Force Majeure Is Nice, But Have You Tried Impracticability?

Force Majeure Is Nice, But Have You Tried Impracticability?

One trick I learned early in my litigation career was what the witness can say when the lawyer asks, “ok, but is it possible that ____?”

The classic answer: “Anything’s possible.”

Sure, it’s flip, but it’s effective. This answer succinctly points out the folly of the question. Getting a witness to say it’s possible that some event happened doesn’t really prove anything. In litigator lingo, it’s “no evidence” that the thing actually happened.

But is it true that anything is possible? Sometimes performance of a contract will become impossible after the parties sign it. This has become even more apparent in the COVID-19 era.

Suppose you own a hotel in the Houston area, where I practice law. You sign a contract with the Texas Knitting Association to host their annual knitting blowout. The contract calls for the hotel to provide a ballroom, three meeting rooms, and catered meals for a three-day convention. The TKA expects 500 members to attend.

But of course something goes wrong. The COVID-19 pandemic hits Texas with a wallop. Both the Governor of Texas and the Mayor of Houston issue emergency declarations.

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Public health officials said a large gathering would present a “clear and present danger.”

Then, the week before the knitting convention, the Director of the Houston Public Health Authority notifies the Mayor that the risk of COVID-19 spreading at large in-person gatherings is high. He says a convention presents a “clear and present danger to the health and well-being of convention attendees, workers, local hotel and restaurant owners and Houstonians because of the surging pandemic.” The Mayor recommends that Houston hotels cancel large conventions.

So, the hotel manager emails the head of the TKA. “I’m sorry, we must cancel the convention because of the pandemic situation.”

But this hotel messed with the wrong people.

The knitters swing into action and call their aggressive Houston lawyers. The lawyers file suit asking a Houston judge to order the hotel to host the convention. They claim the breach will cause “irreparable injury” because there’s no time to find an alternate venue, and this may be the last chance some of their members ever get to attend.

Did the hotel breach the contract? Does it have a good defense to the lawsuit? Let’s break it down.

The General Rule 

The general rule in Texas is that a deal’s a deal. Impossibility of performance does not excuse a breach of contract:

Where the obligation to perform is absolute, impossibility of performance occurring after the contract was made is not an excuse for nonperformance if the impossibility might have reasonably been anticipated and guarded against in the contract. This is true even though an impossibility may subsequently have occurred by virtue of an act of God or some other circumstance over which the parties had no control. Impossibility of performance is also not an excuse if it is subsequently occasioned by the act or default of the promisor or by the acts of a third party.

Calvin V. Kolterman, Inc. v. Underream Piling Co., 563 S.W.2d 950, 957 (Tex. Civ. App.—San Antonio 1977, writ ref’d n.r.e.).

So there you have it. If you want to use a subsequent event as an excuse to get out of the contract, you should have put that in the contract. If performance becomes impossible, too bad so sad.

But wait, my loyal Fivers say. What if the parties did put that in the contract? What about a force majeure clause, which you deftly explained in your viral blog post Use the Force (Majeure).

I’m glad you asked.

Use the Force (Majeure Clause)

A force majeure clause is a defense to a breach of contract claim if:

1. The event at issue is one of the events specifically enumerated in the force majeure clause

OR

2. The event at issue is within the scope of the “catch-all” clause AND was not reasonably foreseeable to the parties (?)

AND

3. The event caused the breaching party’s failure to perform

AND

4. The breaching party complied with any notice requirements of the force majeure clause

See TEC Olmos, LLC v. ConocoPhillips Co., 555 S.W.3d 176-84 (Tex. App.—Houston [1st Dist.] 2018, pet. denied).

I put a question mark by the “reasonably foreseeable” part because not everybody agrees. The dissent in TEC Olmos said the court should not read “reasonably foreseeable” into the contract if the plain language of the contract doesn’t say that.

Setting aside that complication, let’s apply these elements to our Houston knitting convention.

Was the event at issue expressly enumerated in the force majeure clause?

Let’s assume for our hypothetical that the force majeure clause expressly refers to “epidemics,” as follows:

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But that’s not all! Let’s suppose that after the pandemic hit, the knitting association and the hotel signed an addendum containing this “supplemental” force majeure clause:

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I think that gives us a pretty clear answer to element 1. Under our hypothetical, the force majeure clauses specifically refer to the very events that the hotel cited as force majeure events. We don’t even have to look at the catch-all clause under element 2.

