The Non-Binding Agreement – Louisiana Edition

I say, ”Let’s go down to the crab shack for some seafood”.  You say, “I agree, we’ll go to a steakhouse for a big, juicy slab of cow”.  Am I obligated to join you to split a 32 ounce Porterhouse with three sides and a Cabernet with a 94 rating?

No.  In 2008 as the Haynesville Shale was being developed at breakneck speed, companies rushed to lease and landowners banded together in groups in order to obtain the best terms. Landowner Mr. Walsworth joined the “Go Getters”, which retained the assistance of attorney Wedgeworth to represent them in negotiations.

What happened?

July 8 – Chesapeake delivers an “Agreement to Lease” with basic terms of an offer, subject to “ … execution of a mutually agreed upon paid up form of Oil and Gas Lease, in the form … attached …”

July-September – Wedgworth replaces that provision with “Chesapeake’s offer is subject to the execution of a mutually agreed upon paid up form of Oil and Gas Lease.”

September 10 – Wedgeworth forwards a lessor-friendly lease. The terms were essentially the same as terms previously approved by Chesapeake for a lease on behalf of another group Wedgeworth represented.

September 18 – members of the group execute Wedgworth’s revised Agreement to Lease

October 8 – Wedgeworth inquires about a response.

October 17 – Chesapeake withdraws the offer, rejecting the form and citing greatly reduced gas prices and lease values.

October 10 – Plaintiff sues, claiming the Chesapeake repudiated the Agreement to Lease, thereby breaching the contract in bad faith.

The Question

Did the Agreement to Lease and Wedgeworth’s revision constitute a contract between the parties?

No. Upon receiving Chesapeake’s proposal the landowners submitted their own proposal, specifying different terms. This was a counteroffer with material changes.  Chesapeake had two courses of action: (1) accept the offer, manifesting assent, or (2) reject the offer.

There was testimony that Chesapeake communicated approval of the lease form to the landowners before backing out. Chesapeake countered by presenting Wedgeworth’s testimony that at no time did Chesapeake inform him that the lease had been approved. Also, it was Wedgeworth, who rejected Chesapeake’s original lease form and revised the Agreement to state that the form would be negotiated. This meant to the court that there was no acceptance of the Chesapeake offer, which means the offer was rejected.

The result

In Walsworth v. Chesapeake Louisiana, L.P.,  the court said, the executed Agreement to Lease did not result in a binding agreement because the undisputed facts indicate that the parties understood that their Agreement to Lease was tantamount to a letter of intent which contemplated additional negotiations, to wit: finalizing the lease form” The revision changed the Agreement to Lease into an unenforceable contract that Chesapeake was free to remove itself from.

We’re catching up on our Louisiana cases.  Would you like to be leaving or are you glad we’re going back?

 

Topics:  Commercial Leases, Haynesville Shale, Mineral Leases, Oil & Gas

Published In: General Business Updates, Energy & Utilities Updates, Residential Real Estate Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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