Face Challenges Confidently

655 Carrizo Oil & Gas, Inc. v. Barrow-Shaver Resources Co. Carrizo Oil & Gas, Inc. v. Barrow–Shaver Res. Co., 516 S.W.3d 89 (Tex. App.—Tyler 2017, pet. filed)

Tuesday, July 17th, 2018

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.

Carrizo Oil & Gas, Inc. v. Barrow-Shaver Resources Co. Carrizo Oil & Gas, Inc. v. Barrow–Shaver Res. Co., 516 S.W.3d 89 (Tex. App.—Tyler 2017, pet. filed) held that “express written consent” to assign under a farmout agreement meant “sole and absolute discretion” consent. Carrizo (“Farmor”) owned an oil and gas lease and entered into farmout negotiations with BSR (“Farmee”) to drill on the lease. An initial draft agreement’s consent-to-assign provision stated that Farmee could not assign its rights without Farmor’s consent, which “shall not be unreasonably withheld.” After four drafts of the agreement, the final draft deleted this language and provided that it could not be assigned “without the express written consent of [Farmor].” This provision was clearly negotiated. Farmor’s representative said that Farmor’s legal counsel insisted on deleting “which shall not be unreasonably withheld,” but on three separate occasions Farmor’s representative said Farmor would, in fact, consent. Farmee spent $22,000,000 drilling with no results, and then found a buyer for $28,000,000. Farmor refused consent, unless Farmee paid Farmor $5,000,000. Farmee refused, lost the sale, and sued Farmor for $28,000,000 based on breach of contract and fraud. At trial, Farmor contended that the evidence on the prior negotiations was admissible, that the contract was unambiguous, and that the court should rule for Farmor as a matter of law. The trial court held the prior negotiations were inadmissible, admitted Farmee’s expert testimony that under custom and practice in the industry “which shall not be unreasonably withheld” was implied in “without consent,” and submitted the case to a jury. Based on the verdict for Farmee, the court entered judgment for Farmee in the amount of $28,000,000.

Whether Farmor breached the contract hinged on the level of discretion the agreement gave Farmor to withhold consent. Farmee argued that because there was no express qualifier on “consent,” the final agreement was silent as to the type of consent Farmor could exercise. Farmee argued that Farmor breached the contract by unreasonably withholding consent which contradicted industry custom requiring that consent be reasonably granted. Farmor contended that the prior drafts established unfettered discretion for Farmor to withhold consent.

The court stated that it “may consider the facts and circumstances surrounding a contract, including . . . objectively determinable factors that give context to the parties’ transaction.” The court reasoned that negotiations resulting in the deletion of the “unreasonably withheld” language gave the agreement more context and were not barred from admissibility by the parol evidence rule. “We hold that the consent-to-assignment provision of the farmout agreement was not silent when we are informed by its surrounding circumstances. The agreement gave [Farmor] an unqualified right to refuse [Farmee’s] proposed assignment.” This also meant that the unambiguous provision should have been construed by the court as a matter of law. The judgment was reversed and rendered that Farmee take nothing.

The opinion is silent as to whether “consent” could ever equal unqualified consent or sole and absolute discretion consent. Rather, it expressly turns on the parol evidence that this provision was not “silent,” but “informed by its surrounding circumstances.” The opinion is also silent as to whether the farmout agreement (which was only a few pages long) did, or did not, include an entirety clause.

The court then considered whether Farmor committed fraud by withholding consent after orally promising Farmee that it would not unreasonably withhold consent. One of the elements of fraud is justifiable reliance. The court held that Farmee’s “reliance is of no consequence in light of the unambiguous term in the written contract that directly contradicts the oral representation.” Farmee did not reasonably rely on Farmor’s promise because “[a] written contract vitiates any reliance on oral promises.”

The significance of the case is the holding that earlier drafts of a consent-to-assign provision are relevant to and admissible in determining the scope of the final version of the consent-to-assign provision included in the agreement. The case suggests that the word “consent” is not clear, and therefore custom in the industry and prior negotiations may supply the parties intent.