Cabot Oil & Gas Corp. v. Daugherty Petroleum, Inc.

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 11-1398
CABOT OIL & GAS CORPORATION, a foreign corporation,
Plaintiff - Appellant,
v.
DAUGHERTY PETROLEUM, INCORPORATED, a Kentucky corporation,
Defendant - Appellee.
Appeal from the United States District Court for the Southern
District of West Virginia, at Huntington. Robert C. Chambers,
District Judge. (3:09-cv-00955)
Argued: March 23, 2012 Decided: May 3, 2012
Before GREGORY, KEENAN, and FLOYD, Circuit Judges.
Affirmed by unpublished per curiam opinion.
ARGUED: Timothy Minor Miller, ROBINSON & MCELWEE, PLLC,
Charleston, West Virginia, for Appellant. Ramonda C. Lyons,
LEWIS, GLASSER, CASEY & ROLLINS, PLLC, Charleston, West
Virginia, for Appellee. ON BRIEF: Benjamin W. Price, ROBINSON &
MCELWEE, PLLC, Charleston, West Virginia, for Appellant.
Richard L. Gottlieb, LEWIS, GLASSER, CASEY & ROLLINS, PLLC,
Charleston, West Virginia, for Appellee.
Unpublished opinions are not binding precedent in this circuit.
PER CURIAM:
This case involves a breach of contract claim asserted by
Cabot Oil & Gas Corporation (Cabot Oil) against Daugherty
Petroleum, Inc. According to Cabot Oil, the two parties formed
a binding contract in which Cabot Oil agreed to sell oil and gas
leases to Daugherty Petroleum. Cabot Oil contends that
Daugherty Petroleum breached this agreement by failing to
complete the purchase. The district court granted summary
judgment in Daugherty Petroleum’s favor on the ground that there
was no binding agreement between the parties. Cabot Oil now
appeals. For the following reasons, we affirm.
I.
Cabot Oil is a Delaware corporation authorized to do
business in West Virginia. On July 31, 2008, it issued a
solicitation for bids for the purchase of oil and gas leases
located across three counties in West Virginia. Daugherty
Petroleum, a Kentucky corporation, was one of the companies to
receive the solicitation.
In the solicitation letter, Cabot Oil stated that the
leases covered approximately 15,367 gross acres and 15,085 net
acres. Included with the letter were a map and schedule of the
leases, but Cabot Oil disclaimed making any representations as
to their accuracy or completeness. The solicitation letter
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invited recipients to submit a “preliminary bid or proposal” and
provided that “those submitting such proposals, if any, will be
notified for further discussion and negotiation.”
Daugherty Petroleum responded by letter on August 15, 2008.
Throughout its letter, Daugherty Petroleum characterized its
response as a “bid” or an “offer.” It accordingly proposed a
purchase price of $175 per net acre and a 2% overriding royalty
interest for the leases. Daugherty Petroleum noted that it
anticipated being able to close the transaction within seventy-
five days of Cabot Oil’s acceptance.
Daugherty Petroleum emphasized, however, that its bid was
“contingent and conditioned” on a number of terms. One involved
the form of consideration, which Daugherty Petroleum provided
would likely involve payment of cash by wire transfer at the
closing. Another condition entailed a due-diligence requirement
that would allow Daugherty Petroleum to conduct appropriate
title searches and that further required Cabot Oil to provide
Daugherty Petroleum access to all documents in its possession
relating to the lease properties and rights of access to the
lease properties. A third condition required Cabot Oil to agree
to take the leases off the market for sixty days to allow
Daugherty Petroleum to conduct due diligence. Daugherty
Petroleum specified it would not conduct due diligence unless
Cabot Oil agreed to such an exclusivity period. Finally,
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Daugherty Petroleum provided that while it was conducting due
diligence the parties were to “negotiate the terms and
conditions of an asset purchase agreement.”
Weeks passed without Cabot Oil responding to Daugherty
Petroleum’s letter. During this time, representatives from the
two companies exchanged phone calls. At one point, Tom
Liberatore from Cabot Oil instructed Jeff Keim, his coworker, to
hold off William Barr of Daugherty Petroleum so that Liberatore
could consult with Cabot Oil’s officers about whether they
wanted to pursue a deal.
