Co-author Chance Decker
In Barrow-Shaver Resources Company v. Carrizo Oil & Gas, Inc the Supreme Court of Texas has held again, here in a consent-to-assign dispute, that a contract means what the words say, even if in negotiations a landman said something he didn’t mean, … or changed his mind later, and even if “industry custom” is to the contrary.
A 22,000 acre lease in which Carrizo had an interest was set to expire if a well wasn’t drilled. Carrizo and Barrow-Shaver entered into a drill-to-earn farmout, which was memorialized in a letter agreement. An early draft of the agreement contained this consent-to-assignment language (a “soft consent”):
“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 which consent shall not be unreasonably withheld.”
In later negotiations, Carrizo removed “which consent shall not be unreasonably withheld”. Barrow-Shaver objected to the deletion, but Carrizo’s land manager (allegedly) assured Barrow Shaver that Carrizo would consent to an assignment. Barrow-Shaver relented and accepted the clause as modified .
Before the lease expired, Barrow Shaver drilled an unsuccessful well on the farmed out acreage (spending $22 million in the process). Raptor Petroleum then offered Barrow-Shaver $27 million for its farmout rights. Carrizo, however, would not consent to the assignment. Instead, it proposed selling its interest in the lease to Barrow-Shaver for $5,000,000. Barrow-Shaver didn’t respond to Raptor’s offer for the farmout rights and the deal died.
Barrow-Shaver sued Carrizo for breach of contract and fraud, alleging that even though the consent-to-assignment clause didn’t expressly say it, industry custom imposed a reasonableness requirement upon Carrizo’s right to withhold consent. According to Barrow-Shaver, conditioning consent to an assignment upon the payment of $5 million from the assignor was not reasonable and offended oilfield custom. The jury agreed and awarded Barrow-Shaver $27 million.
The court of appeals reversed and ruled that Barrow-Shaver take nothing. The Supreme Court affirmed. The absence of language in the agreement requiring reasonableness meant Carrizo could withhold consent for any reason or no reason at all (i.e. a “hard consent”). When an agreement is unambiguous, evidence of industry custom can’t be used to impose obligations the contract’s plain language does not impose. The agreement unambiguously gave Carrizo a hard consent right, so Barrow-Shaver could not have reasonably relied upon representations that consent would not be withheld. Thus, the fraud claim was also dismissed.
The ruling was far from unanimous. A concurrence and dissent complained that the majority repudiated trade usage and custom as an aid in contract interpretation and went against the jury finding that CArrizo acted unreasonably in withholding consent. This abrogated established contract construction principles and threatens to unsettle industry expectations about what industry-specific contracts mean. Express language should not be necessary for the consent clause to mean consent cannot be unreasonably withheld.
A dissent would have reversed the court of appeals on the basis of the role that industry custom and usage play in the formation and construction of written agreements.
Get it in writing. Oil and gas contracts are interpreted in accordance with their plain language, and courts won’t rely on oilfield custom or statements made during negotiations to impose terms into a contract that aren’t expressly stated. Thus, if a consent-to-assign clause doesn’t expressly require that “consent will not be unreasonably withheld”, the holder of the right can withhold consent for any reason or no reason at all. This is a warning for any provision of any contract.
So, get it in writing.
We said get it in writing.
Have we ever told you to get it in writing?
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