On February 28, 2020, the Texas Supreme Court reversed a ruling from the First Court of Appeals in Houston in the case of Chalker Energy Partners III, LLC, et al. v. Le Norman Operating LLC, 547 S.W.3d 27 (Tex. App.—Houston, 2017). The Texas Supreme Court held that an email exchange “falls short of an agreement as a matter of law” where the parties included a No Obligation Clause in the Confidentiality Agreement.^[1]

Background

In December 2012, 18 entities, including Chalker Energy Partners III, LLC (“Sellers”), completed development of working interests in approximately 70 oil and gas leases in Texas (the “Assets”) worth hundreds of millions of dollars. A bid process began and interested parties, including Le Norman Operating (“LNO”) entered into Confidentiality Agreements with Sellers that included an express disclaimer of contract regarding the transaction until the execution of a definitive agreement (the “No Obligation Clause”). After receiving LNO’s bid proposal for 100% of the Assets, Sellers offered via email to sell 67% of the Assets to LNO. LNO responded with a short list of terms, including “Execution of a PSA on or before 11.30.12.”  Sellers responded that the group was “on board to deliver 67% subject to a mutually agreeable PSA.”  However, when presented with a more favorable offer from a third party, Sellers accepted and executed a PSA with the third party. LNO sued Sellers for breach of contract.

The trial court granted Sellers’ motion for summary judgment. Subsequently, the First Court of Appeals in Houston reversed the trial court’s determination, holding that whether the alleged contract was subject to the bidding procedures, including the Confidentiality Agreement, and whether LNO and the Sellers intended to be bound by the terms set forth in the emails were fact issues precluding summary judgment.

On February 28, 2020, the Texas Supreme Court (the “Court”) delivered an opinion reversing the decision of the First Court of Appeals, holding that the email exchange did not, as a matter of law, constitute a binding agreement. In its opinion, the Court noted that parties are unquestionably free to protect themselves through agreements stipulating the conditions upon which they will be bound. Further, the fact that Sellers’ alleged acceptance was “subject to a mutually agreeable PSA” emphasizes that the definitive agreement was a condition precedent to contract formation.

In its analysis, the Court noted that the email falls short of a definitive agreement because, pursuant to the Confidentiality Agreement, the term “definitive agreement” did not include an executed letter of intent or other preliminary written agreement unless specifically so designated in writing and executed by both Parties, which the email was not. The Court went on to look at the Black’s Law Dictionary definition of “preliminary agreement” and “definitive agreement,” concluding that the email was preliminary in nature as both parties contemplated executing a PSA.

Our View

The Court’s decision in Chalker Energy Partners III, LLC, et al. v. Le Norman Operating LLC reinforces longstanding Texas law regarding freedom of contract. The Court’s opinion provides reassurance that parties can choose to detail conditions precedent to forming contractual obligations, setting the standard above offer and acceptance. At the same time, the Court’s decision emphasizes the importance of No Obligation Clauses to ensure that parties will not unwittingly find themselves subject to a binding agreement during the negotiations process.

This decision comes on the heels of Energy Transfer Partners LP et al. v. Enterprise Products Partners LP, in which the Court held that “parties can contract for conditions precedent to preclude the unintentional formation of a partnership” under Texas law.^[2] As in Energy Transfer Partners, the Court is taking the opportunity in Chalker Energy Partners to emphasize freedom to contract by using conditions precedent to change the rules for relations among parties in a transaction.