On October 6, 2008, Cabot Oil sent Daugherty Petroleum a
letter in which it accepted Daugherty Petroleum’s offered
purchase price and noted that Daugherty Petroleum’s proposed
cash settlement was acceptable as well. Cabot Oil stated that
it preferred to move directly into negotiating a purchase and
sale agreement, which would provide Daugherty Petroleum an
opportunity to conduct due diligence. Cabot Oil concluded by
informing Daugherty Petroleum that it would begin preparation of
a purchase and sale agreement.
Cabot Oil’s letter omitted any reference to Daugherty
Petroleum’s condition requiring a sixty-day exclusivity period.
Cabot Oil insists, however, that after it sent its letter it
took the leases off the market and declined other offers to
purchase them. Yet the record gives no indication that Cabot
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Oil notified Daugherty Petroleum it had done so, and Daugherty
Petroleum maintains it first learned that Cabot Oil had removed
the leases from the market when Cabot Oil filed its complaint.
Daugherty Petroleum failed to respond to Cabot Oil’s
October 6, 2008, letter, prompting Cabot Oil to send an e-mail
on November 13, 2008, asking how it wished to proceed.
Daugherty Petroleum still did not respond. Six days later,
Cabot Oil sent Daugherty Petroleum a follow-up letter. In it,
Cabot Oil asserted that in its October 6, 2008, letter it
accepted Daugherty Petroleum’s offer to purchase the leases. It
also discussed unreturned phone calls it had made to Daugherty
Petroleum. The letter concluded by threatening to take legal
action if necessary and requesting that Daugherty Petroleum
contact it to “consummate [a] purchase and sale and avoid the
necessity of a legal proceeding.”
Upon receipt of this latest letter, Barr responded via e-
mail on behalf of Daugherty Petroleum. He began by stating that
he had been traveling for three weeks and just received Cabot
Oil’s messages. He noted that Daugherty Petroleum had
conditioned its offer on the execution of a mutually agreeable
purchase and sale agreement and the successful completion of due
diligence. He further stated that he was awaiting a proposed
agreement and that due diligence would not begin until the
parties successfully negotiated such an agreement. During
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Barr’s subsequent deposition, however, he testified that by the
time he sent this e-mail he did not believe the parties would be
able to successfully negotiate a purchase and sale agreement
because of the prevailing market conditions. He admitted that
he did not convey this belief to Cabot Oil, explaining that he
was agitated with the aggressive, threatening nature of Cabot
Oil’s previous letter.
On November 24, 2008, Cabot Oil sent Daugherty Petroleum a
proposed purchase and sale agreement (the Proposed Agreement)
via e-mail. The Proposed Agreement spanned twelve pages. It
included terms that differed from Daugherty Petroleum’s August
15, 2008, letter. For instance, whereas Daugherty Petroleum
provided that it would likely pay with cash by wire transfer at
closing, the Proposed Agreement contained a provision requiring
that Daugherty Petroleum pay 25% of the purchase price upon
execution of the agreement and the balance at closing. The
Proposed Agreement also contained terms not included or
contemplated in Daugherty Petroleum’s August 15, 2008, letter,
such as terms providing for specific remedies upon certain
events of termination and various provisions relating to
warranties and representations.
Cabot Oil followed up on multiple occasions in December
2008 and January 2009 to determine how Daugherty Petroleum’s
review of the Proposed Agreement was proceeding. Daugherty
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Petroleum did not respond to Cabot Oil’s inquiries or the
Proposed Agreement. Nor did Daugherty Petroleum notify Cabot
Oil that it did not intend to go through with the purchase of
the leases.
In July 2009, Cabot Oil filed a complaint in the Circuit
Court of Putnam County, West Virginia. In the complaint, Cabot
Oil asserted a breach of contract claim against Daugherty
Petroleum and requested either specific performance or damages
in the amount of no less than $2,564,560. Daugherty Petroleum
subsequently removed the case to the Southern District of West
Virginia, invoking the district court’s diversity jurisdiction.
Thereafter the parties filed cross-motions for summary
judgment. Cabot Oil’s motion for partial summary judgment
asserted that no genuine issues of material fact existed
concerning Daugherty Petroleum’s liability for breach of
contract and that Cabot Oil was entitled to judgment as a matter
of law as to liability. Daugherty Petroleum, in its motion for
summary judgment, contended that the undisputed facts
demonstrated that no binding contract existed between the
parties and it was entitled to judgment as a matter of law.
