Email Contract Formation
In the wake of COVID-19 and a substantial number of companies and businesses transitioning to a remote “work from home” model, the value of being able to get deals done at a distance has risen exponentially. At first glance, this may seem easily achievable, especially given the normalcy, the frequency, and, frankly, the dependency we have all developed with respect to electronic correspondence—email. However, under Texas contract law, it may take more than an affirmative email reply to “seal the deal.”
Consider this scenario…
Suppose my neighbor offers to purchase my charming Subaru hatchback sedan from me for fair market value. If I accept his offer, are we in a legally binding contract?—yes, we are. Now, consider the same scenario, but I condition my acceptance of my neighbor’s offer on whether or not he and I agree to a “transfer agreement” that details the manner in which the Subaru is transferred into my neighbor’s possession. Do we still have a binding agreement? What if all of this took place over email? The Texas Supreme Court decided a similar issue this year in Chalker Energy Partners III, LLC v. Le Norman Operating LLC (Tex. 2020), which dealt with whether an email exchange constituted a purchase and sale agreement for $230 million in oil and gas assets.
In Chalker, one of the bidders for these oil and gas assets being sold by Chalker, Le Norman, filed a breach of contract claim against Chalker, in response to Chalker accepting a higher bid after allegedly consummating a deal with Le Norman via email.
The Texas Supreme Court decided against Le Norman, holding that the email exchange between Chalker and Le Norman did not constitute a binding agreement. The reasoning was essentially because Chalker had created a condition precedent to the formation of a contract between Chalker and all of its bidders.
What’s a condition precedent?
A condition precedent is a condition or event that must occur before parties are bound to an agreement. For instance, considering my Subaru scenario above, by conditioning the sale of my Subaru on whether or not my neighbor and I agree to a transfer agreement, I created a condition precedent that prevents me from being bound to sell him my fetching hatchback sedan until the condition is fulfilled. Consequently, I can offer/agree to sell my Subaru to any other party while that condition precedent remains unfulfilled. However, once the condition is fulfilled, a contract has been formed and I will be legally bound to sell my Subaru to my neighbor.
With regard to Chalker, the court held that Chalker had created a condition precedent by virtue of a No Obligation Clause contained within its standard confidentiality agreement that every bidder was required to sign at the outset of the bidding process. More specifically, the No Obligation Clause 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.” The clause further provided that “‘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.”
Therefore, because all that had transpired between Chalker and Le Norman were a series of email exchanges regarding the deal they allegedly struck and no “definitive agreement” had been executed, Chalker’s condition precedent was not satisfied and Chalker was free to contract with any other party for the sale of its mineral assets.
OK… so what?
Now, initially, this may appear to be the logical or obvious outcome, given what we have discussed thus far, but what makes this case interesting is the fact that there were strong indications from the email correspondence between Chalker and Le Norman that a deal had indeed been struck; insofar as 1) the Chalker sellers sent an email to Le Norman’s private equity investor, congratulating him on the sale the parties had accomplished, and 2) the competing bidder to whom Chalker eventually sold sent an email to the Chalker sellers acknowledging that they had “lost the deal….” Clearly, it would seem that all parties shared an understanding that Chalker and Le Norman had committed to the sale.
Yet the court rejected Le Norman’s claim that the email correspondence between Chalker and Le Norman waived the No Obligation Clause condition precedent because the emails did not reflect “an intentional relinquishment of the right to a definitive agreement secured by the No Obligation Clause.”
The Bottom Line.
With all of that said, here is what we should take away from Chalker:
1. Preliminary agreements that create conditions precedent to the formation of a contract will more than likely be upheld by Texas courts, even if there is evidence in subsequent correspondence indicating a contrary understanding;
2. Parties that are concerned about potentially being bound to an agreement based on email correspondence should contemplate and include in a preliminary agreement or, at the very least, state some kind of condition precedent to the formation of any agreement at the outset of an engagement; and
3. Parties seeking to hold a business partner or potential business partner to their word in an email should double check the language in any preliminary agreements and/or correspondence that may have transpired prior to that point for the presence of any conditions precedent either party may have set and, if such conditions exist, obtain proof of an intentional relinquishment of that right under the condition precedent.
Finally, while Chalker certainly provides some guidance for properly completing valid business transactions over email, the most effective way to guard against complicated situations that arise from dealing at a distance is to engage experienced legal counsel to advise you on best practices and the latest legal developments. If you are interested in protecting your rights as a contracting party to a transaction or have questions about a particular transaction, please contact us and connect with our team of attorneys experienced in this area of the law.