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Mandatory Arbitration Clause in Texas Oil & Gas Lease is Enforceable

In Ridge Natural Resources, LLC v. Double Eagle Royalty, LP, 2018 WL 4057283 (Tex.Civ.App.- El Paso 2018), a case involving a dispute over ownership of mineral interests in Winkler County, Texas,   the El Paso Court of Appeals upheld a mandatory arbitration clause in an oil and gas royalty lease. Ridge Natural Resources is a major decision, likely to be reviewed by the Texas Supreme Court. In this article, part one of two, we discuss the arbitration aspect of the case. If the new trend will be to add arbitration clauses to oil and gas leases, the oil and gas industry is in for a big change and Texas oil and gas lawyers will need to keep informed of these changes. In part two of this series, we will discuss majority’s holding that a contractual prohibition on an award of punitive damages is void as against public policy.

Texas Natural Resources Law: Arbitration and Oil, Gas, and Mineral Leases

In 2016, members of the McDaniel family signed an oil and gas lease with Ridge Natural Resources, LLC (“Ridge”) for their property in Winkler County. In the lease, the parties agreed “… that all disputes between the parties shall be resolved solely by binding arbitration administered by the American Arbitration Association in accordance with its commercial arbitration rules pursuant to the Texas General Arbitration Act.” The provision was lengthy and extensive covering a variety of claims and disputes that would be subject to arbitration. After the lease was signed, Double Eagle Royalty (“Double Eagle”) became the successor-in-interest to the McDaniel family and claimed ownership of the mineral interests, and also separately received an assignment of any claims against Ridge. A dispute arose between Double Eagle and Ridge as to who had title to the mineral interests. Ridge immediately sought to compel arbitration.

Double Eagle made two arguments (and these are the two general categories of arguments made against arbitration clauses). First, Double Eagle argued that the arbitration provision was contrary to Texas oil, gas and mineral law as a matter of substantive unconscionability. Double Eagle argued that arbitration is just not viable for oil, gas and mineral leases. Double Eagle hired an expert, a Texas attorney board certified in oil, gas, and mineral law, who provided the opinion that that “[i]t would be highly unusual for an Oil and Gas Lease covering Texas land to contain an arbitration provision.” Double Eagle also made three narrower arguments regarding substantive unconscionability.

Second, Double Eagle argued that the provision was procedurally unconscionable — that is, the parties had not really agreed to arbitrate, or alternatively, that the provision was so one-sided as to “shock the conscience.” Double Eagle highlighted testimony from the McDaniels where they said they had “not read the Ridge lease in depth” and that none of them “spoke to legal counsel or anyone else” about the lease. The arbitration provision was also not in bold-face or otherwise highlighted or given prominence. Thus, Double Eagle argued that the arbitration clause was not enforceable because the McDaniels had not truly understood what they were agreeing to.

The trial court agreed with Double Eagle and refused to compel arbitration. However, the Court of Appeals reversed.

Texas Arbitration Law: Legal Principles: Procedural and Substantive Unconscionability

Arbitration is a matter of contract law. The first question, as always, is did the parties agree to arbitrate their disputes? If yes, under general principles of contract law, Texas courts will enforce the parties’ agreement. As noted above, there are two main challenges to an arbitration agreement – procedural and substantive. Procedurally, to challenge an arbitration agreement, a party argues that there was never an agreement to arbitration. That is, no contract was formed. Questions here relate to issues including:

  • Was the arbitration clause mentioned and/or separately negotiated?
  • Is the provision “buried” in small print on the reverse side of the agreement?
  • Is the provision in bold-face or larger font so that the eyes are drawn to the provision?
  • Is the provision shockingly one-sided?

As a matter of substantive unconscionability, the question is whether, as a matter of law and public policy, does society want these types of legal cases decided by arbitration?

Court Of Appeals Upholds Arbitration Clause

 In reversing the trial court, the Court of Appeals held that there was no procedural unconscionability. There were no facts to suggest that the 2016 lease had not been agreed to. It was, for example, signed by various members of the McDaniel family. Even though they did not use a lawyer to review the lease, the McDaniels certainly could have and often landowners do retain counsel. This was not a “consumer-type” contract where procedural protections are more important.

The Court also rejected the substantive unconscionability argument. In general, arbitration is favored in the law, both by courts and by the Texas legislature as evidenced by the Texas Arbitration Act. As a specific claim of substantive unconscionability, Double Eagle focused on the prohibition on punitive damages. As discussed in our companion article, the Court of Appeals agreed that that prohibition was unconscionable, but held that such did not void the entire arbitration provision, but only that portion of the arbitration clause was void.

The Dissent: No Agreement to Arbitrate

As indicated above, the Ridge Natural Resources decision was 2 to 1. The dissent argued that the trial court should have been affirmed on the grounds that no true agreement had been reached to arbitrate. In the majority opinion, once it was shown the that 2016 had been signed, the burden was shifted to Double Eagle to show lack of contract formation. The dissent disagreed with that burden shifting. The dissent argued that Ridge should have always born the burden. According to the dissent, the evidence was not sufficient for Ridge to show that arbitration had been agreed to. As such, procedurally, the dissent would have held that the provision was void.

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