In a case with major implications generally and for transactions in the oil-and-gas industry in particular, the Texas Supreme Court recently held that emails exchanged between a buyer and seller did not create a contract for the sale of $230 million in oil and gas assets because the parties had expressly agreed in a “no obligation” clause that “unless and until a definitive agreement has been executed and delivered,” no contract between the parties relating to the transaction would exist.  

This February 28 decision, Chalker Energy Partners III, LLC et al. v. Le Norman Operating LLC, is significant for several reasons, chief among them because it provides useful guidance to parties seeking to avoid unintended agreements when negotiating contracts.

An auction of oil-and gas assets and an alleged contract by email

In 2012, a group of working interest owners led by Chalker Energy Partners III, LLC decided to sell their interests in several oil and gas leases in the Texas Panhandle—interests worth hundreds of millions of dollars.  The sale followed an auction process, with bidders required to sign a confidentiality agreement in order to access the data room and place a bid.  Of note, the confidentiality agreement contained a broad “no-obligation clause,” providing that “unless and until a definitive agreement has been executed and delivered,” no contract between the parties relating to the transaction would exist.

Le Norman Operating LLC (“Le Norman”) was one of the bidders who signed the confidentiality agreement and participated in the bid process.  After Le Norman’s initial bid was rejected by the sellers, Le Norman’s president emailed the sellers’ representative with a counter proposal containing terms for price, specifying the working interests to be acquired, and stating that the PSA would be signed and the closing would take place by a date certain.  The sellers’ representative responded by email committing that they were “on board to deliver [the interests] subject to a mutually agreeable PSA . . . .”  But when presented with a better offer by a different bidder, the sellers reversed course and executed a PSA with the new bidder.  Le Norman sued to enforce an alleged contract entered through the email exchange.

On cross-motions for summary judgment, the trial court granted the sellers’ motion concluding that (1) the parties did not intend to be bound to any agreement; (2) a PSA was a condition precedent to contract formation; and (3) there was no meeting of the minds because the Confidentiality Agreement, bidding procedures, and data room presentation precluded a binding contract without a signed PSA.  The First Court of Appeals reversed, however, holding that fact issues existed precluding summary judgment, including whether the sellers intended to be bound by the terms in the parties’ email exchange.

The Texas Supreme Court’s February 28 Decision

On February 28, 2020, the Texas Supreme Court issued a unanimous opinion reversing the Court of Appeals and rendering judgment for the sellers.  Writing for the court, Chief Justice Hecht remarked that “[t]he common law has long recognized that an agreement can be expressed in multiple writings exchanged between the parties” but cautioned that email is “a distinctly conversational, informal medium.”  Recognizing that “we must begin to give certainty to this developing area of contract law,” the court held that the parties’ email exchange did not constitute a contract as a matter of law.

In reaching this decision, the court relied on the unambiguous no-obligation clause in the parties’ Confidentiality Agreement.  The court reasoned that by including this clause, the parties “agreed that a definitive agreement was a condition precedent to contract formation.”  The court went on to conclude that the email exchange was not such a definitive agreement, as the parties’ dealings confirmed that they both intended for a more formalized document like a PSA to satisfy this requirement.  In particular, the court noted Le Norman’s email proposal referring to the execution of a PSA in the near future and the fact that the parties subsequently exchanged drafts of a PSA.  The court further reasoned that “[i]f mere proposals that contemplate a later-executed PSA and the subsequent exchanging of unagreed-to drafts are sufficient to raise a fact question on the existence of a definitive agreement, No Obligation Clauses will be stripped of much of their meaning and utility.”

Finally, the court considered but rejected Le Norman’s argument that the sellers had waived the requirement of a definitive agreement.  Although Le Norman and the court of appeals both pointed to the fact that Le Norman’s email counter-proposal was sent after the initial bid process concluded, the Texas Supreme Court noted that the subject of Le Norman’s email was “Counter Proposal,” indicating that negotiations were a continuation of Le Norman’s earlier attempts to negotiate a sale of the assets.  The court further pointed to the sellers’ email qualifying acceptance “subject to a mutually agreeable PSA” as conduct consistent with the sellers’ right to a definitive agreement. 

Lessons Learned

The court’s opinion has major implications for energy companies doing business in Texas and provides much needed clarity to Texas contract law in two important respects.

First, like the court’s recent decision in Energy Transfer Partners, L.P. v. Enterprise Products Partners, L.P., summarized here, the Chalker decision helps parties avoid unintended agreements by reaffirming the enforceability of contractual conditions precedent in confidentiality agreements entered as part of the asset sale or M&A process.  Given the prevalence of auction-style sales of oil and gas interests in Texas, this decision offers a clear roadmap for parties to avoid being bound by email exchanges before signing the final PSA.  As a practical matter, this decision gives parties ammunition to seek a prompt dismissal at earlier stages of litigation because conditions precedent can be enforced “as a matter of law.”

Second, although the opinion acknowledges that it is possible to waive conditions precedent, the court has taken a narrow view of the conduct sufficient to knowingly and voluntarily waive a condition precedent.  This may help discourage challenges to the enforcement of similar no-obligations clauses or conditions precedent. 

Chalker reinforces the need for companies conducting asset sales to clearly define the conditions necessary for a definitive agreement during negotiations, and the language of the “no obligation” provision in Chalker is a good starting place.