Introduction. In the COVID19 age, Business transactions and formal legal proceedings are now commonly being conducted remotely. In the recent Texas Supreme Court decision of Chalker Energy Partners III, LLC v. Le Norman Operating LLC, 595 S.W.3d 668, 669–70 (Tex. 2020), the Court recognizes that transactions conducted remotely and through email can result in the consummation of binding legal contracts. However, the electronically transmitted negotiations in this case were made subject to the execution of a Purchase and Sale Agreement (“PSA”) that was never executed. As a result, the Plaintiff lost on its breach of contract claim involving the purchase of over $200+ million in oil and gas interest Assets.
Background and analysis. The Texas Supreme Court begins its decision by stating:
In Texas, a deal is, of course, a deal. An agreement as to many things can be oral, sealed by a handshake, even a $10.53 billion handshake.1 The common law has long recognized that an agreement can be expressed in multiple writings exchanged between the parties.2 Emails are such writings.3 Email can be a convenient way to *670 reach agreement, but it is also a distinctly conversational, informal medium. Hitting send may be deliberate; it may be hasty. And so in this brave new world, or at least this braver new world, we must decide whether an email exchange reflected the meeting of minds required for a contract, given the nature of the transaction and the parties’ expressed contemplations. And we must begin to give certainty to this developing area of contract law. Today, we hold that the parties’ email exchange falls short of an agreement as a matter of law and therefore reverse the judgment of the court of appeals4 and render judgment for petitioners.
Chalk Energy Partners, III, LLC, v. Le Norman Operation, LLC, supra, *669-070.
This case involved the online auction of hundreds of millions of dollars in oil and gas interest “Assets.” Bidding procedures required the bidders to be given access to a virtual room containing information about the Assets. The bidders were required to sign a Confidentiality Agreement. Once a bid was made each Seller had 24 hours to decide whether to accept it.
The key provision in the Confidentiality Agreement stated:
No Obligation. The Parties hereto understand that unless and until a definitive agreement has been executed and delivered, no contract or agreement providing for a transaction between the Parties shall be deemed to exist and neither Party will be under any legal obligation of any kind whatsoever with respect to such transaction by virtue of this or any written or oral expression thereof, except, in the case of this Agreement, for the matters specially agreed to herein. For purposes of this Agreement, the term “definitive agreement” does not include an executed letter of intent or any other preliminary written agreement or offer, unless specifically so designated in writing and executed by both Parties.
Chalk Energy Partners, III, LLC, v. Le Norman Operation, LLC, supra, *670.
On the date of the bidding deadline, one bid was submitted by LNO for $332 million and another was submitted by Jones Energy. Sellers refused the offers.
Subsequently, Sellers offered by email to sell 67% of the ssets. On November 19, LNO offered to purchase 67% of the Assets without reference to the bidding procedures. The “Counter Proposal” included multiple terms including that a PSA had to be executed before November 30, 2012. On November 20, 2020, the Sellers sent an email to LNO that they were on board to sell 67% of the Assets to LNO, subject to the execution of a mutually agreeable PSA.
On November 22, Jones Energy, the other bidder, presented Sellers with a new offer. The Sellers found this offer to be more beneficial than the one made by LNO and elected to accept it. And, on November 28, 2020 the sellers entered into a binding PSA with Jones Energy. The Sellers never entered into a final PSA with LNO.
LNO sued Sellers for breach of contract on the grounds that the Sellers breached the agreement created by the November 19 and 20 email exchange for Sellers to sell 67% of the Assets to LNO. The trial granted summary judgment in favor of Sellers as to Plaintiff’s breach of contract claim which was reversed on appeal, resulting in this petition for review being decided by the Texas Supreme Court.
In a nutshell, the Texas Supreme Court found that since the No Obligation Clause in the Confidentiality Agreement stated that a definitive agreement (the “PSA”) was a condition precedent to contract formation, there was no issue of fact as to whether Sellers breached any agreement with LNO since no PSA was ever executed between Sellers and LNO. The Texas Supreme Court also noted that:
The emails here are more akin to a preliminary agreement than a definitive agreement to sell the Assets, and the parties’ dealings suggest that they intended that a more formalized document, like a PSA, would satisfy the definitive-agreement requirement.
Chalk Energy Partners, III, LLC, v. Le Norman Operation, LLC, supra, *675.
Court’s holding. Thus, the Court held that as a matter of law that the Sellers and LNO did not execute a definitive agreement as required by the Confidentiality Agreement. The judgment of the court of appeals was reversed and judgment was rendered for the Sellers.
Lessons learned. The Texas Supreme Court has a history of holding parties to the strict terms of their negotiations and express language of their contracts. If the parties stipulate that a condition precedent must be satisfied to form a contract, then this condition must be satisfied in order for there to be an enforceable contract. (See reversal-of-500-million-judgment-in-pipeline-partnership-dispute-affirmed). Thus, if you are a party to contract negotiations, carefully review any conditions that must be satisfied in order for there to be a final binding agreement and make sure that you intend for these conditions to be part of your negotiations and the terms of any written contracts presented for signature. Otherwise, you may find yourself in the shoes of LNO with no final agreement to enforce.