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Preventing Accidental Contracts

© 2017 The Texas Lawbook.

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By Timothy E. Hudson, Mackenzie M. Salenger and Gregory S. Meece of Thompson & Knight

Mackenzie Salenger

(Nov. 30) – Business transactions have evolved in recent years, first from face-to-face meetings in boardrooms, then to telephone conferences, and now to emails sent from laptops, tablets and even cellphones. The convenience of using electronic communications to foster business relationships and engage in business transactions has forever changed the business world and is now beginning to have significant legal consequences for contract formation in the digital age.

Recently, the First Court of Appeals in Houston, in Le Norman Operating LLC v. Chalker Energy Partners III, LLC, 2017 WL 4366265 (Tex. App.—Houston [1st Dist.] Oct. 3, 2017, no pet. h.), held that email correspondence prior to the execution and delivery of a purchase and sale agreement (PSA) was sufficient evidence to create a fact issue as to contract formation and thereby defeat a summary judgment motion. The court also held that the mere presence of a name or email address in the “from” field of an email was sufficient evidence of an electronic signature.

In Le Norman, a group of working interest owners sought to sell oil and gas assets in the Texas Panhandle pursuant to a bid process. The sellers engaged Chalker Energy to manage the sale process. Le Norman, a potential buyer, agreed to the bid procedures prepared by Chalker Energy and signed a confidentiality agreement providing that “unless and until a definitive agreement has been executed and delivered, no contract … shall be deemed to exist.”

Pursuant to the bid procedure instructions, Le Norman submitted a bid to Chalker Energy, which eventually selected it for submission to the sellers. Following the sellers’ rejection of the bid, negotiations with Le Norman continued for a while but were eventually terminated.

Tim Hudson

Five days after the negotiations with Le Norman were terminated, the sellers proposed a new offer, and Le Norman emailed a counterproposal to Chalker Energy listing seven specific terms relating to its potential purchase of the assets. Chalker Energy forwarded Le Norman’s counterproposal email to the sellers, who all communicated their acceptance of it in writing – many doing so via email.

Chalker Energy then sent an email to Le Norman confirming that its counterproposal had been accepted. Email correspondence continued among the parties, including an email from Chalker Energy to Le Norman referencing the assets as “what is being sold to Le Norman,” as well as an email from one of the sellers to Le Norman congratulating it for “winning the bid.”

Before a PSA between Le Norman and the sellers was executed, a previously interested potential purchaser, Jones Energy, presented a new offer for the assets to Chalker Energy, which the sellers accepted. Shortly thereafter, the sellers and Jones Energy executed and delivered a PSA providing for conveyance of the assets to Jones Energy.

Le Norman then filed suit against the sellers for breach of contract. The sellers counterclaimed, seeking, among other things, declaratory relief that no contract with Le Norman had been formed and that Le Norman had breached the confidentiality agreement by failing to follow the bid procedure instructions. The sellers argued that the evidence failed to demonstrate a meeting of the minds between the parties because no PSA was executed and delivered as required by the confidentiality agreement.

The trial court agreed with the sellers and granted summary judgment on the basis that Le Norman had failed to comply with the bid procedure instructions and no contract with the sellers had been formed.

The First Court of Appeals in Houston disagreed. The court found sufficient evidence to create a fact issue as to contract formation, relying on the email correspondence between the parties and the internal emails circulated among the sellers. The court also pointed to the specific language and terms included in Le Norman’s counterproposal and certain conduct of the sellers that directly contradicted the bid procedure instructions.

Additionally, the court rejected the sellers’ contention that there was no contract formation under the Texas Uniform Electronic Transactions Act because the parties had not agreed to conduct business electronically and the acceptance email lacked an electronic signature. The court explained that the conduct of the parties evidenced an intent to conduct business by electronic means and that the identification of the sender in the “from” field of an email sufficiently functioned as an electronic signature. Because there was evidence of contract formation and compliance with the UETA, the court reversed.

Given the significant implications of accidentally creating binding contracts through email correspondence, the following practical tips should be kept in mind when navigating negotiations and business relationships in the digital age.

Prepare a separate letter agreement confirming the parties are not bound until a definitive non-electronic agreement has been executed by the parties and delivered. Similar language should be included in all letters of intent and nondisclosure agreements. Consider including language like the following:

• “The parties do not agree to conduct business electronically for purposes of contract formation.”
• “This provision survives the termination of the agreement unless the parties agree otherwise in writing (i.e., not in an electronic manner).”
• “The term ‘definitive agreement’ means ….”
• “No contract is binding on the company unless it has been approved by its senior management.”

Include disclaimers in all electronic communications. Consider including language like the following:

• “The ‘from’ field and the signature block in this email do not constitute an electronic signature or signed writing for purposes of forming a binding contract between the parties.”
• “This email does not constitute an offer to form a binding contract unless it contains the following language: ‘I hereby bind the company by contract ….’”
• “The company will be bound only by an executed formal, non-electronic written agreement that includes all customary terms and conditions.”

Train employees who regularly conduct electronic communications that potentially involve contract formation.

• They should be wary of responding to emails with language that may be interpreted as forming a contract. Examples of wording where courts have held that contracts have been formed include: approved, agreed, offer, accept, promise, okay and doable.
• Misinterpreted emails should be promptly corrected.
• Provide specific language that must be used when a party intends to be bound by an electronic signature: “Pursuant to the Texas Uniform Electronic Transactions Act, I intend for this to constitute my electronic signature to the foregoing proposal.”

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