Case Analysis: Email Agreements in the Oil Patch

The Texas Supreme Court in Chalker Energy Partners III, LLC et al. v. Le Norman Operating LLC Weighs in on Email Agreements

Deals move fast in the oil patch. When it comes to signing up a lease or any number of agreements, oil and gas operators sometimes must move fast or risk losing a lease. Emails get fired off quickly, trying to close a deal. But what happens if the buyer gets cold feet? Or the seller gets a better offer? Is the flurry of emails between the parties enough to be a binding contract? This is an area of the law where oil and gas operators are often operating without clear guidance from the courts.

Last week, the Texas Supreme Court in Chalker Energy Partners III, LLC et al. v. Le Norman Operating LLC, provided some much-needed clarity on this matter. The Court even recognized at the outset of its decision that, when it comes to Texas law on email contracts, the Court needs to “begin to give certainty to this developing area of contract law.”

In the case, eighteen different parties were selling dozens of oil and gas leases in the Texas Panhandle that were worth hundreds of millions of dollars (the “Assets”). These parties designated one party (Chalker) to be their agent for the sale, and Chalker hired Raymond James to conduct a sale through a bidding process.

Each potential bidder for the Assets signed a Confidentiality Agreement that required the parties execute a “definitive agreement” in order to complete a sale. The Confidentiality Agreement also said that a definitive agreement did 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.”

Chalker and Le Norman Operation (“LNO”) discussed possible sale terms for the assets. Eventually, LNO emailed a proposal to Chalker to buy 2/3 of the Assets, along with other sales terms. The sellers voted collectively to sell based on this proposal, and Raymond James then emailed LNO saying that the sellers were “on board to deliver 67% subject to a mutually agreeable PSA. We were calling to discuss next steps and timing. Chalker et al will be turning a PSA tonight to respond to your last draft.”

Two days later, another bidder, Jones Energy, submitted another bid for the Assets. The sellers preferred Jones Energy’s bid and ultimately signed up a PSA without telling LNO. When LNO found out, it filed a lawsuit for breach of contract. The trial court granted summary judgment in favor of the sellers, but the court of appeals reversed, holding that the parties’ email traffic created a fact question that precluded summary judgment.

The Texas Supreme Court noted in its opinion how many transactions are now conducted by email and how parties are reacting to this fact with additional protections:

Many of today’s most sophisticated transactions are conducted, in part, through email. In response to this reality, parties often protect themselves through agreements stipulating the conditions upon which they will be bound. Unquestionably, they are free to do so.

Looking at the “definite agreement” requirement in the Confidentiality Agreement, the Court concluded that this language made such an agreement “a condition precedent to contract formation.”

LNO argued that there was a fact question on whether the parties’ emails constituted such a “definite agreement,” relying on Foreca, S.A. v. GRD Development Co., Inc., 758 S.W.2d 744 (Tex. 1988). In Foreca, the Court had held there was a fact question whether the parties had formed a binding agreement despite language saying that the alleged agreement was “subject to legal documentation.” But the Court here distinguished Foreca, saying the language in the Confidentiality Agreement required more:

[L]anguage that no contract will arise until a formal agreement is executed makes clear the parties’ intent that the contemplated formal document is a condition precedent to contract formation. Thus, the fact that Chalker’s alleged acceptance was “subject to a mutually agreeable PSA” does not create a fact issue; instead, it emphasizes that the definitive agreement referenced in the No Obligation Clause was a condition precedent to contract formation.

The Court also noted that the parties had not agreed on a PSA despite earlier negotiations, and that the parties had not agreed on other key related agreements such as an escrow agreement, a noncompete agreement, and a joint operating agreement.

As a backup argument, LNO argued that the sellers had waived the condition precedent through their conduct. LNO noted that the parties sent their deal emails after the original deadline for a completed sale and used different bidding procedures than the sellers had originally included as part of the sales process. But again, the Court disagreed, and held as a matter of law that this was not enough to show an “intentional relinquishment of the right to a definitive agreement” under the Confidentiality Agreement.

Following this case, operators have a better way to protect themselves against accidentally binding themselves to a contract that they never thought was final. The Court made it clear that it will protect an operator’s right to condition the formation of a final agreement on future documentation.

The Chalker Energy Partners decision is not the only Texas Supreme Court examining email-exchange “agreements” this term. The Court in Copano Energy, LLC v. Bujnoch, 18-0044, 2020 WL 499765 (Tex. Jan. 31, 2020) held that an email exchange between a pipeline company and a landowner’s attorney did not constitute a written agreement for the purchase of an easement. On a related note, the Court in Energy Transfer Partners, L.P. v. Enterprise Products Partners, L.P., 17-0862, 2020 WL 622763 (Tex. Jan. 31, 2020) held that “parties can contract for conditions precedent to preclude the unintentional formation of a partnership” under Texas law. When examined together, Chalker Energy Partners, Copano Energy, and Energy Transfer Partners suggest that parties seeking to enforce more-informal email exchanges as binding agreements (or partnerships) face an uphill battle in Texas courts.