Reed Smith Client Alerts

The processes of bidding and negotiation often unfold in unanticipated directions, including via the “distinctly conversational, informal medium” of email. A recent Texas Supreme Court decision demonstrates how businesses might protect themselves, especially when negotiating by email, and reiterates the strong Texas principle of freedom to contract.

In Chalker Energy Partners III LLC et al. v. Le Norman Operating LLC, the Texas Supreme Court addressed whether an exchange of emails and documents constituted a “definitive agreement.”1 This opinion was delivered shortly after the Energy Transfer Partners LP et al. v. Enterprise Products Partners LP opinion, in which the Court held that “parties can contract for conditions precedent to preclude the unintentional formation of a partnership” under Texas law.2 Similar to the Energy Transfer Partners LP et al. v. Enterprise Products Partners LP opinion, the Texas Supreme Court ultimately held in Chalker Energy Partners III LLC et al. v. Le Norman Operating LLC that while “the emails are writings, they do not form a definitive agreement[,]” as required by the no obligation clause in the confidentiality agreement between the parties.3

In 2012, a group of 18 individuals and entities (the Sellers) sought to sell their assets consisting of approximately 70 oil and gas leases.4 The Sellers hired a financial services company to conduct the bidding, and formal bidding procedures and deadlines were put into place.5

After signing a confidentiality agreement, each bidder was given access to a data room with information about the oil and gas leases.6 One provision of the confidentiality agreement was the no obligation clause, which provided 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 . . . .”7 In other words, a “definitive agreement” between both of the parties was required before a contract could be formed.

Under the bidding procedures, bidders would use forms to submit their bids to the Sellers’ representative by the deadline, the representative would forward them to the Sellers, and each Seller would have 24 hours to decide whether to sell.8 If a sale was approved by the Sellers, then the representative would “negotiate a definitive purchase-and-sale agreement, or PSA.”9

On the date of the bidding deadline, the two high bidders were LNO and Jones Energy.10 LNO negotiated back and forth with the Sellers, and eventually – two weeks after the bidding deadline – the Sellers made LNO an offer to sell 67 percent of the oil and gas leases. LNO’s principal sent an email to the financial services company “without reference to the bidding procedures,” under a subject line of “Counter Proposal.”11 The body of the email contained a list of seven terms and provided a deadline of 5:00 p.m. the following day for the Sellers to accept.12 The Sellers voted to sell, but LNO and the Sellers had not yet executed a PSA.13