Purchase and sale transactions often progress through several stages of instruments, like layers of an onion, before they reach the final definitive purchase agreement, and perhaps even more layers before they reach the final assignment and post-closing items. But, when deals break down before reaching the finish line, disputes often arise as to whether the existing writings or communications are enough to form an enforceable agreement. Sometimes, the parties have little more than a confidentiality agreement or letter of intent; sometimes the parties have significant communications and informal agreements.
A recent case on this topic is Pappas Harris Capital, LLC v. Advance Hydrocarbon Corp., No. 14-23-00224-CV, 2024 WL 3616716 (Tex. App.—Houston [14th Dist.] Aug. 1, 2024, no pet. h.).
This recent case addressed whether letters of intent (LOIs) could create enforceable contracts in the course of asset purchase negotiations, even though they explicitly state that they are non-binding and that they are subject to future agreement. The Houston 14th Court of Appeals held that they were not an enforceable contract.
Advance Hydrocarbon Corporation (“Advance”) sought to sell certain assets related to its saltwater disposal business. On August 1, 2018, Advance and Pappas Harris Capital, LLC (“Pappas”) signed a Confidentiality Agreement to exchange confidential information for a possible transaction to acquire Advance’s business, Advance provided a memorandum listing the assets for sale with general information. After review, Pappas prepared and signed an LOI on on September 24, 2018, proposing to purchase Advance’s business and assets for $2 million. The LOI stated it was “not intended to create a binding contract” and was “subject to the execution of a mutually acceptable asset purchase agreement.”
Over several months, the parties negotiated and Pappas conducted due diligence. Pappas discovered some listed assets were missing or in poor condition, leading to discussions on addressing these issues. Advance prepared a draft asset purchase agreement dated November 13, 2018, but it was never executed. On December 10, 2018, the parties met to resolve outstanding matters but did not reach a final agreement. Advance terminated the proposed transaction on December 14, 2018.
Pappas filed suit alleging breach of the LOI and, alternatively, breach of an oral contract that was allegedly formed during the December 10 meeting. The trial court granted summary judgment in favor of Advance, Pappas appealed.
The Court of Appeals held that the LOI did not constitute an enforceable contract. It emphasized that the LOI explicitly stated it was “not intended to create a binding contract” and that the “transaction would be subject to the execution of a mutually acceptable asset purchase agreement”—a condition precedent that was never fulfilled. Further, the court rejected Pappas’ argument that the LOI was an enforceable agreement obligating the parties to “work together in good faith to consummate the transaction,” holding that agreements to negotiate toward a future contract are not legally enforceable, even if the party agreed to negotiate in good faith.
Regarding the alleged oral agreement from the December 10 meeting, the court found no enforceable contract was formed. In the court’s view, Pappas did not provide any evidence regarding how the alleged oral contract would establish the elements of an enforceable contract. Further, the only offer made was the LOI, but it expressly indicated it was subject to a mutually acceptable asset purchase agreement, with was never satisfied. The court stated, “Pappas cannot now argue that the deal could be closed with a handshake or in some other manner that was not a mutually agreeable asset purchase agreement executed by both parties.” Because material matters remained open for future negotiation, the court said that any alleged oral agreement was an unenforceable agreement to agree.
This case serves as a crucial reminder for oil and gas lawyers to exercise precision in drafting preliminary agreements and to manage client expectations regarding the enforceability of LOIs. Ensuring that any intent to create binding obligations is clearly expressed—and that all necessary agreements are duly executed—is essential to avoid similar disputes.