So we go to element 3: did these events cause the hotel’s failure to perform?

The answer seems to be yes, but let’s muddy the hypothetical a little. Suppose that a week before the Mayor recommended canceling hotel conventions, he found out that the president of the knitting association made a big campaign contribution to the Mayor’s opponent. The knitters claim in their lawsuit that the mayor didn’t make his recommendation for legitimate public health reasons, but to get back at the knitters.

That might at least present a factual dispute about causation.

If these facts ring a bell, it’s probably because I’ve loosely based them on the litigation over the 2020 Texas Republican Party Convention. The force majeure clauses cited above are taken directly from the contract the Texas Republican Party signed with Houston First, the corporation that operates the massive George R. Brown Convention Center in Houston.

I got pretty excited when that case hit the headlines, because I was scheduled to co-present a continuing legal education course on force majeure issues. But the case, for all its craziness, was kind of a letdown, at least as to force majeure issues. As we’ve seen, whether the pandemic was a force majeure event was not even a close call. It was right there in both the original contract and the addendum.

The harder question was the “pretext” issue, i.e. the allegation that the Mayor caused Houston First to cancel the convention for political reasons, not because of the pandemic. In theory, that allegation could negate the causation element of the force majeure defense.

But in practice, that argument was a pretty hard sell, considering the unprecedented nature of the COVID-19 epidemic and the fact that cases were spiking right around the time of the convention. Two state district court judges and the Texas Supreme Court didn’t seem to buy it. The only judge who did was U.S. District Court Judge Lynn Hughes, who ordered the convention to proceed. But the Fifth Circuit Court of Appeals quickly stayed that order, and then sat on the case until it effectively became moot.

It seems the only lasting effect was to give thought leaders like me a fun hypothetical.

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The convention contract specifically included “Pandemics affecting Houston” as a force majeure event

My takeaway for private disputes is that you can make the pretext argument if you represent the party trying to enforce performance, but you’d better have some really strong facts to support it, especially where there’s no question that an enumerated force majeure event occurred.

But that’s really just the first half of the story. Let’s suppose our contract between the hotel and the knitting association doesn’t have a force majeure clause at all. Is the hotel stuck with the obligation to perform?

Impracticability

This is where the impracticability defense comes in. Think of it as an implied, non-contractual force majeure clause.

As we saw earlier, the general rule is that impossibility of performance is no excuse. But there’s an exception. Section 261 of the Restatement (Second) of Contracts states as follows:

Where, after a contract is made, a party’s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.

Of course, the Restatement isn’t binding on a judge. It’s basically just an attempt by legal scholars to consolidate and “restate” what a bunch of courts have said. But the Texas Supreme Court did cite Section 261 favorably in Centex Corp. v. Dalton, 840 S.W.2d 952, 954 (Tex. 1992).

But what does it mean? In typical Restatement fashion, Section 261 is dense, awkwardly worded, and contains the familiar pragmatist escape hatch “unless the language or the circumstances indicate the contrary.”

Let me see if I can put it in plain language: If a basic assumption of the contract unexpectedly becomes untrue, it wasn’t your fault, and you can’t perform your obligation as a result, then you’re excused from performing. That’s the general rule of “impracticability.”

Applying this to our hypothetical, the hotel would have a pretty strong impracticability defense. It was a basic assumption of the contract that holding a convention in the hotel would not threaten public health or run afoul of emergency orders from state and local governments. It wasn’t the hotel’s fault. And the result is that it’s impracticable for the hotel to perform.

Indeed, government action is one of the classic impracticability scenarios. Texas courts have recognized three narrow situations where the impracticability defense applies:

(1) the death or incapacity of a person necessary for performance

(2) the destruction or deterioration of a thing necessary for performance

(3) prevention by governmental regulation.

Tractebel Energy Mktng., Inc. v. E.I. DuPont de Nemours & Co., 118 S.W.3d 60, 64-66 (Tex. App.—Houston [14th Dist.] 2003, pet. denied).

You can remember these three things if you just think “death, destruction, and taxes.”

Even in these situations, the party trying to avoid performance must show it used reasonable efforts to surmount the alleged obstacle to performance. See id. at 69 (citing Restatement (Second) of Contracts § 261, cmt. d).

