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Monday, October 1, 2012

Fifth Circuit Finds Oil and Gas Lease Agreement Most Definitely Not Indefinite

Last year, the United States District Court for the Eastern District of Texas when the court determined Chesapeake Exploration, LLC (“Chesapeake”) violated its agreement with Peak Energy Corporation (“Peak”) involving certain oil and gas leases in the Haynesville Shale formation.  Chesapeake appealed the district court decision, contending that the agreement at issue was unenforceable under the Texas statute of frauds, was fatally indefinite, and that Peak had failed to tender 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) to Peak’s contact, Richard Coe.  The e-mail contained offer of a little over $81 million for the oil and gas leases on Peak’s 5,404.74 acres of land  in Harrison County, TX, at $15,000 per acre.  The offer had to be accepted by 5:00 PM CDT on July 3, 2008, but also described the transaction as a “valid and binding agreement.”  

5th CirThe parties were to close on August 31, 2008.  After a few delays on both sides, pushing the closing date to October 9, 2008, Chesapeake requested a further delay and then announced that it was backing out.  This decision coincided with the 50% fall of natural gas prices, leaving the leases in question with a value of $3000/acre.  Peak and the Coes then filed suit to enforce the July Agreement.

Although Chesapeake claimed that the July Agreement was void under the Texas statute of frauds because it did not adequately identify the property.  To satisfy the statute of frauds, a contract for the conveyance of an interest in land must only identify the 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 the requisite 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 material terms.  However, the July Agreement stated on its face that it was “valid and binding,” stated plainly that it was an “Offer to Purchase” and placed a time limit on acceptance.  In addition, Chesapeake repeatedly assured Peak that it would follow through with the transaction.  Chesapeake sought to rely on a confidentiality agreement into which the parties had entered as evidence that the transaction was merely contemplated.  The Fifth Circuit affirmed the District Court’s finding that the confidentiality agreement did not alter the substance of the July Agreement and was a standard form routinely used by Peak when providing information in connection with transactional due diligence. 

Chesapeake further contended that the terms of the July Agreement were so indefinite as to render the agreement unenforceable.  It claimed the agreement did not provide a final lease schedule or a figure regarding revenue interest.  The Fifth Circuit found that the first term was not material and the second term was in fact covered in the July Agreement Although Chesapeake claims it requested that the latter term be deleted, “one party unsuccessfully attempting to retroactively change an essential term does not prove that term had not been previously agreed to and included in the agreement.”  Chesapeake also claimed the July Agreement lacked terms that would have been included in the final Purchase and Sale Agreement, such as warranties of title, depth limitations, non-compete provisions, and options to purchase additional acreage.  The Fifth Circuit rejected these arguments either because they were included in the July Agreement or were not essential terms whose absence would render an agreement indefinite.

In its final attempt to render the July agreement unenforceable, Chesapeake alleged that Peak failed to perform its obligations under the July Agreement when it only delivered 1,645.917 acres instead of 5,404.75.  Both parties were aware that the number of acres Peak could deliver was uncertain, which is demonstrated by the language “approximately” and “more or less,” along with an adjustment clause present in the July Agreement.  The Fifth Circuit thus found that the District Court did not err in concluding  that Peak was willing and able to tender its performance as specified by the July Agreement. 

[JT & Christina Phillips]

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