The following is a case update written by the Hon. Meredith A. Jury, United States Bankruptcy Judge, C.D. Cal. (Ret.), analyzing a recent decision of interest:

Relying on the strong Texas principle of freedom to contract, the Texas Supreme Court held recently that although emails are writings, an exchange of emails and documents which demonstrate that parties have reached a meeting of the minds is not sufficient to form a definitive agreement to create an enforceable contract. Chalker Energy Partners III, LLC v. Le Norman Operating LLC, 2020 WL 976930 (Tex. 2/28/20).

To view the opinion, click here.

FACTS

Eighteen individuals and entities (Sellers) owned interests in 70 oil and gas leases in Texas. After completion of development, they decided to sell the leases and designated one seller, Chalker Energy Partners III, LLC (Chalker), to act as their designated agent during the sale process. Bid procedures gave bidders access to a virtual data room of information about the assets for sale after signing a Confidentiality Agreement. The Confidentiality Agreement provided in part that until a “definitive agreement” had been executed, no contract between the parties would exist. It then stated that a “definitive agreement” did not include “an executed letter of intent or any other preliminary written agreement or offer” unless so designated in writing as such.

Two active bidders, Le Norman Operating LLC (LNO) and Jones Energy, were actively involved in the sale, made procedurally complex because after Chalker received any bids, it had to forward them to the Sellers, who had 24 hours to decide whether to sell their interests. The bid process turned on offers and counteroffers being exchanged by email between Chalker and LNO; these emails resulted in a commitment by Sellers to sell and LNO to buy 67% of the interests. Further emails were exchanged and Chalker sent a draft Purchase and Sale Agreement (PSA) to LNO. Their agreement was sufficiently certain that Jones Energy emailed one of the Sellers, stating that it had “heard that we lost the deal.” Notwithstanding that email, however, Jones Energy presented Chalker with a new offer and the Sellers elected to take that offer over LNO’s. Within a couple of days, Jones Energy and Chalker executed a PSA.

LNO sued the Sellers for breach of contract arguing that they breached the agreement reached through email. Sellers counterclaimed for declaratory relief that there was no contract. Both parties filed summary judgment motions. The trial court granted Sellers’ motion and dismissed the complaint. The First Court of Appeal reversed, finding that the emails put disputed facts at issue. The Texas Supreme Court granted review and reversed again, finding there was no enforceable contract between LNO and the Sellers.

REASONING

The Supreme Court characterized the requirement in the Confidentiality Agreement that a definitive agreement be executed as a condition precedent to contract formation. Once it had done so, its analysis relied on its recent holding in Energy Transfer Partners, L.P. v. Enterprise Prods. Partners L.P., 2020 WL 622763 (Tex. Jan. 31, 2020) that parties were entitled to impose a condition precedent upon the formation of a contract. Because LNO and the Sellers had never executed a PSA, the condition precedent failed and LNO had no contract to buy. Disagreeing with the Court of Appeal, the Supreme Court ruled that as a matter of law no fact issue was created by the emails because it was undisputed that the parties had not executed the required definitive agreement; it was also undisputed that the Sellers had not waived that condition.

The Supreme Court recognized that in the modern era many contract negotiations take place by email between the parties. Since emails are undoubtedly “writings,” it can often be asserted that a string of emails contains an offer and an acceptance that fit the traditional concept for contract formation. To avoid assertions that an agreement has been reached prematurely, a sophisticated business can protect itself against unintentionally creating an enforceable agreement by imposing as a condition precedent execution of a formal agreement. The court reiterated its lesson from Energy Partners: the freedom to contract is a paramount public policy, not to be lightly interfered with. Since that freedom resulted in a condition precedent to contract formation, failure of the condition results in no contract.

AUTHOR’S COMMENTS

This opinion has consequences far beyond upholding freedom to contract in the state of Texas. It has to raise the question: Are term sheets dead? If so, why are we scrambling around at the conclusion of a mediation to put the agreed deal points down in a writing—perhaps an email or memo and certainly not a “definitive agreement”—executed by all the parties before they leave the mediation room? Then there is the secondary question: is there no longer such a thing as a binding oral contract? Is a handshake between two respected business owners no longer an enforceable commitment to do business on agreed terms?

The answer to both of these questions does not have to be “yes.” But it will depend on what the parties do say to each other explicitly about contract formation. If you want to avoid an unintended contract, then make formation dependent on execution of that formal agreement while you are negotiating or in any exchanged term sheet. However, if you want that mediation term sheet to be enforceable, then say it will be in the term sheet and certainly do not make it subject to execution of the formal agreement. Some foresight will prevent problems with enforcement later.

These materials were written by the Hon. Meredith A. Jury, United States Bankruptcy Judge, C.D. Cal. (Ret.), a member of the ad hoc group with editorial contributions by Monique Jewett-Brewster, an attorney with Hopkins & Carley, ALC, a member of the ad hoc group and 2018-19 Chair of the CLA Business Law Section. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.