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Energy & the Law

No Agreement on Essential Terms Means No Contract

Posted in Contract Disputes

If your written agreement terminates and you engage in extensive discussions to reestablish the agreement but essential terms are not agreed on, you don’t have a binding contract. So said a Texas court in 2001 Trinity Fund, L.L.C. v. Carrizo Oil & Gas, Inc. Trading a bunch of emails without agreeing on the essential terms doesn’t get it done.

The Agreement

Carrizo owned leases in the Barnett Shale. The leases would expire unless Carrizo began drilling a well. Trinity was interested in participating, so the parties entered into the “Barnett Shale Participation Agreement”. Trinity was to pay a specified portion of the costs by a certain date in exchange for the potential to earn a portion of Carrizo’s leasehold rights. Trinity failed to pay, and the Agreement automatically terminated.

The Emails

The parties began exchanging emails to revive the agreement. Carrizo’s landman sent an email offering to amend the Agreement. Trinity agreed in principle but said that internal issues would have to be resolved first. Later, Trinity said it would have to wait until its investors had executed unspecified documents. Thus, it could not commit to a time to make its first payment.

Alternative drafts of an amending agreement were circulated, with terms that were different than those previously discussed. Trinity never executed any draft and never paid the drilling costs.

Carrizo sued for breach-of-contract, promissory-estoppel, and quantum-meruit.

The Opinion

The appeals court reversed a verdict and judgment for Carrizo that Trinity breached the contract. Because the Agreement would terminate automatically if Trinity didn’t pay by a certain date, and Trinity didn‘t pay, a breach of contract claim could not be based on the Agreement. Instead, the claim was based on the email exchange.

There was no “meeting of the minds”. Because Trinity failed to make a timely payment, Carrizo was relieved of its obligation in the Agreement to allow Trinity to earn leasehold rights. The emails themselves raised many issues which were never resolved in later emails. The emails showed that the “agreement in principle” did not mean that the parties had reached agreement on all of the contract’s basic terms. Trinity was waiting to execute documents with its investors and payment for the costs would only come after those documents were executed.

The evidence did not support quantum-meruit. Carrizo had to prove that it rendered valuable services for Trinity. Because the Agreement had terminated, Trinity could not obtain an interest in the leases. By drilling wells Carrizo had only benefited itself.

There was no evidence to support promissory-estoppel because of a merger clause in the Agreement.

Another Way to Look At It 

One concurring opinion concluded that the breach-of-contract analysis went too far. The email exchange had no agreement on the time of Trinity’s first payment. This term was essential, because the Agreement automatically terminated if Trinity failed to timely pay. The emails indicate that it was still of paramount important to Carrizo. Trinity never made a commitment to pay on a certain day.

A Third Way to Look At It

A third justice agreed there was no contract but disagreed with how the issue was resolved, and invoked the Texas Uniform Electronic Transactions Act.

The parties did not intend to be bound by electronic communications, as required by the Act. The Agreement provided that it could only be amended by a signed writing. Nowhere in the email exchange did the parties agree to waive that provision of the Agreement. Furthermore, the parties’ multiple efforts to obtain signatures on a written amendment negated any inference that the parties agreed to be bound by their emails.”

Did the parties feel like this when their emails failed to result in a deal? I doubt it.