I don’t always agree with Nathan Hecht, Chief Justice of the Texas Supreme Court. But I’ll give him this. The man knows how to start an opinion.
Here’s part of his intro to the opinion issued last Friday in Chalker Energy Partners III, LLC v. Le Norman Operating LLC:
Email can be a convenient way to reach agreement, but it is also a distinctly conversational, informal medium. Hitting send may be deliberate; it may be hasty. And so in this brave new world, or at least this braver new world, we must decide whether an email exchange reflected the meeting of minds required for a contract, given the nature of the transaction and the parties’ expressed contemplations. And we must begin to give certainty to this developing area of contract law.
This is what marketing experts call a “tease.” It draws the reader in, promising something exciting. A brave new world! Certainty!
But then the opinion fails to deliver.
You see, the Texas Supreme Court’s Chalker Energy opinion isn’t really about emails. It’s about a “No Obligation” clause. Chalker Energy held the communications at issue did not constitute a “definitive agreement” required by the No Obligation clause in the parties’ preliminary agreement.
It just happens that the communications at issue were emails. The reasoning of the opinion shows the result would have been the same if the communications had been faxed letters, for example. So we will have to wait for another opinion to deliver the promised certainty for the brave new world of contracting by email.
Still, Chalker Energy is an important case for businesses and the lawyers who represent them. It’s worth looking at what the court decided and what it didn’t.
The “rule” of Chalker Energy
In the first year of law school they teach us to “brief” a case by outlining its facts, holding, reasoning, and rule. The “rule” is the hard part. It’s the abstract principle to be derived from the case and applied to future disputes.
The rule of Brown v. Board of Education, for example, is that the doctrine of separate but equal has no place in public school education. The rule of Texaco v. Pennzoil is that they’ll name a law school library after you if you make enough money.
So what is the Chalker Energy rule?
Before I take a stab at it, let’s understand what a No Obligation clause is. It’s a provision in an initial agreement between the parties to a contemplated business deal. It says the parties will have no legal obligation concerning the potential transaction until they sign a final written agreement.
The purpose? A No Obligation clause allows the parties to communicate freely about the terms of a deal without fear that their communications will establish a binding contract. It also provides certainty (hopefully) about whether the parties do or do not have a legally binding agreement.
With that understanding, the rule established by Chalker Energy is this:
An agreement on deal terms in written communications between the parties is not a definitive agreement contemplated by a No Obligation clause, where the communications reflect that the parties intended the agreement to be “subject to” signing a more detailed written agreement later, even if (a) the agreement is reached after the bidding process the parties agreed to has ended and (b) there is some evidence that the parties thought the emails established a binding agreement.
I realize that’s a fairly complicated “rule.” But that’s because Chalker Energy is a fairly fact-intensive opinion. You may see headlines that proclaim more broadly “Texas Supreme Court Rejects Agreements by Email” etc., but don’t believe the hype. Change one or two key facts, and the result could be different.
But which facts would make a difference?
Ah, there’s the rub. Now we have to get down in the weeds, at least a little.
The essential facts of Chalker Energy, shorn of any extraneous details
Chalker represented a group of working interest owners holding 70 oil and gas leases in the Texas Panhandle worth hundreds of millions of dollars. Chalker invited bids from potential buyers, who had to sign a Confidentiality Agreement. If a seller accepted a bid, the buyer and seller would sign a definitive purchase-and-sale agreement, or PSA.
The Confidentiality Agreement contained the following No Obligation clause:
It came down to two bidders, LNO and Jones Energy. Both of them submitted bids the sellers did not accept.
The sellers then offered to sell 67% of the assets. In response, LNO sent an email with the subject line “Counter Proposal.” The email listed seven key terms, including price, a closing date, and execution of a PSA.
Then the best part of the email: “We will not be modifying or accepting any changes to the base deal described above and don’t want to be jerked around anymore.”
Oops, I promised no extraneous details.
Anyway, the sellers responded with an email stating they 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.”
Various emails ensued. One of the sellers congratulated one of LNO’s private equity investors on “winning the bid.” Jones Energy got wind of the deal and emailed a seller, saying it “heard that we lost the deal again.”
Did Jones Energy give up? Come on, this is a Texas oil and gas case about whether two parties had a binding multi-million-dollar contract. You know there’s going to be a third party who stole the deal.
Jones Energy made a new offer, the sellers accepted, and Chalker and Jones Energy signed a PSA. “That same day, unaware of what had happened, LNO’s general counsel sent Chalker a redlined PSA.”
I love that little detail too. I’ve been waiting for redlining to make an appearance in a major contract case. That’s almost as good as a discussion of fonts. Plus, you can just picture LNO’s people going ballistic after finding out Chalker had already done a deal with Jones Energy.
