Did We Sign Up for This? Court Compels Arbitration Based on Dispute Resolution Terms of Separate Contract

by Reed Smith

A Texas Court of Appeals has held that parties to a natural gas gathering contract are required to utilize arbitration—despite the absence of an arbitration provision in the contract—because the case cannot be decided without considering the terms of a separate, related contract that contains a mandatory arbitration clause.1

Enterprise Field Services, LLC ("Enterprise") owns a natural gas gathering system in the San Juan Basin in New Mexico. In 1984, the predecessor-in-interest to Enterprise entered into a gas gathering agreement (the "1984 Contract") with ConocoPhillips ("Conoco") and the predecessor in interest to TOC-Rocky-Mountain, Inc. ("TOC"). Under the 1984 Contract, Enterprise agreed to deliver gas quantities to a processing plant jointly owned by Conoco and TOC (the "San Juan Gas Plant"). Conoco and TOC retained all natural gas liquids ("NGLs") attributable to their own gas production, and as part of their processing fee, the plant owners also retained a certain percentage of NGLs attributable to third-party gas production delivered by Enterprise and processed at the San Juan Gas Plant (the "NGL Allocation").

Initially, the NGL Allocation was performed by Conoco and TOC in accordance with the 1984 Contract’s terms, but Enterprise later started performing the NGL Allocation itself and continued this practice for approximately 20 years.

In 2006, Enterprise and TOC’s parent company, BP America Production Company ("BP"), entered into a long-term gathering agreement relating to gas delivery and processing at the San Juan Gas Plant (the "2006 Contract"). Although the 2006 Contract did not specify how NGLs would be allocated, Enterprise and BP agreed to enter into good faith negotiations with TOC and Conoco in order to reach an agreement on NGL Allocation for future gas deliveries to the San Juan Gas Plant.

A year later, a dispute arose over the way the NGL Allocation was performed, which eventually led to Enterprise terminating the 1984 Contract. Enterprise sought a declaratory judgment that it had no obligation to gather and deliver gas owned by Conoco to the San Juan Gas Plant, and that the 1984 Contract had expired or terminated by its terms. TOC, which was joined as a necessary party to the lawsuit, filed a counterclaim seeking damages for breach of the NGL Allocation provisions of the 1984 Contract, and a declaratory judgment regarding its rights and duties under the 1984 Contract.

Enterprise moved to compel arbitration, alleging that TOC’s breach of contract claim under the 1984 Contract "touches on" the terms of the 2006 Contract, and therefore the dispute resolution procedures in the 2006 Contract should apply.

The threshold issue before the Texas Court of Appeals ("Court") was whether TOC’s claims relating to the 1984 Contract—which did not contain an arbitration provision—were otherwise subject to a mandatory arbitration provision in the 2006 Contract.

The Court held that TOC’s claims relating to the 1984 Contract were subject to the mandatory arbitration provision under the 2006 Contract. According to the Court, claims of breach of performance under the 1984 Contract would "necessarily involve the interpretation of provisions of the [2006 Contract]." Furthermore, it did not matter that TOC was not a signatory to the 2006 Contract between Enterprise and TOC’s affiliate, BP. In its pleadings, TOC referred to itself as "BP" and also judicially admitted that, apart from the 1984 Contract, it "has a separate gas gathering agreement"—referring to the 2006 Contract. Because TOC never complained or alleged, in its pleadings or otherwise, that it was not bound by the terms of the 2006 Contract signed by TOC’s affiliate, the Court would not allow TOC to effectively argue that the arbitration language in the 2006 Contract did not apply to TOC’s claims under the 1984 Contract. Accordingly, the Court compelled arbitration of TOC’s 1984 Contract claims pursuant to the 2006 Contract’s dispute resolution terms.

The Enterprise decision serves as a reminder that parties should be cautious when analyzing and negotiating energy transactions involving multiple agreements and counterparties, to make sure that dispute resolution procedures generally align across related contracts. If you have any questions about this decision, please contact Craig Enochs, Paul Turner, Kevin Page or Malin Delling.

1 Enterprise Field Services, LLC v. TOC-Rocky Mountain, Inc., 2013 WL 744006 (Tex. Ct. App.—Houston [1st Dist.]).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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