Broker run auctions are a common method of buying and selling oil and gas assets. The auctions typically provide data rooms on the assets and rules for bidding and acceptance. A form Purchase and Sale Agreements is provided and required to executed to consummate a sale. However, a recent Texas appellate court decision found this process can be preempted by emails between a buyer and seller. In Le Norman v. Chalker, The Court of Appeals for the First District of Texas ruled an email sent between parties could be upheld as a contract to purchase assets when there was a formal bid process for the oil and gas sale of the same assets which required a Purchase and Sales Agreement.
Le Norman Operating LLC sought to purchase valuable oil and gas interests in the Texas panhandle. Le Norman engaged in a competitive bid process and other negotiations with Chalker Energy Partners, which was brokering the deal. Le Norman believed it had entered into a binding purchase agreement with Chalker, however, Chalker sold the oil and gas interests to a third party.
During a formal bidding process, Le Norman received two “Confidential Bid Instruction” letters that explained “[a] scanned document delivered via e-mail is the preferred delivery method” and set out the format in which bids should be submitted. The letters stated that the offer should include, among other things, a “proposed amount and type of consideration to be paid” to the sellers, a “description of the financial arrangement to be used to consummate the proposed transaction,” the “[t]iming of the transaction including the expected date for the signing of a definitive agreement and the anticipated closing date of the transaction,” and “[a] marked copy of the Purchase Sale Agreement.”
After submitting a bid, the sellers would be given 24 hours to decide whether or not to sell their assets. The bidder could then adjust the bid in light of the sellers’ decisions and Chalker would negotiate a definitive purchase agreement with the selected party. The sellers would then be given 48 hours to elect to accept the terms of the purchase agreement and execute it.
Le Norman submitted its first bid via email per the bidding process. Le Norman and another bidder were asked to increase their bids, and Le Norman did so via email during the second round of bidding. Pursuant to the bidding procedure, Chalker presented Le Norman’s bid to the sellers and gave them 24 hours to respond. After unsuccessful negotiations, Le Norman informed Chalker via email that it would no longer pursue the transaction; however, Le Norman left open the possibility that a future agreement might be reached.
Approximately a week later, on November 19, 2012, Le Norman responded to a new offer from the sellers for a smaller percentage of the oil and gas interests by sending an email proposing new deal terms. Le Norman explicitly stated that the company “will not be modifying or accepting any changes to the base deal described above and don’t want to be jerked around anymore.”
Chalker received the bid and forwarded it to the sellers who communicated via email about the sale. The sellers responded to the bid and agreed to participate electronically via email. Le Norman was informed of the agreement to sell and began completing key exhibits to the Purchase Sale Agreement.
The day after accepting Le Norman’s offer, the sellers were presented with a new offer from a third party. This new offer had numerous advantages over the offer agreed to with Le Norman, and at least one of the sellers expressed interest in the new offer. The sellers went ahead with a Purchase Sale Agreement for the new offer, despite agreeing to a sale with Le Norman. Le Norman requested that Chalker and the sellers honor their agreement, but the company refused. Le Norman filed a lawsuit against Chalker and the sellers claiming breach of contract, however Chalker argued no valid contract was in place with Le Norman.
The Court of Appeals for the First District of Texas ruled Le Norman’s November 19th email was sent after the initial bid process had concluded and the procedure set out in the bid process failed to yield a sale. This means Le Norman was not subject to the rules and procedures set out in the initial bid. Furthermore, the appeals court determined Le Norman substantially deviated from the initial bid procedure and the sellers continued to engage with Le Norman regarding the sale despite the deviation from the initial bid procedure.
Le Norman argued the seller’s electronic agreement to its November 19th proposal was sufficient to create a valid contract. The appeals court agreed, noting there was evidence the email communication met the requirements of a legal contract because the communication included: (1) an offer, (2) an acceptance in strict compliance with the terms of the offer, (3) a meeting of the minds, (4) each party’s consent to the terms, and (5) execution and delivery of the contract with the intent that it be mutually binding.The reversed the trial court’s summary judgment and remanded for a trial on the breach of contract.
What Does This Mean For The Oil And Gas Industry?
Anyone engaging in oil and gas sales needs to be aware of the potential implications of their electronic communications. If you are facing oil and gas litigation, let the experienced attorneys at MehaffyWeber review your case.