And when business people go ballistic, they file lawsuits.
The exciting “procedural history”
LNO sued the sellers for breach of contract, arguing that the sellers breached the agreement to sell 67% of the assets reflected in the emails.
The trial court granted summary judgment for the sellers, concluding that the parties did not intend to be bound, a PSA was a condition precedent (pre-see-dent) to contract formation, and the No Obligation clause precluded a binding contract without an executed, delivered PSA. (A condition precedent is an event that must occur before a binding contract is formed.)
The First Court of Appeals (Houston) disagreed with the trial court. It held that whether the alleged contract was subject to the bidding procedures in the Confidentiality Agreement and whether LNO and the sellers intended to be bound by the terms in the emails were fact issues, which preclude summary judgment. That meant there would have to be a trial.
The Texas Supreme Court’s reasoning
The Texas Supreme Court disagreed and reversed the Court of Appeals. The Supreme Court reasoned as follows:
- No Obligation clauses are enforceable under freedom-of-contract principles, especially for “arms-length” negotiations between sophisticated business entities.
- In two prior Texas Supreme Court cases cited by LNO, there were fact issues about whether a contemplated formal document was a condition precedent to contract formation, but neither case involved the kind of No Obligation clause in Chalker’s agreement.
- The facts were more similar to WTG Gas Processing, a case where the Fourteenth Court of Appeals (also Houston) held that a No Obligation clause precluded a binding contract where the parties never signed a PSA.
- The emails in Chalker were more akin to a preliminary agreement than a definitive agreement to sell, and the parties’ dealings suggest they intended a more formal PSA would satisfy the definitive agreement requirement.
- LNO’s email referred to a PSA, and the sellers’ acceptance was made “subject to a mutually agreeable PSA.”
- The court threw in one more little fact: no agreement was “executed and delivered” as required by the No Obligation clause.
The Supreme Court rejected the Court of Appeals’ reasoning that the emails set out the key provisions such as the assets, the price, and the closing date, noting there were still key agreements to be negotiated including an escrow agreement, non-compete agreement (my favorite!), and a joint operating agreement.
The Supreme Court also rejected the Court of Appeals’ reliance on evidence that some of sellers thought they had a deal:
- Chalker declared the group was “committed to sell”
- One seller sent a congratulatory message to LNO
- Chalker referred to assets as “what is being sold to LNO”
- Several sellers testified that they intended to sell the assets to LNO as of the date of the email
Pish posh. The Supreme Court said these “one-off musings” of a few sellers out of 18 owners “could be construed many ways” and could not create a fact issue in light of the unambiguous No Obligation clause.
“If mere proposals that contemplate a later-executed PSA and the subsequent exchanging of unagreed-to drafts are sufficient to raise a fact question on the existence of a definitive agreement,” the court said, “No Obligation Clauses will be stripped of much of their meaning and utility.”
The court also rejected the argument that the sellers waived the condition precedent created by the No Obligation clause.
I gather from all this that the Chalker Energy decision rested on two key facts: (1) the preliminary agreement had an unambiguous No Obligation clause requiring a definitive agreement, and (2) the emails LNO relied on made it clear the deal was “subject to” a PSA the parties intended to sign later.
In short, when the parties agree to a No Obligation clause and it’s undisputed they intended to sign a more detailed agreement later, you don’t have a definitive agreement, even if the parties exchange written communications stating agreement on key terms.
That’s the Chalker Energy rule in a nutshell.
What Chalker Energy did not address
But how far does the Chalker Energy rule go?
Let’s change the facts a little. Suppose the emails didn’t reference a later PSA. Let’s even suppose the offer email stated “your acceptance of this offer by reply email will create a legally binding definitive agreement between us,” and the reply email simply stated “we accept.”
That would be a definitive agreement, right? The Chalker Energy rule wouldn’t apply. The condition precedent in the No Obligation clause would be satisfied.
But hold on. There’s a problem. Some of you might remember something else the No Obligation clause said. It didn’t just require a definitive agreement; it required an “executed and delivered” definitive agreement. (Executed is a fancy legal word for signed.)
Can an exchange of emails regarding key terms be an “executed and delivered” agreement?
We don’t know yet. Like I said, the Texas Supreme Court’s Chalker Energy opinion is not really about the brave new world of emails.
So did the opinion promise more than it delivered? Hecht, yes!
Zach Wolfe (email@example.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at Zach Wolfe Law Firm. Thomson Reuters named him a Texas “Super Lawyer”® for Business Litigation in 2020 and 2021.
These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.