“No Obligation” Clause Dooms Oil and Gas Asset Bid

“No Obligation” Clause Dooms Oil and Gas Asset Bid

Originally published by Charles Sartain.

In Chalker Energy Partners III LLC v. LeNorman Operating LLC, the Texas Supreme Court reaffirmed its belief in the sanctity of the written contract and the freedom of parties to negotiate and agree to contracts as they desire.

Chalker and other sellers wanted to sell leases in several Panhandle counties. LeNorman signed a Confidentiality  Agreement, which had a provision entitled “No Obligation”, “ … unless and until a definitive agreement has been executed and delivered, no contract … providing for a transaction … shall be deemed to exist and neither Party will be under any legal obligation of any kind whatsoever with respect to  such transaction … “

After a bidding war between LeNorman and Jones Energy, the Sellers declined to sell and LeNorman elected not to pursue the transaction. Then, after the bidding deadline the Sellers offered to sell 67 percent of the assets, LeNorman emailed what it termed a “counter-proposal”, setting a deadline and adding that it would not be modifying or accepting any changes. Sellers’ representative emailed an acceptance before the deadline, subject to a “mutual agreeable Purchase and Sale Agreement”, sent LeNorman a revised draft PSA, and took off for Thanksgiving. LeNorman sent a redlined PSA for consideration.  During that time Jones made another offer that was accepted and Jones acquired the assets.

LeNorman sued for breach of contract. The Sellers counterclaimed for breach of the Confidentiality Agreement and the bid documents. The trial court concluded that a PSA was a condition precedent and there was no meeting of the minds. The court of appeal reversed, finding fact issues.

Both sides agreed that unless there was a definitive agreement executed and delivered there was no contract. The No Obligation Clause did not define “definitive agreement” but said that term did not include “an executed letter of intent or any other preliminary written agreement or offer, unless specifically so designated in writing at and executed by both parties.”  The Court deemed the emails to be a preliminary agreement and a document such as a more formalized PSA would satisfy the definitive agreement requirement.

The Court concluded that Chalker’s Thanksgiving weekend acceptance of LeNorman’s offer subject to a mutual agreeable PSA did not create a fact issue. Instead, the definitive agreement referenced in the No Obligation Clause was a condition precedent to contract formation.

Takeaway – the practical effect on contract negotiations

The Court’s rationale was that if the exchange of agreed-to drafts were sufficient to raise a fact question as to the existence of a definitive agreement then the No Obligation Clause would be stripped of its meaning and utility. Even worse, such clauses would mislead parties operating under the assumption that they could freely engage in negotiations without binding themselves to proposals in an email exchange. By agreeing to the No Obligation Clause the parties provided themselves with the freedom to negotiate without fear of being bound to a contract.

Waiver?

To establish waiver by conduct, the conduct must be unequivocally inconsistent with claiming a known right.  The Court concluded that the negotiations were subject to the bidding procedures and the Confidentiality Agreement and the parties had not waived the right to a definitive agreement. Waiver was decided as a matter of law. The parties consistently agreed that a deal was subject to a mutual agreeable PSA. Chalker’s failure to object to the deviation between the contractually required bidding procedures and the emails was not evidence of an intentional relinquishment of the right to require a definitive agreement such as a PSA.

Have you ever seen the so-bad-its-good Plan 9 from Outer Space? This is gonna be painful, but here is your musical corollary.

 

 

Curated by Texas Bar Today. Follow us on Twitter @texasbartoday.



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