A proper contract is the basic foundation of any deal or transaction. There has to be an offer, acceptance and adequate consideration for the same. These are basic requirements in theory but in practice a whole lot of issues can make a contract invalid. The questions have been discussed in detail in a recent judgment by Court of Appeals, fifth Circuit, of Richard C. Coe v. Chesapeake Exploration, L.L.C. (the judgment can be accessed on:http://www.ca5.uscourts.gov/opinions%5Cpub%5C11/11-41003-CV0.wpd.pdf)
In July 2008 Chesapeake entered into an agreement to purchase drilling rights from Peak Energy Corporation. It was alleged by Peak that when the price of natural gas plummeted Chesapeake refused to honor its commitment. In the response filed by Chesapeake it was contended that the parties’ agreement was unenforceable due to the following reasons: a) the Texas statute of frauds, b) fatally indefinite, and c) the plaintiffs had failed to tender performance.
The first suit was filed in the district court of Texas where the court adjudicated in favor of Peak and awarded damages to the tune of $19,951,004 along with pre-judgment and post-judgment interest, and attorneys’ fees and costs. Hence, this appeal was filed by Chesapeake Exploration, L.L.C.
Keeping in mind the provisions of Texas statute of Frauds (accessible at:http://www.statutes.legis.state.tx.us/Docs/BC/htm/BC.26.htm), the court derived the intent of parties and meeting of minds contention. Chesapeake claimed that the agreement did not have adequate reference to the property that was intended to be leased hence no ‘meeting of minds’ had occurred. The Court of appeals agreed with the district court when it said that, “In cases where the agreement contains an adequate nucleus of description, however, Texas courts do allow extrinsic evidence to be used to identify the property...from the data contained in the contract.”
Another argument by Chesapeake was that in the July Agreement the parties did not intend to bind themselves by signing the letter and that the agreement lacked essential terms. The court cited that “It is well settled law that when an agreement leaves material matters open for future adjustment and agreement that never occur, it is not binding upon the parties and merely constitutes an agreement to agree.” But finally the court pronounced that the intention binding the two parties could be gauged in the July Agreement (the impugned agreement).
The Court of Appeal upheld the decision of district court and ordered the damages. There are similar suits filed in the state of Michigan, Pennsylvania, etc. against Chesapeake Exploration, LLC. for breach of contract. This decision might have enlightened a pathway for decision-making for other courts too.