On March 23, 2011, the district court granted Daugherty
Petroleum’s motion for summary judgment and denied Cabot Oil’s
motion for partial summary judgment. The court determined that
Cabot Oil and Daugherty Petroleum’s correspondence did not
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create a binding agreement, but instead constituted preliminary
negotiations. In so holding, the court emphasized the parties’
consistent mutual recognition of their intent to negotiate and
execute a purchase and sale agreement to consummate any
agreement but their failure to do so. Alternatively, the court
concluded that there was no meeting of the minds between Cabot
Oil and Daugherty Petroleum because Cabot Oil’s October 6, 2008,
letter and the Proposed Agreement contained terms different from
Daugherty Petroleum’s August 15, 2008, letter. Cabot Oil now
appeals the district court’s order.
II.
We review de novo the district court’s order granting
summary judgment. See Henry v. Purnell, 652 F.3d 524, 531 (4th
Cir. 2011) (en banc). “Summary judgment is appropriate only if
taking the evidence and all reasonable inferences drawn
therefrom in the light most favorable to the nonmoving party,
‘no material facts are disputed and the moving party is entitled
to judgment as a matter of law.’” Id. (quoting Ausherman v.
Bank of Am. Corp., 352 F.3d 896, 899 (4th Cir. 2003)). Inasmuch
as jurisdiction in this case rests on the parties’ diversity of
citizenship, we apply the substantive law of West Virginia. See
Moore Bros. Co. v. Brown & Root, Inc., 207 F.3d 717, 722 (4th
Cir. 2000).
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III.
A.
The fundamental elements of a binding, enforceable contract
are “competent parties, legal subject-matter, valuable
consideration[,] and mutual assent.” Eurenergy Res. Corp. v. S
& A Prop. Research, LLC, 720 S.E.2d 163, 168 (W. Va. 2011)
(quoting Virginian Exp. Coal Co. v. Rowland Land Co., 131 S.E.
253, 254 (W. Va. 1926)) (internal quotation marks omitted).
Mutuality of assent, in turn, generally requires an offer by one
party and acceptance by the other. See Ways v. Imation Enters.
Corp., 589 S.E.2d 36, 44 (W. Va. 2003). Offer and acceptance
may be manifested through “word, act[,] or conduct that
evince[s] the intention of the parties to contract.” Id.(quoting Bailey v. Sewell Coal Co., 437 S.E.2d 448, 450-51 (W.
Va. 1993)) (internal quotation marks omitted). And a meeting of
the minds, which is a sine qua non of enforceable contracts,
Sprout v. Bd. of Educ., 599 S.E.2d 764, 768 (W. Va. 2004), “may
be shown by direct evidence of an actual agreement or by
indirect evidence through facts from which an agreement may be
implied,” Ways, 589 S.E.2d at 44 (quoting Bailey, 437 S.E.2d at
451) (internal quotation marks omitted).
Parties may form binding contracts through correspondence.
Sprout, 599 S.E.2d at 768. Yet courts must be careful not to
construe correspondence as constituting a binding agreement if
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the parties intended for it to serve merely as preliminary
negotiations. Id. If the correspondence reflects that the
parties intended to reduce an agreement to a formal written
contract, a presumption arises under West Virginia law that the
correspondence does not constitute a binding contract, but
instead only preliminary negotiations. Blair v. Dickinson, 54
S.E.2d 828, 844 (W. Va. 1949); see also Sprout, 599 S.E.2d at
768 (recognizing with approval this presumption). Strong
evidence is necessary to rebut this presumption. Sprout, 599
S.E.2d at 768; Blair, 54 S.E.2d at 844.
In considering whether a party has rebutted this
presumption, the overarching goal is to discern whether the
parties intended for a final written document to be merely a
“convenient memorial” of their agreement or the “consummation of
the negotiation.” Blair, 54 S.E.2d at 844 (quoting Elkhorn-
Hazard Coal Co. v. Ky. River Coal Corp., 20 F.2d 67, 70 (6th
Cir. 1927)) (internal quotation marks omitted). The Supreme
Court of West Virginia has recognized six factors to guide
courts in making this determination: 1) “whether the contract is
of that class . . . usually found to be in writing”; 2) “whether
it is of such nature as to need a formal writing for its full
expression”; 3) “whether it has few or many details”;
4) “whether the amount involved is large or small”; 5) “whether
it is a common or unusual contract”; and 6) “whether the
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negotiations themselves indicate that a written draft is
contemplated as a final conclusion of the negotiations.” Id.(quoting Elkhorn-Hazard, 20 F.2d at 70) (internal quotation
marks omitted).