Texas courts have also recognized some typical scenarios where the impracticability defense does not apply. Those include:

  • Where performance has merely become “more economically burdensome than expected.” Huffines v. Swor Sand & Gravel Co., 750 S.W.2d 38, 40 (Tex. App.—Fort Worth 1988, no writ)
  • Where the expected source for a commodity becomes unavailable but the commodity can be obtained from another source. United Sales Co. v. Curtis Peanut Co., 302 S.W.2d 763, 766 (Tex. Civ. App.—Dallas 1957, writ ref’d n.r.e.)
  • Inability to obtain financing needed to perform the obligation. E. Taylor Syndicate v. James, 243 S.W. 1105, 1108-9 (Tex. Civ. App.—Amarillo 1922, writ ref’d).

Comparing the categories of events that can establish impracticability with these events that do not, you can see a theme. Just like we saw with force majeure clauses, courts applying the impracticability defense are skeptical of economic excuses for a failure to perform. The fact that performance has become more expensive is usually not going to cut it.

Unless the facts or circumstances indicate otherwise. Anything’s possible.

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IMG_4571Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. Follow @zachwolfelaw on Instagram to keep up with his latest shenanigans.

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.

 

Use the Force (Majeure)

Use the Force (Majeure)

Even if you’re not a lawyer, you’ve probably heard the phrase force majeure, which is French for “use the force, Luke.” Not as clumsy or random as the Latin, vis major. It’s an elegant phrase, for a more civilized age.

Force majeure actually means something like “superior force,” and it’s a concept you find in contract law. It’s the idea that a party to a contract is excused from strict performance of the contract’s terms if some extraordinary event beyond that party’s reasonable control prevented performance.

Force majeure is closely associated with an English phrase, “act of God,” which gives you an idea of the kind of event we’re talking about: hurricanes, tornados, cats and dogs living together.

Force majeure in contract law

Force majeure is an exception to the general rule of contract law. Unlike the law of negligence, contract law is usually not concerned with fault. If a party fails to perform a material requirement of a contract, it has breached the contract and is liable for the resulting damages to the other party. Generally, it doesn’t matter if the breaching party has a good excuse. You might say contract law imposes “strict liability” on the breaching party. It’s a “no fault” regime.

Is that fair?

Here’s one way to look at it: the whole point of a contract is to allocate risk between the contracting parties. Let’s say Pop Tarts are currently trading at $2.00 per box. If we sign a contract that says I will deliver a truckload of strawberry Pop Tarts to your store in 30 days for $2.00 a box, I’m taking the risk that the price will go up, and you’re taking the risk that the price will go down. If there’s a run on Pop Tarts after we sign the contract and the price doubles, I don’t get to complain that the contract price we agreed on isn’t fair.

That’s what I mean here by “strict liability.”

But this concept has its limits. In 1712, the King’s Bakers Company signed a contract to deliver 13 dozen strawberry tarts to Ye Olde Tavern for 15 shillings per dozen. An extraordinary cold snap destroyed that year’s strawberry crop, and the King’s Bakers could not deliver. The English court adopted the rule of force majeure, holding that this act of God was an unforeseen circumstance that excused the seller from performing.

Ok, I made that case up, but that was basically the common-law rule of force majeure. Then lawyers started incorporating this concept into the contracts they wrote. Today, force majeure is no longer a common-law rule that applies to all contracts. The issue now is interpreting the scope of the particular force majeure clause the parties agreed to (if any).

This should make it easy to figure out if a particular occurrence qualifies as a force majeure event. Just look at the definition in the contract.

But I know my Fivers. You’re shaking your heads no. You know it’s going to be more complicated than that.

A typical force majeure clause

Let’s look at an example. Here’s a typical force majeure clause:

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I’m sure you see the obvious problem: no Oxford commas. But let’s set that aside.

This definition has a two-part structure that you see in many legal definitions, whether in a contract or a statute. It defines a key concept by listing specific instances followed by a broader “catch-all” clause.

In this case, there are seven instances listed:

  • fire
  • flood
  • storm
  • act of God
  • governmental authority
  • labor disputes
  • war

Those are the specific enumerated events that qualify as force majeure. They are followed by the catch-all: “any other cause not enumerated herein but which is beyond the reasonable control of the Party whose performance is affected.”

It is, of course, a little more complicated than that, because one of the seven specific things is “act of God,” which is also a kind of catch-all. But you get the idea.

The interesting thing about this kind of structure is that the catch-all informs interpretation of the enumerated events, while the enumerated events inform interpretation of the catch-all. (The latter principle is called ejusdem generis–again with the foreign languages!)

We don’t want to take the specific events out of context. Let’s say I can’t deliver the truckload of Pop Tarts because I set fire to my warehouse to get the insurance money. Under a literal interpretation, the force majeure clause would apply.

