrator
decide arbitrability where arbitration agreement was not broad, but rather identified specific
claims that were covered and excluded); BossCorp, Inc. v. Donegal, Inc., 370 S.W.3d 68, 76
(Tex. App.—Houston [14th Dist.] 2012, no pet.) (applying Delaware law and noting that,
“[w]here an arbitration agreement contains carve-outs and exceptions providing judicial
remedies for disputes, something more than mere reference to the AAA Rules for the conduct of
the arbitration is needed to show that the parties clearly and unmistakably intended to delegate
arbitrability to the arbitrator instead of the court”); Haddock v. Quinn, 287 S.W.3d 158, 175
(Tex. App.—Fort Worth 2009, pet. denied) (general reference to AAA rules was not clear and
unmistakable evidence that arbitrator should decide arbitrability where agreement was otherwise
silent and AAA Rule 7(a) did not exist when arbitration agreement was originally added to
partnership agreement); Burlington Res. Oil & Gas Co. v. San Juan Basin Royalty Tr., 249
S.W.3d 34, 41 (Tex. App.—Houston [1st Dist.] 2007, pet. denied) (express incorporation of
AAA’s rules did not constitute clear and unmistakable evidence of parties’ delegation of issues
of arbitrability to arbitrator where arbitration agreement restricted the arbitrator’s reach only to
specifically identified “audit disputes” and only for specific amounts); In re Ford Motor Co.,
220 S.W.3d 21, 23-24 (Tex. App.—San Antonio 2006, orig. proceeding) (express incorporation
of AAA rules did not constitute unmistakable evidence that parties intended for arbitrator to
decide whether nonparties were bound by arbitration agreement). No such evidence exists here.
As previously stated, the arbitration clause is broad and did not exclude any claims from
arbitration. Nor is this an instance wherein MP seeks to compel a nonparty to arbitrate.
       We find persuasive the above-cited Texas and federal cases holding that express
incorporation of the AAA rules constitutes clear and unmistakable evidence of the parties’ intent
to delegate issues of arbitrability to the arbitrator. Applying the reasoning of those cases here, we
conclude that there is clear and unmistakable evidence that the parties intended for the arbitrator
to decide arbitrability based on the parties’ express incorporation of the Commercial Rules of the
AAA, in combination with a broad arbitration agreement sending to the arbitrator “any dispute or
controversy aris[ing] 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.”
See Trafigura, 526 S.W.3d at 618. As such, the trial court erred by determining whether the

                                                 7
dispute between Total and MP falls within the arbitration provision. 4 Accordingly, we sustain
MP’s first issue. 5
                                        MOTION TO STAY ARBITRATION
        In its third issue, MP urges the trial court erred in granting Total’s motion to stay the
AAA arbitration.
        Section 171.098 of the Texas Civil Practice and Remedies Code permits the interlocutory
appeal of an order staying arbitration. TEX. CIV. PRAC. & REM. CODE ANN. § 171.098 (West
2019). A party moving to stay arbitration must show that there is not an agreement to arbitrate.
See id. § 171.023 (West 2019). We apply a no-evidence standard of review to orders granting
motions to stay arbitration. ODL Servs., Inc. v. ConocoPhillips Co., 264 S.W.3d 399, 417 n.7
(Tex. App.—Houston [1st Dist.] 2008, no pet.).
        Total does not dispute that the SOA contains an arbitration clause. And Total does not
dispute the validity of that arbitration provision. As explained above, the SOA contains a broad
arbitration clause incorporating the AAA rules.                   Total has not shown the absence of an
agreement to arbitrate. Accordingly, we hold that the trial court erred in staying the arbitration.
See TEX. CIV. PRAC. & REM. CODE ANN. § 171.023. We sustain MP’s third issue. Because our
resolution of MP’s first and third issues require reversal, we do not reach MP’s remaining issue. 6
See TEX. R. APP. P. 47.1.

                                                    DISPOSITION
        Having sustained MP’s first and third issues, we reverse the trial court’s orders denying
MP’s motion to compel arbitration and staying the AAA arbitration and we render judgment
compelling the AAA arbitration and lifting the stay.

        4
           At oral argument, Total emphasized that the term “the Agreement” also limits the scope of the arbitration
clause. It argues that its declaratory judgment action relates to the CSA and the SOA’s arbitration clause is limited
to disagreements arising under the SOA instead of the CSA. However, Total’s argument ignores the reasoning of
the arbitration provision and that arbitrability, including which agreement is at issue, has been delegated to the
arbitrators. See Trafigura, 526 S.W.3d at 619.
          5
            Total urges that, should we determine the arbitration provision to be broad, that we hold that the CPR
arbitration prevail under the Chinook Agreement. However, whether the dispute arises under the Chinook
Agreement or the SOA, under this broad arbitration provision, is a determination of arbitrability to be made by the
arbitrator.
        6
            MP’s second issue questions whether the trial court erred by refusing to enforce the arbitration agreement.

                                                           8
                                                              GREG NEELEY
                                                                 Justice

Opinion delivered December 16, 2020.
Panel consisted of Worthen, C.J., Hoyle, J., and Neeley, J.

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                                  COURT OF APPEALS

     TWELFTH COURT OF APPEALS DISTRICT OF TEXAS

                                          JUDGMENT

                                       DECEMBER 16, 2020

                                        NO. 12-20-00180-CV

                                 MP GULF OF MEXICO, LLC,
                                         Appellant
                                            V.
                                   TOTAL E&P USA, INC.,
                                         Appellee

                               Appeal from the 165th District Court
                        of Harris County, Texas (Tr.Ct.No. 2020-29728)

                       THIS CAUSE came to be heard on the oral arguments, appellate record
and briefs filed herein, and the same being considered, it is the opinion of this court that there
was error in the orders as entered by the trial court and that the same should be reversed and
judgment rendered.
                       It is therefore ORDERED, ADJUDGED and DECREED that the trial
court’s orders denying Appellant, MP GULF OF MEXICO, LLC’s, motion to compel
arbitration and staying the AAA arbitration be reversed and judgment rendered compelling the
AAA arbitration and lifting the stay; all costs are assessed against Appellee, TOTAL E&P USA,
INC., and that this decision be certified to the court below for observance.
                    Greg Neeley, Justice.
                   Panel consisted of Worthen, C.J., Hoyle, J., and Neeley, J.

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