Moreover, “[i]f a written draft is proposed, suggested or
referred to, during the negotiations, it is some evidence that
the parties intended it to be the final closing of the
contract.” Id. (quoting Elkhorn-Hazard, 20 F.2d at 70)
(internal quotation marks omitted). And if “the parties to an
agreement make its reduction to writing and signing a condition
precedent to its completion, it will not be a contract until
this is done, although all of the terms of the contract have
been agreed upon.” Id. at 843 (quoting Brown v. W. Md. Ry. Co.,
114 S.E. 457, 457 (W. Va. 1922)) (internal quotation marks
omitted).
B.
We begin by recognizing that from the start the parties
manifested their intention to reduce any agreement into a final
purchase and sale agreement. Daugherty Petroleum’s August 15,
2008, letter proposing a purchase price made the negotiation of
such an agreement a condition to its bid. Likewise, Cabot Oil’s
purported acceptance of Daugherty Petroleum’s proposed purchase
price reflected an understanding that the parties needed to
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negotiate a purchase and sale agreement. Barr’s response to
Cabot Oil’s follow-up e-mail and letter again emphasized that
Daugherty Petroleum conditioned its offer on the execution of a
mutually agreeable purchase and sale agreement. Most emblematic
of the parties’ mutual understanding that they would negotiate a
formal contract, however, is the Proposed Agreement that Cabot
Oil composed and sent to Daugherty Petroleum. Hence, because
the parties manifested their mutual intention to memorialize any
agreement in a formal written contract, we begin with the
presumption that their correspondence did not create a binding
agreement in the absence of such a formal contract.
Using the factors recognized by the Supreme Court of West
Virginia, we next conclude that Cabot Oil has not offered strong
evidence to overcome this presumption. Even accepting as true
Cabot Oil’s suggestion that these types of lease contracts are
not unusual, we find that the other five factors reinforce that
an executed purchase and sale agreement was necessary to form a
binding contract. We address these five factors in turn.
First, as the district court noted and Cabot Oil
acknowledged at oral argument, representatives from both parties
indicated in depositions that formal purchase and sale
agreements are customary for these types of lease transactions.
Second, a formal contract appears to have been necessary to
fully express the parties’ agreement. Although the parties’
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correspondence contained a number of essential terms of an
agreement, such as a proposed price term, general information
about the leases, and so forth, it left many terms for the
parties to negotiate later. Third, the numerous details that
the parties still needed to negotiate after their initial
correspondence are evidenced by the Proposed Agreement, which
spans twelve pages in length and includes a multitude of terms
that either conflicted with or were additional to Daugherty
Petroleum’s August 15, 2008, letter. Fourth, the amount
involved in the transaction—over $2,600,000—is large. Finally,
the parties’ correspondence not only reveals that a final
purchase and sale agreement was contemplated as a conclusion to
their negotiations, but, as reflected in Daugherty Petroleum’s
initial proposal, it was a condition to the bid. Because these
factors militate in Daugherty Petroleum’s favor, Cabot Oil has
failed to rebut the presumption that a formal purchase and sale
agreement was necessary to form a binding contract.
We therefore agree with the district court that the
undisputed facts indicate that the parties merely engaged in
preliminary negotiations and there was no mutual assent. From
the start, the parties’ correspondence reflected that the
execution of a mutually agreeable purchase and sale agreement
was necessary to consummate their negotiations and would not
merely be a convenient memorial of a preexisting agreement.
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And, furthermore, such a purchase and sale agreement was a
condition precedent to the formation of a binding agreement. In
the absence of an executed purchase and sale agreement, we agree
with the district court that under West Virginia law no binding
contract exists between the parties. As a result, Daugherty
Petroleum’s decision to abandon the negotiations and not to
purchase the leases does not constitute a breach of contract.
IV.
We address briefly a few arguments made by Cabot Oil to
support its assertion that the district court erred in granting
summary judgment.
A.
Relying on our decision in Charbonnages de France v. Smith,
597 F.2d 406 (4th Cir. 1979), Cabot Oil contends that summary
judgment was inappropriate because the issue of whether the
parties formed a binding agreement was a question for a jury to
resolve.
