Chalker Energy Partners III, LLC v. Le Norman Operating LLC, No. 18-0352, 2020 Tex. LEXIS 161 (Tex. Feb. 28, 2020);
Copano Energy, LLC v. Bujnoch, No. 18-0044, 63 Tex. Sup. Ct. J. 348, 2020 Tex. LEXIS 49, (Jan. 31, 2020)
In response to COVID-19, many companies and their employees have quickly shifted to a “work from home” model. Even though email has been a large part of business for decades, the new “remote” reality has only increased our reliance on electronic communications. In a pair of recent cases, the Texas Supreme Court was tasked with deciding what role email plays in contract formation. As companies continue to conduct an extensive amount of business electronically, it is important to keep in mind what effect courts will give to agreements formed through email conversations.
Chalker Energy Partners III, LLC v. Le Norman Operating LLC
In Chalker, The Texas Supreme Court had to decide whether an email exchange was sufficient to constitute a contract for the purchase and sale of $230 million in oil and gas assets. The sellers were 18 working interest owners in 70 oil and gas leases in the Texas panhandle. The sellers conducted a sale with bidding procedures that required the signing of a confidentiality agreement prior to gaining access to a virtual data room. The confidentiality agreement contained a “No Obligation” provision, indicating 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.”
Pursuant to the bidding procedures, Le Norman emailed a bid of $332 million for 100% of the Assets, indicating it was “subject to the execution of a mutually acceptable [PSA],” along with a proposed PSA. Jones Energy submitted a higher bid, and then Le Norman increased its bid to $345 million. The sellers refused to accept Le Norman’s bid, and Le Norman declined further bidding.
The sellers then offered to sell 67% of the assets. Le Norman emailed a proposed set of deal terms, including a $230 million sales price and stating “PSA similar to what we returned.” The email indicated Le Norman would not consider any counter proposals and gave a firm deadline of 5:00 pm the next day to accept. The sellers accepted the offer by email before the deadline, but “subject to a mutually agreeable PSA.” Hours later the sellers provided a revised PSA and invited further discussion. The sellers sent Le Norman’s private equity investor a congratulatory email, and Jones Energy emailed the sellers stating they “hear that we lost the deal again.”
However, a few days later, Jones Energy presented the sellers with a new offer, which the sellers ultimately voted to accept. About a week after the sellers had already emailed Le Norman to accept its offer, the sellers executed a purchase and sale agreement with Jones Energy. That same day, unaware of what had happened, Le Norman’s general counsel sent the sellers a redlined PSA.
Le Norman sued the sellers for breach of contract, contending that their email exchange constituted an enforceable agreement. The trial court held in favor of the sellers, and the Houston First Court of Appeals reversed and remanded, holding that there was a fact issue as to whether the parties intended to be bound by the terms in the emails.
The Texas Supreme Court reversed the court of appeals and rendered judgment in favor of the sellers. The court held that, by agreeing to the “No Obligation” provision in the Confidentiality Agreement, the parties had agreed upon an enforceable condition precedent to contract formation. As the court acknowledged, most sophisticated transactions are now conducted by email, and parties often protect themselves by stipulated conditions precedent to contract formation. “A party seeking to recover under a contract bears the burden of proving that all conditions precedent have been satisfied.”
The Court also rejected Le Norman’s argument that the emails raise a fact issue as to whether a definitive agreement existed. The Court acknowledged that its previous decisions held that there can be a fact question regarding whether parties intend for a definitive document to be a condition precedent or merely a “memorial of an already-enforceable contract.” However, those cases did not involve an express condition precedent like the No Obligation provision.
The Court also indicated that, although the emails in this case were in writing, they were not sufficient to form a definitive agreement, as the confidentiality agreement expressly indicated that a letter of intent or preliminary written agreement would not be sufficient. It is important to note that the Court faced a somewhat similar case involving ETP and Enterprise just a few months before the Court addressed this case. The court also rejected Le Norman’s argument that the No Obligation clause did not apply since the disputed emails were after the formal bidding process. The Court disagreed, reasoning that the subject line “Counter Proposal” indicated that the negotiations were a continuation of the prior negotiations, and because the Confidentiality Agreement did not terminate until a year later.
Le Norman also argued there was a fact issue regarding whether the sellers waived the condition precedent established under the No Obligation clause, relying upon inconsistencies between the bidding procedures and how the parties actually made and responded to offers. The court rejected that argument, indicating that the deviation from bidding procedures was not evidence of an intentional relinquishment of the No Obligation provision. In addition, the parties’ conduct was not inconsistent with the No Obligation provision, as the emails specifically contemplated working on and executing a PSA, and the email offer was made “subject to a mutually agreeable PSA.”
Copano Energy, LLC v. Bujnoch
In another case involving emails, the Texas Supreme Court held that a series of emails relating to the purchase of an easement were not sufficient to meet the statute of frauds.
The plaintiffs were landowners in Lavaca and Dewitt Counties. In 2011, the landowners granted easements to Copano for the construction and operation of a 24-inch pipeline on their properties. In 2012, Copano approached the landowners about obtaining another easement to construct an additional pipeline.
A Copano landman contacted Marcus Schwartz, an attorney representing the landowners, to discuss the proposed second easement. The attorney’s assistant exchanged several emails with the landman in advance of a meeting scheduled between the attorney and the landman. The emails included a discussion of the size of the proposed pipeline and what type of gas it would transport. Notably, the subject of the email was “Meeting with Schwartz.”
Following the date of the proposed meeting, the landman emailed Schwartz directly for the first time. Schwartz said [p]ursuant to our conversation earlier, Copano agrees to pay your clients $70.00 per foot for the second 24-inch line it proposes to build. In addition to this amount Copano agrees to address and correct the damages to your client’s property caused due to the construction of the first 24-inch line.” Schwartz responded, “[i]n reliance on this representation we accept your offer and will tell our client you are authorized to proceed with the survey on their property. We would appreciate you letting them know a reasonable time before going on their property.” Copano was in the midst of a sale to Kinder Morgan, and the second pipeline was never built.
The landowners sued Copano and Kinder Morgan for, among other things, breach of contract. The landowners claimed a contract to sell an easement to the landowners for $70 per foot existed and was enforceable. Copano and Kinder Morgan moved for summary judgment based on the statute of frauds.
The Supreme Court of Texas held that the statute of frauds was not met, even though the emails “surely contain[ed] an offer and an acceptance.” The Court explained that essential terms, such as the easement’s location and size, were not present in the emails in a form sufficient to demonstrate an intent to be bound. While certain terms were discussed via email, the Court found they were in anticipation of future, in-person meetings. According to the Court, these emails were nothing more than forward looking requests to negotiate. Thus, the landowners could not meet the statute of frauds.