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Energy & the Law

How to “Score” a Contract from the Red Zone

Posted in Contract Disputes

red zoneFootball pundits like to discuss Red Zone effectiveness. Driving to the goal line doesn’t much matter if you don‘t score. So, why would a negotiating party fail to score an enforceable contract while negotiating from the Red Zone:

  • He’s in a hurry;
  • He has a “handshake deal”;
  • He won’t sign an agreement until he gets the deal he “deserves”;
  • He’s stubborn;
  • He doesn’t understand that “meeting of the minds” does not mean “reading of the minds”;

To summarize the facts in Conglomerate Gas II, L.P. v. Gibb (a Texas case that applies anywhere):

  • Gibbs is a licensed real estate broker.
  • MTV real estate owned 100% of the surface and 50% of the minerals under the 2,232-acre Rock Creek Ranch and agreed to sell the surface to Crestview and grant an oil and gas lease to Crestview Resources or Anterra Resources.
  • Crestview needed help to cover the purchase price and hired Eichberg to find a buyer. He contacted Gibb, who started working to sell the tract even though he didn’t have a brokerage agreement.  According to Gibb, time was of the essence.
  • From May 23rd to late October there were offers, rejections, and counteroffers. Players came and players went; terms came and terms went. Eichberg would make an offer, Gibb would counter, rinse and repeat.
  • The issue for Gibb was always a minimum commission, which Eichberg would never accept. At one point Eichberg offered a “3% back in working interest on a well by well basis”
  • The parties finally agreed on a cash commission but not on the 3% back in, and Gibb received a cash commission that met his minimum.

The Result

In reversing a jury award to Gibb of $1.8MM in damages and $1.7MM in attorney fees, the court of appeal made the following points:

  • The meaning of the “3% back in working interest on a well-by-well basis” was subject to dispute. There was no meeting of the minds regarding that interest. Without more, it was too vague to have meaning.
  • Although Gibb finally accepted one material term in the original offer (the cash commission) he never agreed on the other (the 3% back in).
  • A counteroffer, which Gibb repeatedly did,  operates as a rejection of the original offer.
  • Contract law requires that an acceptance be identical with the offer in order for there to be a meeting of the minds and therefore a binding contract.
  • The original offer had two material terms, a cash commission and the back in. Gibb always countered with a demand for a minimum commission.  Crestview/Eichberg always said that would not happen.
  • Gibb’s testified about what was “in my mind”. In determining whether parties have formed a contract, objective manifestations of intent to be bound are relevant; unexpressed subjective intentions are not.
  • Testimony about whether a party “countered” or “rejected” is conclusory and of no evidentiary value.
  • A party can’t accept by performance an offer that he has previously rejected by a counteroffer.

How to score? Avoid Gibbs’ mistakes.

Mr. Gibbs’ musical interlude