On June 28, 2019, in Barrow-Shaver Resources Co. v. Carrizo Oil & Gas, Inc.[1], the Texas Supreme Court confirmed that industry customs cannot qualify an unrestricted consent-to-assign provision contained in a farmout agreement, nor is such a provision subject to any implied duty of good faith or fair dealing. The ruling was hotly contested, evidenced by both the 5-4 decision and the multitude of letters received by the court from industry players.

The case stems from a farmout agreement between Carrizo Oil & Gas, Inc. (“Carrizo”) and Barrow-Shaver Resources Co. (“Barrow-Shaver”), in which Barrow-Shaver would earn a partial assignment of Carrizo’s interest in a 22,000 acre lease upon successful well completion. The following language regarding future assignments by Barrow-Shaver was contained in the memorialized agreement:

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.

Later, Raptor Petroleum II, LLC approached Barrow-Shaver about a potential assignment of the farmout, but to affect the assignment, Barrow-Shaver would have to obtain the consent of the interest holders, including Carrizo. All of the parties consented to the proposition, except Carrizo, and instead, Carrizo proposed selling its interest to Barrow-Shaver for $5.0 million. Barrow-Shaver ignored that offer, and ultimately, Carrizo refused to consent to the proposed assignment.

After the deal lapsed, Barrow-Shaver sued Carrizo for breach of contract, fraud, and tortious interference with contract. Barrow-Shaver admitted that the consent-to-assign provision was unambiguous, but the company argued that the agreement was silent as to the basis on which Carrizo could withhold consent. Barrow-Shaver asserted that the jury should hear evidence of industry custom and usage to determine whether the contract was breached. The trial court agreed and submitted the breach of contract question to the impaneled jury, and the court allowed the jurors to consider evidence of industry custom. A unanimous verdict in favor of Barrow-Shaver awarded over $27.0 million in total damages.

The court of appeals reversed, ruling Carrizo had established the clause allowed them the right to withhold consent for any reason or no reason at all. The appellate court noted the previous drafts of the farmout agreement illustrated a purposeful deletion of qualifying language over the course of negotiations.

On further appeal, the Texas Supreme Court affirmed the court of appeals. The court found the plain language of the consent-to-assign provision imposed no obligation on Carrizo because the agreement: (1) did not require consent when certain conditions were met, (2) did not require a reason for withholding consent, or (3) did not subject Carrizo to any particular standard for withholding consent. The court declined to read a qualifier into the unambiguous clause when the terms made clear that Carrizo had no obligation and its right to withhold consent was unrestricted.

In reaching its conclusion, the court excluded consideration of industry custom. The court stated, “. . . industry custom and usage, cannot be used to add, alter, or change the contract’s agreed-to terms.” Further, the court cautioned, the use of industry custom to alter the clear and easily understood term “express written consent” would allow juries to create ambiguities where none exist or alter the terms of a contract’s clear unequivocal language. The court expressed:

It is not the province of the jury to decide whether a contract is ambiguous or to interpret a bargained-for provision in an unambiguous contract, and the jury may not imply an obligation into an unambiguous contract. Nor is it our province to change the terms of the parties’ unambiguous agreement. We may neither rewrite the parties’ contract nor add to its language.

For certainty, the court went further to reject Barrow-Shaver’s implicit assertion of the existence of an implied duty of good faith and fair dealing. The court determined that adopting the covenant to apply to the farmout agreement would be contrary to Texas’s long-standing principle that parties are free to contract for their own duties and obligations. The court declined to read into the farmout agreement more stringent obligations than the parties intended.

Key Takeways

In sum, if a party’s right to consent is not qualified by the written language of the agreement, then the right is likely unrestricted, at least in the oil & gas industry. One thing is clear, to be assured that an agreement operates in accordance with industry customs, a party should express those customs in the written contract.  Going forward, buyers of oil and gas properties may want to give strong consideration to including unqualified consent to assignment provisions in the definition of “hard” consents in their purchase and sale agreements.

[1] The Supreme Court of Texas case is No. 17-0332 Barrow-Shaver Res. Co. v. Carrizo Oil & Gas Inc.