Oil and Gas Lawyer Blog
In 2017 I wrote about consent-to-assign provisions in oil and gas leases, and I commented on a case decided by the Tyler Court of Appeals that year addressing such provisions, Carrizo Oil & Gas v. Barrow-Shaver Resources, 2017 WL 412892. In December last year, the Texas Supreme Court wrote on that case, No. 17-0332, Barrow-Shaver Resources v. Carrizo Oil & Gas. The court split 5 to 4. Although the
consent-to-assign provision in the case was in a farmout agreement, it sheds light on how such provisions in oil and gas leases would be treated by the courts.
The facts of the case are these: Carrizo owned an interest in an oil and gas lease covering 22,000 acres in north-central Texas. It entered into a farmout agreement with Barrow-Shaver under which Barrow-Shaver was granted the right to drill wells and earn assignments of the lease, with Carrizo retaining an overriding royalty. The farmout agreement contained the following provision:
The rights provided to [Barrow-Shaver] under this Letter Agreement may not be assigned, subleased or otherwise transferred in whole or in part, without the express written consent of Carrizo.
In negotiations for the contract Barrow-Shaver tried to get Carrizo to insert “which consent shall not be unreasonably withheld” into the contract, but Carrizo refused. Carrizo’s landman told Barrow-Shaver’s representative that consent would not be a problem and that Carrizo would “work with” Barrow Shaver if the issue ever came up.
Barrow-Shaver spent $22 million drilling a well on the lease, with unsuccessful results. It then proposed to assign its rights under the farmout agreement to another company, Raptor, for which Raptor offered to pay Barrow-Shaver $27 million. Barrow-Shaver requested Carrizo’s consent to assign, but Carrizo refused. Instead, Carrizo offered to sell Barrow-Shaver its rights in the lease and under the farmout agreement for $5 million. Barrow-Shaver refused, Raptor’s offer fell through, and Barrow-Shaver sued Carrizo for unreasonably refusing to grant consent.
As is often the case in contract disputes, both sides agreed the contract was not ambiguous, but they disagreed on its meaning. At trial, Barrow-Shaver introduced evidence of “custom and usage” in the industry, and each side presented expert testimony on custom and usage, and — not surprisingly — the experts also disagreed. Barrow-Shaver’s expert testified that “charging for consent to assign is inconsistent with the custom and usage of the industry [and] refusing consent based on something which is outside the industry custom and usage constituted a breach of the farmout agreement.” Carrizo’s expert denied that industry custom placed any limitation on whether Carrizo could grant or withhold consent.
The trial court submitted the question to the jury, and the jury found for Barrow-Shaver, awarding it $27.7 million in damages, plus interest and attorneys’ fees.
The Supreme Court’s majority opinion is by Justice Green, joined by Justices Lehrmann, Devine, Blacklock and Brown. The majority held that Carrizo was entitled to withhold its consent for any reason and therefore did not breach the contract as a matter of law. The court refused to imply a reasonableness standard on Carrizo’s option to grant or deny consent. “We decline to read a qualifier into the consent-to-assign provision when the terms of the agreement make clear that Carrizo has no obligation and its right to withhold consent is thus unrestricted.”
Barrow-Shaver and Carrizo both sought to introduce evidence of the parties’ prior negotiations. Carrizo sought to show that Barrow-Shaver sought and failed to get “not-unreasonably-withheld” language in the contract, showing that the parties agreed to a “hard” consent. Barrow-Shaver sought to introduce evidence of Carrizo’s assurances that it would “work with” Barrow-Shaver as evidence that such a reasonableness requirement was part of the contract. The trial court refused to allow that evidence, and the Supreme Court agreed. While evidence of surrounding circumstances can be used to “inform the contract text and render it capable of only one meaning,” it can’t be used to create ambiguity in an otherwise unambiguous contract, said the court.
The court also said that evidence of custom and usage in the industry could not be admitted to construe an unambiguous contract. “Allowing evidence of industry custom and usage here would give the jury an opportunity to create an ambiguity where none exists, or to alter the terms of the contract’s clear and unequivocal language as to the parties’ obligations.”
The court further refused to impose an implied duty to act in good faith into the contract. The court said that Texas law does not imply a covenant to act in good faith in every contract, but only in certain types of contracts, like insurance contracts, where there is a special relationship between the parties or unequal bargaining power.
Because the right to withhold consent [is] unqualified, Carrizo [can] refuse consent for any reason, expressed or not, reasonable or not, legitimate or not, or no reason at all. … In fact, had the consent-to-assign provision explicitly stated that Carrizo could withhold its consent “for any reason or no reason,” such language would be surplusage because the phrase “may not be assigned without the express written consent of Carrizo” had identical meaning. The same can be said if the provision added “which can be granted or withheld at Carrizo’s sole discretion.” Adding language to this effect would have been unnecessary and meaningless given the unambiguous language the parties chose in the farmout agreement.
The court also declined “to read a reasonableness requirement into the consent-to-assign provision as a way to avoid any impermissible restraint on alienation.”
Barrow-Shaver also alleged as an alternative claim that by promising it would reasonably grant consent and then refusing to do so Carrizo had committed fraud, inducing Barrow-Shaver to enter into the contract. The court held that this claim must fail because there is no evidence that Barrow-Shaver reasonably relied on Carrizo’s promise in the face of an express contractual provision allowing it to withhold consent without cause.
Justice Guzman wrote a vigorous 23-page dissent, joined by Chief Justice Hecht and Justice Busby. Justice Guzman said that evidence of trade custom and usage is always admissible to inform the meaning of terms “that might otherwise seem intuitive to industry outsiders.” Conflicting evidence on custom and usage was properly admissible, the jury considered that evidence and concluded that Carrizo did have a duty not to unreasonably withhold consent and had refused consent unreasonably; “we cannot disturb the jury’s finding that the contracting parties understood the consent-to-assign clause to mean consent could not be unreasonably withheld.” Justice Guzman agreed that evidence of the negotiating history was barred by the parol evidence rule. “When the only purpose of extrinsic evidence is to show the parties intended the contract to say something other than what it says, such evidence is inadmissible.” Finally, on the fraud finding, Justice Guzman would hold that “Barrow-Shaver established justifiable reliance [on Carrizo’s assurances] as a matter of law.”
Justice Boyd wrote a separate dissent. He would remand the case for a new trial. His position is that both evidence of custom and usage and evidence of the contract negotiations should have been admitted. He opined that the evidence of prior negotiations
tends to establish that Barrow-Shaver knew Carrizo’s intent was inconsistent with the alleged industry usage, and thus rebuts the presumption that the parties impliedly incorporated the alleged industry usage in their contract. The jury never heard Carrizo’s evidence regarding the parties’ prior drafts and negotiations, however, because the trial court sustained Barrow-Shaver’s objection and excluded it. I conclude the trial court erred by excluding the negotiations evidence. Carrizo was entitled to submit surrounding-circumstances evidence to rebut the presumption that the parties contracted with respect to the alleged industry usage.
The three opinions issued in the case present remarkably differing views on undisputed facts. The majority appeared to view Carrizo’s actions as commercially reasonable, including its offer to sell its position for $5 million. The dissent viewed this as an unreasonable request to be paid for the consent. The majority and dissent also disagreed on the admissibility of custom-and-usage testimony to construe contract language. And Justice Boyd disagreed with the other justices on admissibility of surrounding-circumstances evidence of the negotiations leading up to the contract. Notwithstanding these differences, it now appears to be settled law that a consent requirement like that in the Barrow-Shaver – Carrizo contract entitles the party asked to give consent to refuse such consent for any reason or no reason.