When do email exchanges create a contract?—The Texas Supreme Court Clarifies
Email is fundamental to almost every business. It is used to communicate, invoice, develop business, and, increasingly, to contract. Contracting through email exchanges presents unique complications, however. Most notably, given the conversational, informal manner of the medium, it is increasingly difficult to determine whether there has been a meeting of the minds required to create a binding contract. Recognizing the need for certainty in this area of contract law, the Texas Supreme Court has already taken up the issue twice in 2020.
Chalker Energy Partners III, LLC v. Le Norman Operating LLC
In an opinion delivered on February 28, 2020, the Texas Supreme Court evaluated whether a chain of emails contemplating an agreed sale of working interests constituted a binding contract obligating the seller to ultimately follow through with a sale.
In Chalker, an interested buyer placed a bid on a package of working interests in various oil and gas leases in the Texas Panhandle. In conjunction with the bid, the buyer executed a confidentiality agreement which included, among other things, a No Obligation Clause specifying that no contract existed between the parties “unless and until a definite agreement [had] been executed and delivered.” The No Obligation Clause went on to state “[f]or the purposes of this Agreement, the term ‘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 signed by both Parties.”
When the seller rejected the buyer’s initial bid, the buyer sent an email delineating the terms of its counteroffer. The seller responded via email informing the buyer it was agreeable to the sale “subject to a mutually agreeable PSA.” A few days later, however, the seller had a change of heart and executed a PSA with a different party without notifying the buyer. The buyer sued for breach of contract, arguing the email exchanges between the parties created a binding agreement to sell the interests.
Reversing the court of appeals, the Supreme Court held the email exchanges did not establish a written contract. In doing so, the Supreme Court characterized the No Obligation Clause as a condition precedent to contract formation. Because the email exchanges did not constitute a “definite agreement” for purposes of the No Obligation Clause, the parties failed to satisfy all conditions precedent and therefore, no contract existed.
The Court also noted the strong public policy in Texas favoring freedom of contract which allows parties to stipulate through agreements the conditions upon which they will be bound. By including the No Obligation Clause in the confidentiality agreement, the parties provided themselves with the freedom to negotiate without fear of being bound by a contract. Ignoring such an agreement would discourage written negotiations for fear they would result in a binding agreement.
Copano Energy, LLC v. Bujnoch
Issued less than a month before the Chalker opinion, the Texas Supreme Court’s opinion in Copano similarly highlights the complications of entering into a contract via email exchanges. Copano involved a purported written agreement to extend a previously granted pipeline easement. In short, a Copano representative sent the landowners’ law firm an email stating “Copano agrees to pay your clients $70.00 per foot for the second 24 inch line it proposes to build.” The landowners accepted the offer in an email response (the “Offer/Acceptance Emails”). When Copano decided not to purchase the easement, the landowners brought suit, alleging the parties had entered into a contract to sell an easement for $70 per foot.
The landowners conceded that Offer/Acceptance Emails did not contemplate essential terms such as the location of the easement, but pointed to an earlier email exchange (“Terms Emails”) in an attempt fill that void. The Court rejected the argument for two reasons. First, the Terms Emails did not reflect a current agreement to be bound by the terms they described. Instead, the Court explained, the repeated use of futuristic language (“[i]t will be a 24 inch gas line”; “we will be laying the line generally on the North side”) constituted an anticipated offering of those terms; not an actual offering of them. The Court also noted that nothing in the Offer/Acceptance Emails reflected an intent to be bound by the terms included in the Terms Emails.
Because the email exchanges did not clearly set forth the parties’ intent to be bound by essential terms, the Court found there was no written agreement to satisfy the Statute of Frauds.
Key take-aways from Chalker and Copano
- While at times conversational and informal, email exchanges can constitute an enforceable agreement if the formation requirements are met.
- Courts will hold parties to the agreements they sign—i.e. the No Obligation Clause in Chalker.
- Conditions precedent matter.
- A clear showing of a meeting of the minds is essential for contracts based on email exchanges.
- To constitute an enforceable agreement, email exchanges must show a present intent to be bound by essential terms.
Lessons Learned from Chalker and Copano
- Be careful with your emails because they can bind you. To avoid unintentionally entering into an binding contract, consider the following:
- Utilize a No Obligation Clause or other language that makes clear there will be no binding agreement absent an independent, definitive agreement signed by the parties;
- Avoid language demonstrating a present intent to be bound (i.e. “I agree”);
- If merely negotiating, make that intention clear.
- When attempting to enter into a contract via an email exchange, consider the following to ensure you are entering into a binding agreement:
- Be sure the exchange includes an offer, acceptance, and essential terms.
- If the essential terms will be incorporated from another email conversation or document, clearly indicate such.
- Avoid futuristic language (i.e. “I will agree”);
- Ensure emails evidence a meeting of the minds by clearly communicating the parties’ intent to enter into a binding contract and avoiding conversational tone.