Maverick Natural Resources, LLC at al v. Glenn D. Cooper Oil & Gas, Inc. is for control freaks wherever you are … and for those of you who advise the aforesaid control freaks.

Cooper sent Maverick a letter offering to purchase oil and gas wells and leases in Crane County for $950,000, to which Maverick agreed. The letter contemplated typical due diligence rights for Cooper (examination of title, LOS’s, etc.). Cooper would have the exclusive right to purchase the properties until a certain date. The letter gave Cooper the sole discretion to decide whether to actually close.

The closing date passed and Maverick decided not to sell. Cooper sued for breach of contract, declaratory judgment and statutory fraud. Maverick’s response was that the “I can bail out whenever I want for no reason” language rendered the letter unenforceable for want of consideration. The trial court disagreed with Maverick and issued a series of summary judgments which, among others, awarded Cooper specific performance.

The court of appeal reverses

At the heart of the dispute was this language in the letter:

“… Should [Cooper] in its sole discretion, desire to move forward to a closing, no financing contingencies shall be had, and closing will occur promptly. Should [Cooper] discover anything during its diligence period it determines unacceptable, no closing or exchange of funds shall occur.”  (emphasis added)

Why the Court Did What It Did

For a contract to be enforceable it must be supported by valid consideration i.e. mutuality of obligation. Consideration refers to something that is a benefit to the promisor or a loss or detriment to promise. Although a promise to perform constitutes consideration, if the promisor retains the option to terminate the transaction in the performing it, the promise is illusory and does not actually bind the promisor. Consequently, if one party retains the option to walk away, that party must give separate consideration for the option. When the letter was signed the commitments in the letter were the sole form of consideration exchanged; no money was paid.

Cooper insisted that its sole discretion was contingent upon its discovery of unacceptable information during its diligence review and carried an implied duty to act in good faith. The court relied on the plain language of the contract and disagreed. Nothing in the text of the letter conditioned Cooper’s sole discretion on information discovered during the diligence, or anything else for that matter. Cooper insisted that a duty to act in good faith implied in the letter prevented the promise to perform from being illusory. The court declined to apply a good-faith requirement.

What can you do about it?

The Court gave the answer: The agreement could provide for a payment or other benefit in consideration of the promise to close.

There is another answer: Maybe it wasn’t a “control freak”. Maybe the culprit was incomplete, inaccurate, or imprecise language in the problematic sentence. Was the parties’ “real” intention something other than what the plain language said it was? In the world of contract construction, it doesn’t matter.

Your musical interlude.

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