In Chalker Energy Partners III, LLC v. Le Norman Operating LLC,[1] the Texas Supreme Court analyzed an email exchange between the sellers’ agent and a bidder to determine if a contract had been formed. Chalker involved 18 sellers, including Chalker Energy Partners III, LLC (“Chalker”) as the sellers’ designated agent handling the auction and sale process for 70 oil and gas leases in the Texas Panhandle worth over $300 million (the “Assets”). The factual background is noted in some detail below for two reasons: (1) the significance of inadvertently forming a binding contract through email communications and (2) the split among Texas courts on the point of whether an email signature block or even the name in the “from” line constitutes a valid signature.
In Chalker, bidders for the Assets were given access to a virtual data room after signing a Confidentiality Agreement which included the following “No Obligation Clause”:
“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.”
On the deadline under the bidding procedures, and Le Norman Operating LLC (“LNO”) emailed Chris Simon (“Simon”), the Raymond James employee shepherding the sale, a bid of $332 million for all of the Assets and a form of purchase and sale agreement (“PSA”). LNO’s email stated that the bid was being made “subject to the execution of a mutually acceptable [PSA].” The other high bidder was Jones Energy. Subsequent continued bidding led to LNO emailing Chalker that it was dropping out.
Sellers then offered to sell 67% of the Assets, and LNO emailed Simon with the subject line “RE: Counter Proposal,” listing several terms, such as pricing, effective date, deadlines for execution and closing under the PSA, noncompetition provisions and a statement that LNO “. . . will not be modifying or accepting any changes to the base deal described [in the email] and don’t want to be jerked around anymore. We will give you till 5:00 pm CST tomorrow to accept. . . .I have recommended to by Board to pass if the timeline is not met or a counter proposal is sent.”
The Sellers voted to sell, and prior to LNO’s 5:00 pm deadline, Simon emailed LNO that the group was “on board to deliver 67% subject to a mutually agreeable PSA.”
A few days later, Jones Energy submitted a new offer to Chalker. The Sellers found the Jones Energy offer to be more attractive than LNO’s and elected to sell the Assets to Jones Energy. Chalker and Jones Energy executed a PSA, and the same day, unaware that a PSA with Jones Energy had been signed, LNO’s general counsel returned Chalker’s PSA with revisions.
LNO subsequently sued the Sellers for breach of contract arguing that the Sellers had breached the agreement reached through their email exchange. The Court noted that the Confidentiality Agreement provided in its No Obligation Clause that the execution and delivery of a definitive agreement by the parties was a condition precedent to the parties being deemed to have entered into a contract. The Court stated that Texas law requires that the party seeking to recover under a contract show that all conditions precedent to the formation of a contract were satisfied and that the No Obligation Clause set forth such a condition precedent to contract formation.
The Court noted that Texas courts regularly enforce conditions precedent to contract formation and reject legal pleadings to skirt unambiguous contract language, especially when the language is the result of arm’s-length negotiations between sophisticated parties. The Court cited the language in the No Obligation Clause which made clear that the term “definitive agreement” did 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.” Noting that Simon’s acceptance was made “subject to a mutually agreeable PSA,” the Court then found that the email exchange was more like a “preliminary agreement” than a definitive agreement. The Court reasoned that if “mere proposals” were sufficient to raise a fact question on the existence of a definitive agreement, then No Obligation Clauses would be stripped of their meaning.
LNO argued that if there was a condition precedent, then the parties’ email correspondence waived it. This was rejected by the Court, which noted that under Texas law, waiver is “an intentional relinquishment of a known right or intentional conduct inconsistent with claiming that right.” The Court found that there was no evidence of an intentional relinquishment by the sellers of the right to a definitive agreement. In contrast, the subject of LNO’s email was “Counter Proposal”, which the Court found indicated that the negotiations were a continuation of the earlier attempts to negotiate a sale.
Further, since the Confidentiality Agreement provided for a one-year term, the court stated this made it clear the terms of the Confidentiality Agreement, including the No Obligation Clause, would govern negotiations even if they occurred after the original bidding deadline. Based on the above, the Court held that the No Obligation Clause imposed a condition precedent to the formation of a contract between the parties and that Chalker and the Sellers did not waive that condition precedent.
It is important to note that the Chalker decision did not turn on the fact that the discussions occurred via email. In fact, the Court makes it clear that in Texas, an electronic record satisfies the requirement of a “writing.” Some Texas courts have found that if a sender signs an email with his or her name and it is apparent from the context that both sides have agreed to conduct the transaction electronically, then the emailed signature will create an enforceable agreement. However, there is a split among Texas courts as to whether or not a signature block constitutes a valid signature. The issue has yet to be addressed by the Texas Supreme Court or the Legislature.
In Cunningham v. Zurich American Insurance, 352 S.W.3d 519, 523 (Tex. App.—Fort Worth 2011), the Second Court of Appeals in Fort Worth declined to find a signature in an email when there was no evidence suggesting (i) that the signature was typed purposefully rather than generated automatically, (ii) that the party intended the signature block to be her signature and (iii) that the parties had previously agreed that this would constitute a signature. While this case has been met with criticism, it has not been overturned. In Khoury v. Prentis Tomlinson Jr., No. 01-16-00006-CV, (Tex. App.—Houston [1st Dist.] 2017), the First Court of Appeals in Houston decided that the appearance of someone’s name or email address in the “From” line of an email constitutes a signature. The court in Khoury criticized the Cunningham decision, noting that the court had failed to address why physically typing a signature line at the end of an email should be required for a signature block to be an enforceable signature. Since Cunningham has not been overturned, practitioners should consider the venue of potential litigation if this is an issue. Trial courts that are in the same district as a court of appeals are bound by that court of appeals’ prior decisions.
A link to the full case is available here.
[1] Dec. 4, 2019 (No. 18-0352).
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