But obviously, that’s not the kind of “fire” the parties intended. You can see that from the catch-all, which shows the parties intended an enumerated event would only excuse performance if it was beyond the reasonable control of the party affected.

Should we apply force majeure clauses literally?

Let’s take a harder case. Say there’s a thunderstorm in the Houston area the day the truck is scheduled to arrive, and it causes such bad traffic that the truck is late. That’s a “storm,” and it is not an event under the reasonable control of the seller, so if the storm actually prevented timely delivery, the force majeure clause would apply, right?

Most of you are instinctively resisting this conclusion. But why? If you interpret the clause literally, it seems to apply. Shouldn’t a court enforce the “plain meaning” of the words the parties freely negotiated and agreed to?

I think the problem is that, for all our hard-nosed talk about plain meaning and strict liability, we can’t entirely avoid importing our moral notions of fairness into interpretation of the contract.

Our moral intuition tells us it’s not fair for the seller to avoid the contract just because there happened to be a thunderstorm and bad traffic that day. On the other hand, it doesn’t seem fair to hold the seller liable if the truck couldn’t get to the store because Hurricane Harvey flooded the roads.

Is there a way to rationalize this moral instinct, so that judges have an objective rule they can follow to determine whether a particular event falls under the definition the parties agreed to?

A recent case applying a force majeure clause

Let’s look at a fairly recent attempt to do that. In a 2-1 decision in TEC Olmos, LLC v. ConocoPhillips Co., 555 S.W.3d 176 (Tex. App.—Houston [1st Dist.] 2018, pet. denied), the majority tried to solve this problem with a concept that was not stated in the contract but is pervasive in the law: foreseeability. The dissent, in contrast, tried to solve the problem with textualism.

Did either succeed?

The contract in TEC Olmos was a farmout agreement to test-drill land in search of oil and gas. The contract set a deadline to begin drilling and included a liquidated damages clause requiring Olmos to pay $500,000 if it missed the deadline. Id. at 179. By pure coincidence, the force majeure clause in the contract was exactly the same as the example I used above.

Of course, something unexpected happened after the parties signed the contract. In the summer of 2014 the price of oil was over $100 a barrel. By December 2015 it was around $40. As a result of the significant drop in the global oil market, Olmos could not get the financing it needed to do the drilling. So Olmos tried to invoke the force majeure clause to extend the deadline.

The response from ConocoPhillips? You owe us $500,000.

But Olmos had a simple argument for avoiding liability: under the plain meaning of the force majeure clause, the worldwide drop in oil prices and resulting inability to obtain financing was “beyond the reasonable control” of Olmos.

The Court of Appeals disagreed. The court held that the change in the oil and gas market making it impossible for Olmos to obtain financing was not a force majeure event as defined by the contract. The court reasoned that a “foreseeable” event—such as a decline in the oil and gas market—cannot qualify as force majeure under the “catch-all” provision of the force majeure clause. Id. at 181-82, 186.

Foreseeability was part of the common-law force majeure doctrine, but it was not mentioned in the clause the parties agreed to. So was unforeseeability an implied requirement? The court said yes. “A term’s common-law meaning will not override the definition given to a contractual term,” the court said, but “we may consider common law rules to ‘fill in gaps’ when interpreting force majeure clauses.” Id. at 181.

The court explained that “when parties specify certain force majeure events, there is no need to show that the occurrence of such an event was unforeseeable.” Id. at 183. But when the party seeking to avoid performance relies on a catch-all provision, it must show that the event at issue was unforeseeable. Id. 183-84.

The majority reasoned that it would make no sense to allow a foreseeable event to satisfy the catch-all clause. “To dispense with the unforeseeability requirement in the context of a general ‘catch-all’ provision,” the court said, would “render the clause meaningless because any event outside the control of the nonperforming party could excuse performance, even if it were an event that the parties were aware of and took into consideration in drafting the contract.” Id. at 184.

I’m not sure I follow this reasoning. Dispensing with the unforeseeability requirement may render the clause broad—and maybe broader than what is fair—but it doesn’t render the clause meaningless. And shouldn’t we apply the plain language of the contract the parties agreed to? The word “foreseeable” didn’t appear in the force majeure clause.

