The processes of bidding and negotiation often unfold in unanticipated directions, including via the “distinctly conversational, informal medium” of email. A recent Texas Supreme Court decision demonstrates how businesses might protect themselves, especially when negotiating by email, and reiterates the strong Texas principle of freedom to contract.

In Chalker Energy Partners III LLC et al. v. Le Norman Operating LLC, the Texas Supreme Court addressed whether an exchange of emails and documents constituted a “definitive agreement.”1 This opinion was delivered shortly after the Energy Transfer Partners LP et al. v. Enterprise Products Partners LP opinion, in which the Court held that “parties can contract for conditions precedent to preclude the unintentional formation of a partnership” under Texas law.2 Similar to the Energy Transfer Partners LP et al. v. Enterprise Products Partners LP opinion, the Texas Supreme Court ultimately held in Chalker Energy Partners III LLC et al. v. Le Norman Operating LLC that while “the emails are writings, they do not form a definitive agreement[,]” as required by the no obligation clause in the confidentiality agreement between the parties.3

In 2012, a group of 18 individuals and entities (the Sellers) sought to sell their assets consisting of approximately 70 oil and gas leases.4 The Sellers hired a financial services company to conduct the bidding, and formal bidding procedures and deadlines were put into place.5

After signing a confidentiality agreement, each bidder was given access to a data room with information about the oil and gas leases.6 One provision of the confidentiality agreement was the no obligation clause, which provided 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 . . . .”7 In other words, a “definitive agreement” between both of the parties was required before a contract could be formed.

Under the bidding procedures, bidders would use forms to submit their bids to the Sellers’ representative by the deadline, the representative would forward them to the Sellers, and each Seller would have 24 hours to decide whether to sell.8 If a sale was approved by the Sellers, then the representative would “negotiate a definitive purchase-and-sale agreement, or PSA.”9

On the date of the bidding deadline, the two high bidders were LNO and Jones Energy.10 LNO negotiated back and forth with the Sellers, and eventually – two weeks after the bidding deadline – the Sellers made LNO an offer to sell 67 percent of the oil and gas leases. LNO’s principal sent an email to the financial services company “without reference to the bidding procedures,” under a subject line of “Counter Proposal.”11 The body of the email contained a list of seven terms and provided a deadline of 5:00 p.m. the following day for the Sellers to accept.12 The Sellers voted to sell, but LNO and the Sellers had not yet executed a PSA.13

Two days after LNO sent its “Counter Proposal” email, Jones Energy presented the Seller representative with a new offer. The Sellers ultimately accepted Jones Energy’s offer and effectuated it with a fully executed PSA. LNO, who had still been redlining a draft PSA itself, then sued the Sellers for breach of contract.

In its opinion, the Court quoted the Energy Transfer Partners LP et al. v. Enterprise Products Partners LP decision: “Texas courts regularly enforce conditions precedent to contract formation and reject legal claims that are artfully pleaded to skirt unambiguous contract language, especially when that language is the result of arm's-length negotiations between sophisticated business entities.”14 The Court noted that the confidentiality agreement’s no obligation clause demanded that a definitive agreement exist as a condition precedent to contract formation. LNO and the Sellers, however, failed to come to an agreement on the PSA.15 This situation, the Court reasoned, was highly comparable to the case of WTG Gas Processing, L.P. v. ConocoPhillips Co., which included two parties that had agreed to execution of a PSA as a condition precedent to contract formation.16 While the Texas Court of Appeals had distinguished WTG Gas Processing, L.P. v. ConocoPhillips Co. because the alleged contract in that case was oral, the Texas Supreme Court summarily noted, “[t]he distinction is unpersuasive.”17

The Court further noted missing key agreements within the emails, including a conspicuous lack of attention to escrow, noncompete, and joint operating agreements.18 In the end, the Court was unpersuaded that the emails exchanged constituted such a “definitive agreement,” and explained that the emails were more accurately categorized as a “preliminary agreement.”19

In so holding, the Court concluded, “[b]y including the No Obligation Clause in the Confidentiality Agreement, the Sellers and LNO provided themselves with the freedom to negotiate without fear of being bound to a contract. The record here reflects that they were doing just that.”20

Practitioner’s takeaway

This opinion is yet another example of the freedom of contract embraced by the current justices on the Supreme Court of Texas. It also provides more certainty to the business community of Texas that the courts will apply the language of the contracts as written, especially condition precedent provisions.