In energy contracts, there is a need for specificity in arbitration provisions, particularly in the delegation of arbitrability questions to the arbitrator. Because of the high stakes involved in contracts for energy production, transportation, refining, fractionation, mergers and acquisitions, and so on, parties are frequently willing to devote substantial resources to determine how a potential dispute should be resolved.
Parties may be left trying to negotiate (or litigate) that issue after a dispute commences if their contract does not include key terms such as the following:
- Applicable rules (whether a set of American Arbitration Association (AAA) rules or otherwise)
- How arbitrators will be selected
- How many arbitrators there will be
- The length of time between commencement of arbitration and the arbitral hearing
- Where the arbitral hearing will be held
- When the final award is due and how much reasoning or analysis it requires
- The extent to which discovery procedures will be allowed
- Whether class actions are allowed
A crucial provision that is often overlooked is the delegation clause, along the lines of:
The arbitrator, and not any federal, state, or local court, shall have exclusive authority to resolve any dispute relating to the interpretation, scope, applicability, unconscionability, arbitrability, or enforceability of this Agreement, including any claim that all or any part of the Agreement is void or voidable.
Without delegation, the court—not the arbitrator—will determine arbitrability questions, such as whether the arbitration clause encompasses the particular dispute at issue. Because delegation clauses, like arbitration agreements themselves, are severable from the larger contract in which they appear, challenges to the enforceability of the delegation clause itself are for the court to decide, whereas challenges to enforceability of the agreement as a whole are for the arbitrator. See Rent-A-Ctr., W., Inc. v. Jackson, 561 U.S. 63 (2010). Thus, if a contract delegates matters of arbitrability to the arbitrator, and no valid argument exists that the delegation clause in particular is unenforceable, then a reviewing court must compel arbitration rather than addressing arbitrability questions itself.
Delegation can help the parties avoid wasted time and money fighting for the ability to enter arbitration in the first place.
Authored by litigators from our energy team, the Not Just Boilerplate series on Power & Pipes provides real-world examples of the impact that certain contract clauses can have on energy companies. Whether in repeat form agreements, employment agreements, or heavily negotiated one-off deals or mergers, there can sometimes be a tendency to just “grab” clauses from prior agreements, with the thinking that “it has always worked before . . .”
Our energy lawyers have experience with a wide array of litigation matters that have turned on various common contract clauses, some of which may have not received much attention at the time they were included in the agreement. We thought it might be useful to pass on some real-world “lessons learned” from the litigators who have actually fought the battles. Such perspectives might help to inform your next contract—or dispute.