In Charbonnages, we reversed a district court’s order that
granted summary judgment on the basis that the undisputed facts
demonstrated no contract existed between the parties. Id. at
409. In doing so, we acknowledged that “disputes about whether
a contract has or has not been formed as the result of words and
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conduct over a period of time are quintessentially disputes
about ‘states of mind,’” which typically a trier of fact must
resolve. Id. at 414-15. We also recognized, however, that
there can “be situations in which the manifestations of
intention of both parties . . . not to be bound . . . are so
unequivocal as to present no genuine issue of fact.” Id. at
415. But, we held, that will rarely be the case in situations
in which there are “protracted negotiations involving a ‘jumble
of letters, telegrams, acts, and spoken words.’” Id. (quoting
Restatement (Second) of Contracts § 21A cmt. a (Tentative Draft
Nos. 1-7, 1973)). We held that such was the situation presented
in Charbonnages and therefore that summary judgment was
inappropriate. Id.
Furthermore, in Charbonnages, we recognized that although
the parties intended to execute a formal agreement, “[a]n
intention to reduce an agreement to writing does not compel the
conclusion that this is a condition to the formation of
contract” and that “[t]his too depends on the parties’
manifested intentions.” Id. at 417. We held that the record
before the district court prevented resolving this issue as a
matter of law. Id. at 417-18.
We disagree with Cabot Oil’s contention that Charbonnages
precludes summary judgment in this case. Here, unlike in
Charbonnages, there are neither protracted negotiations nor a
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jumble of communications and conduct. Rather, there are a
limited number of e-mails and letters, and the undisputed facts
reflect that the parties intended to negotiate a purchase and
sale agreement to consummate a binding agreement. West Virginia
law presumes no binding contract exists in this situation.
Because Cabot Oil failed to offer facts that could rebut this
presumption, summary judgment is appropriate.
B.
We next address Cabot Oil’s contention that Daugherty
Petroleum is estopped from denying the existence of a contract.
In so arguing, Cabot Oil employs two different legal principles,
neither of which is applicable.
First, Cabot Oil quotes our decision in Stevens v. Howard
D. Johnson Co., 181 F.2d 390 (4th Cir. 1950), in which we
recognized that “[i]t is a principle of fundamental justice that
if a promisor is himself the cause of the failure of
performance, either of an obligation due him or of a condition
upon which his own liability depends, he cannot take advantage
of the failure.” Id. at 393 (quoting George A. Fuller Co. v.
Brown, 15 F.2d 672, 678 (4th Cir. 1926)) (internal quotation
marks omitted). This passage reflects the general rule that a
party whose duty to perform is conditioned on the occurrence of
an event may not in bad faith prevent the occurrence of that
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condition so as to discharge his duty to perform. See
Restatement (Second) of Contracts § 245 & cmt. a (1981). That
rule, of course, presumes the existence of a binding agreement
that imposes a duty to perform. See id. § 224 cmt. c (“In order
for an event to be a condition, it must qualify a duty under an
existing contract.”).
As described above, such a binding agreement imposing
duties to perform does not exist here, so this rule is
inapplicable. The execution of a purchase and sale agreement
was not a condition on a duty to perform pursuant to a binding
contract. Instead, the parties made the negotiation and
execution of a mutually agreeable purchase and sale agreement
necessary to the consummation of a binding agreement between
them. And contrary to Cabot Oil’s suggestion, Daugherty
Petroleum had no duty to negotiate and execute a binding
purchase and sale agreement. As the district court recognized,
because the parties were still engaged in preliminary
negotiations and no contract existed, Daugherty Petroleum was
“at liberty to retire from the bargain” and to decline to enter
into a binding agreement. See Virginian Exp. Coal, 131 S.E. at
261 (internal quotation marks omitted).
Second, Cabot Oil cites Ross v. Midelburg, 42 S.E.2d 185(W. Va. 1947), in support of its argument that Daugherty
Petroleum is estopped from denying the existence of a contract.
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That case, however, recognizes estoppel as an exception to the
statute of frauds. Id. at 191-92. Although at the district
court Daugherty Petroleum raised statute of frauds as a defense
and Cabot Oil asserted estoppel to preclude the applicability of
the statute, the district court did not base its ruling on the
statute of frauds. Thus, because the statute of frauds is not
at issue on appeal, Ross is inapposite.
V.
For these reasons, we affirm the district court’s grant of
summary judgment.
AFFIRMED
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