The textualist dissent

Justice Brown made this point in his dissent. “The contract does not say that an event must have been unforeseeable to suspend performance,” he wrote. “I dissent because the Texas Supreme Court has repeatedly told us that it is this state’s policy to enforce contracts as they are written.” Applying this policy to the force majeure clause, Justice Brown said “[i]f parties wish to limit the scope of their negotiated force majeure provisions to require that an event must have been unforeseeable to excuse performance, it is not difficult to insert that single adjective into their written agreements.” Id. at 189.

Rather than reading an unforeseeability requirement into the force majeure clause, Justice Brown focused on the language of the clause. He emphasized that the clause used the word “hindered,” which dictionaries define to include “get in the way of” and “to make difficult.” “The word hinder suggests a low threshold before the force majeure clause applies,” he wrote. “The party does not have to be prevented from performing, only hindered.” Id. at 199.

In short, Justice Brown took a textualist approach to interpreting the force majeure clause, rejecting the majority’s notion that unforeseeability was implied.

I’m skeptical about whether textualism provides a definitive basis for deciding if a force majeure clause applies. It’s usually going to come down to a question of whether the event at issue falls within the “catch-all” clause, and the catch-all clause is always a little “fuzzy.” The reason there’s a dispute in the first place is that it’s debatable whether the event at issue is covered by the language of the clause. Still, I tend to agree with Justice Brown that the express language of the clause should take priority over a superimposed concept of foreseeability.

Plus, even aside from the the text, there’s a more fundamental problem with making the scope of a force majeure clause turn on whether the event at issue was “foreseeable.”

The problem with “foreseeable”

The majority in TEC Olmos assumed—and the parties apparently agreed—that a worldwide decline in the market causing an inability to obtain financing was foreseeable. Id. at 181 n.1. This was in part due to precedent that a downturn in the oil and gas market is foreseeable. Id. at 183 (citing Valero Transmission Co. v. Mitchell Energy Co., 743 S.W.2d 658 (Tex. App.—Houston [1st Dist.] 1987, no writ)).

But is an extraordinary global market crash any more “foreseeable” than the other “acts of God” typically listed in a force majeure clause? A hurricane, for example, is surely the type of event that can trigger a force majeure clause, but the parties to a contract can foresee that hurricanes happen, especially if they are on the Gulf Coast. An event that has its own “season” can’t be that unpredictable. I would guess a hurricane hits the Gulf Coast more often than the global oil market crashes.

The problem is that you can almost always make a reasonable argument that a given event is or is not “foreseeable.” No, the parties don’t sign the contract expecting that a fire is going to destroy the warehouse. On the other hand, the parties know fires sometimes happen. That’s why people buy fire insurance. So is a fire “foreseeable”?

Foreseeability is a common concept in the law, but after doing litigation for over 20 years, I don’t think the concept is that useful for reasoning our way to a conclusion. I think “foreseeable” is just a label we apply to an event or risk that our intuition tells us a party should be responsible for.

It’s not a binary question of whether an event is foreseeable or not. It’s really a question of how likely the event is, and to what extent the performing party has the ability to mitigate the risk of that event occurring. It’s a sliding scale with these two components.

I think this is the basic calculation we intuitively perform when we decide whether a particular unexpected event is the kind of event that should excuse a party from performance. I confirmed this with a scientific process: going through several hypotheticals with my wife and two kids while we ate tacos at the dinner table. It got a little heated.

But I think my wife hit on something when I asked why a global market drop would not satisfy the force majeure clause. “A market drop is beyond the party’s reasonable control, and that’s what the contract says,” I argued.

“But that’s just not how business works,” she responded. “It’s common sense!”

Common sense. Ultimately, I think that’s the best guide to deciding a force majeure dispute. And whether you agree with that or not, I think that relying on common sense and basic intuitions about fairness is usually what judges are doing anyway, regardless of how they write the opinion.

That’s not very satisfying as an objective basis for deciding disputes. But we just have to muddle through somehow. And based on TEC Olmos v. ConocoPhillips, if you’re a lawyer arguing a force majeure issue, you have to speak the language of “foreseeability.”

Do, or do not. There is no try.

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IMG_4571Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. He had to cut the whole section on ejusdem generis because, hey, this is *Five Minute* Law.

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.

 

Texas Supreme Court Says Emails “Subject To” Later Agreement Do Not Establish “Definitive Agreement”

Texas Supreme Court Says Emails “Subject To” Later Agreement Do Not Establish “Definitive Agreement”

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:

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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!

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IMG_4571Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. Follow @zachwolfelaw on Instagram to keep up with his latest shenanigans.

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.