MRC Permian Co. v. Three Rivers Operating Co.

Dallas Court of Appeals, No. 05-14-00353-CV (August 5, 2015)

Justices Fillmore, Myers (Opinion), and Evans

Ken Carroll

We all experienced it: the contracts exam question with so many twists and turns, blind alleys, and alternative interpretations that it could never arise in “real life.” But, as it turns out, sometimes it does. And, just like that contracts exam grade, the result can surprise you. In this complicated case involving the sale of oil and gas properties, the Dallas Court of Appeals held that a response that proposed terms beyond those in the offer was still an effective acceptance, giving rise to a binding contract.

Three Rivers wanted to sell some oil and gas properties. But under a joint operating agreement covering some of the properties in New Mexico, MRC and Foran had an option or “preferential purchase right” to acquire those properties on the same terms Three Rivers had offered its third-party buyer. Pursuant to the JOA, Three Rivers notified MRC and Foran of the proposed sale and offered them five of the ten New Mexico properties on the same terms, for about $7 million. The offer was quite specific about how it was to be accepted—respond within ten days, return a counterpart of the notice with a box checked indicating exercise of the preferential purchase right, and close on the specified terms of sale. MRC and Foran complied, responding within ten days, checking the prescribed box, and agreeing to close as directed. But they added language saying they wished to exercise their preferential right to purchase all covered properties, even those not described in the offer. Three Rivers concluded that the other five New Mexico properties were in fact covered by the preferential purchase right; so, it sent a second notice and offer to MRC and Foran, purporting to withdraw the original notice and offer, offering all ten covered properties for a total price of just over $14 million, and restating the same specific instructions about how the offer was to be accepted. This time, however, MRC and Foran did not accept in accordance with Three Rivers’ instructions. Instead they reiterated their willingness to close on the original offer and response, and proposed to confer with Three Rivers about the scope of their preferential rights otherwise. When Three Rivers later contended there was a binding deal on all ten properties at the $14 million price, MRC and Foran refused to close, and the litigation began.

In the trial court, the two sides filed cross-motions for summary judgment. The court granted Three Rivers’ motion and denied the MRC/Foran motion, apparently concluding a binding contract resulted when Three Rivers responded to MRC’s and Foran’s initial statement of their intention to exercise their preferential right as to all covered properties by tendering its second letter, adding the other five properties and agreeing to sell all ten on the same terms as those in the third-party contract. The court then tacked on over half a million dollars in trial and appellate attorney’s fees for Three Rivers.

The Dallas Court of Appeals, however, disagreed. It held, first, that a binding contract arose from the parties’ initial exchange. The Court acknowledged that an “expression of assent that changes the terms of the offer in any material respect may be operative as a counter-offer; but it is not an acceptance and consummates no contract.” In this instance, MRC and Foran assented to Three Rivers’ original offer as to the first five properties, but in that same response added their intention to exercise their preferential rights as to all covered properties, even beyond those five. This additional language, however, did not convert the MRC/Foran acceptance into a rejection and counteroffer, the Court said. Where a party unequivocally accepts an offer and then proposes something additional, but does not condition the acceptance on those additional terms, the acceptance stands and the response is not converted into a counteroffer. Instead, the additional proposal is simply treated as a separate offer that may be accepted or rejected by the original offeror. In this instance, MRC and Foran did not condition their acceptance of Three Rivers’ original offer on the exercise of their preferential rights with respect to other unnamed properties. So, there was a binding contract for purchase and sale of the first five properties.

The Court also rejected Three Rivers’ arguments that a contract arose later as to all ten properties. Most obviously, MRC and Foran did not accept Three Rivers’ second proposal in accordance with its terms. Moreover, no binding contract resulted from the combination of the MRC/Foran expression of intent to exercise their preferential right as to all covered properties with the second Three Rivers missive adding those other properties. The second Three Rivers letter was not phrased as an acceptance of any proposal by MRC and Foran. Instead, it was cast as a withdrawal of the original Three Rivers offer (too late for that, of course) and a new offer that had to be accepted by MRC and Foran by certain specified means (which never happened). In addition, although MRC and Foran had expressed an intention to exercise their preferential right as to all covered properties, neither the identities nor the price of all properties was known to them at that time. According to the Court, “MRC and Foran could not agree to a purchase price they did not yet know” nor “accept an offer to buy unnamed properties that had not yet been made.” The appeals court therefore reversed and rendered judgment for MRC and Foran and remanded for assessment of attorney’s fees in their favor.