Supreme Court of Texas, Chalker Energy Partners III, LLC v. Le Norman Operating LLC, Docket No. 18-0352

Contract Law

Contract Formation

Email Exchange

Separate Instruments Construed as One Contract

Condition Precedent

Preliminary Agreement

Letter of Intent

No Obligation Clauses

Statute of Frauds

Common Law

Electronic Records

Texas Law

Contract Drafting

 

 

In Texas, a deal is, of course, a deal. An agreement as to many things can be oral, sealed by a handshake, even a $10.53 billion handshake. The common law has long recognized that an agreement can be expressed in multiple writings exchanged between the parties. Emails are such writings. (…) 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. Today, we hold that the parties’ email exchange falls short of an agreement as a matter of law and therefore reverse the judgment of the court of appeals and render judgment for petitioners.

 

(…) Separate instruments construed as one contract: See, e.g., Fort Worth Indep. Sch. Dist. v. City of Fort Worth, 22 S.W.3d 831, 840 (Tex. 2000) (“It is well-established law that instruments pertaining to the same transaction may be read together to ascertain the parties’ intent, even if the parties executed the instruments at different times and the instruments do not expressly refer to each other, and that a court may determine, as a matter of law, that multiple documents comprise a written contract. In appropriate instances, courts may construe all the documents as if they were part of a single, unified instrument.” (footnotes omitted)); Miles v. Martin, 321 S.W.2d 62, 65 (Tex. 1959) (“It is well settled that separate instruments executed at the same time, between the same parties, and relating to the same subject matter may be considered together and construed as one contract. This undoubtedly is sound in principle when the several instruments are truly parts of the same transaction and together form one entire agreement.” (citations omitted)); see also RESTATEMENT (SECOND) OF CONTRACTS § 132 (AM. LAW INST. 1981) (stating that a memorandum satisfying the statute of frauds “may consist of several writings if one of the writings is signed and the writings in the circumstances clearly indicate that they relate to the same transaction”).

 

Electronic Record: See TEX. BUS. & COM. CODE § 322.007(c) (“If a law requires a record to be in writing, an electronic record satisfies the law.”).

 

The Confidentiality Agreement provided in part:

No Obligation. The Parties hereto understand 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 and neither Party will be under any legal obligation of any kind whatsoever with respect to such transaction by virtue of this or any written or oral expression thereof, except, in the case of this Agreement, for the matters specially agreed to herein. For purposes of this Agreement, the term “definitive agreement” does not include an executed letter of intent or any other preliminary written agreement or offer, unless specifically so designated in writing and executed by both Parties.

By including the No Obligation Clause in the Confidentiality Agreement, Chalker and LNO agreed that a definitive agreement was a condition precedent to contract formation. A party seeking to recover under a contract bears the burden of proving that all conditions precedent have been satisfied.

(…) A condition precedent is an event that must happen or be performed before a right can accrue to enforce an obligation.

(…) While the No Obligation Clause does not define definitive agreement, it does make clear that “the term ‘definitive agreement’ does not include an executed letter of intent or any other preliminary written agreement or offer, unless specifically so designated in writing and executed by both Parties.”

(…) Black’s Law Dictionary defines preliminary agreement as a “precontractual understanding in which two commercial parties allocate their contributions to an undertaking but do not specify all the important terms of the deal.” In contrast, definitive serves “to provide a final solution or to the Assets, and the parties’ dealings suggest that they intended that a more formalized document, end a situation” and is “authoritative and apparently exhaustive”. The emails here are more akin to a preliminary agreement than a definitive agreement to sell like a PSA, would satisfy the definitive-agreement requirement.

 

(…) We do not suggest that the only document that would have satisfied the definitive-agreement requirement was a PSA, only that the emails here do not constitute a definitive agreement.

 

The court of appeals concluded that there is a fact issue as to whether the email chain satisfies the definitive-agreement requirement because the emails set out the assets to be sold, the purchase price, a closing day, and “other key provisions.” The court of appeals also relied on an email containing spreadsheets that Chalker sent to a third party detailing the “interest being sold for each area” and stating that “each area delivers a 67% WI to the buyer”. In a $230 million deal, however, these emails and spreadsheets may leave much to the imagination. Indeed, there were still key agreements to be negotiated between Chalker and LNO before a definitive agreement would exist. The parties had yet to agree upon an escrow agreement, a noncompete agreement, or a joint operating agreement.

 

If (…) the subsequent exchanging of unagreed-to drafts are sufficient to raise a fact question on the existence of a definitive agreement, No Obligation Clauses will be stripped of much of their meaning and utility. Even worse, these clauses would mislead parties operating under the assumption that they can freely engage in negotiations without binding themselves to proposals in an email exchange. By 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.

 

(…) See First Bank v. Brumitt, 519 S.W.3d 95, 110 (Tex. 2017) (reiterating that extrinsic evidence cannot be used to create an ambiguity in contractual language).

 

 

 

(Supreme Court of Texas, Chalker Energy Partners III, LLC v. Le Norman Operating LLC, February 28, 2020, Docket No. 18-0352, Chief Justice Hecht)