Fifth Circuit Finds Oil and Gas Lease Agreement Most Definitely Not Indefinite
Last year, the United States District Court for the EasternDistrict of Texas when the court determined Chesapeake Exploration, LLC(“Chesapeake”) violated its agreement with Peak Energy Corporation (“Peak”) involvingcertain oil and gas leases in the Haynesville Shale formation. Chesapeake appealed the district courtdecision, contending that the agreement at issue was unenforceable under theTexas statute of frauds, was fatally indefinite, and that Peak had failed totender performance. On September 12th,in Coe v. Chesapeake Exploration, LLC, he Fifth Circuit affirmed the award.
In July 2008, when natural gas prices were soaring,Chesapeake emailed a letter entitled “Offer to Purchase” (the July Agreement) toPeak’s contact, Richard Coe. The e-mailcontained offer of a little over $81 million for the oil and gas leases on Peak’s5,404.74 acres of land in HarrisonCounty, TX, at $15,000 per acre. Theoffer had to be accepted by 5:00 PM CDT on July 3, 2008, but also described thetransaction as a “valid and binding agreement.”
Although Chesapeake claimed that the July Agreement was voidunder the Texas statute of frauds because it did not adequately identify theproperty. To satisfy the statute offrauds, a contract for the conveyance of an interest in land must only identifythe property to be conveyed with “reasonable certainty,” and a “recital of ownership”is one mechanism for providing such certainty. Since, in the July Agreement, Peak agreed to convey all of its interests in the oil and gas leases, it had provided therequisite recital of ownership and the “reasonable certainty” standard was met.
Further, Chesapeake claimed that the parties had no intent to“bind themselves” by signing the letter and that the agreement lacked materialterms. However, the July Agreementstated on its face that it was “valid and binding,” stated plainly that it wasan “Offer to Purchase” and placed a time limit on acceptance. In addition, Chesapeake repeatedly assuredPeak that it would follow through with the transaction. Chesapeake sought to rely on aconfidentiality agreement into which the parties had entered as evidence thatthe transaction was merely contemplated. The Fifth Circuit affirmed the District Court’s finding that theconfidentiality agreement did not alter the substance of the July Agreement andwas a standard form routinely used by Peak when providing information inconnection with transactional due diligence.
Chesapeake further contended that the terms of the July Agreementwere so indefinite as to render the agreement unenforceable. It claimed the agreement did not provide afinal lease schedule or a figure regarding revenue interest. The Fifth Circuit found that the first termwas not material and the second term was in fact covered in the July Agreement AlthoughChesapeake claims it requested that the latter term be deleted, “one partyunsuccessfully attempting to retroactively change an essential term does notprove that term had not been previously agreed to and included in theagreement.” Chesapeake also claimed theJuly Agreement lacked terms that would have been included in the final Purchaseand Sale Agreement, such as warranties of title, depth limitations, non-competeprovisions, and options to purchase additional acreage. The Fifth Circuit rejected these argumentseither because they were included in the July Agreement or were not essentialterms whose absence would render an agreement indefinite.
In its final attempt to render the July agreementunenforceable, Chesapeake alleged that Peak failed to perform its obligationsunder the July Agreement when it only delivered 1,645.917 acres instead of5,404.75. Both parties were aware thatthe number of acres Peak could deliver was uncertain, which is demonstrated by thelanguage “approximately” and “more or less,” along with an adjustment clausepresent in the July Agreement. The FifthCircuit thus found that the District Court did not err in concluding that Peak was willing and able to tender itsperformance as specified by the July Agreement.
[JT & ChristinaPhillips]