Barrow-Shaver Resources Co. v. Carrizo Oil & Gas, Inc.
Last Friday, the Supreme Court of Texas delivered a reminder that when drafting contracts, you should say what you mean and mean what you say. The Court also reaffirmed that reliance on oral representations directly contrary to the terms of a written agreement between sophisticated parties is not justifiable.
The case considered a farmout contract between Barrow-Shaver Resources Company and Carrizo Oil & Gas for Barrow-Shaver to build a well on a lease held by Carrizo in exchange for an interest in the mineral rights. The contract contained a consent-to-assign provision prohibiting Barrow-Shaver from assigning its rights under the agreement “without the express written consent of Carrizo.” During negotiations, Barrow-Shaver reportedly raised concerns about the consent-to-assign provision and sought to add language that would prohibit Carrizo from withholding consent unreasonably. But Barrow-Shaver relented when Carrizo’s representative in the negotiations allegedly offered assurances that Carrizo would work cooperatively with Barrow-Shaver in the event assignment became an issue.
Assignment did become an issue, and when Barrow-Shaver approached Carrizo about assigning its rights to another company, Carrizo refused and instead offered to allow Barrow-Shaver to buy its rights to the lease for $5 million, thereby removing the need to have its consent. Barrow-Shaver sued, claiming fraud, breach of contract, and tortious interference, and ultimately obtained a $26-million-dollar jury verdict. The Court of Appeals relied on evidence of contract negotiations excluded by the trial court to conclude that Carrizo was within its rights to withhold consent as a matter of law, because the consent-to-assign provision was unambiguous. The court also rejected Barrow-Shaver’s fraud claim on the basis that oral promises could not justifiably be relied upon when the parties had a written agreement. A divided Texas Supreme Court affirmed that result.
Considering the breach-of-contract claim first, the Supreme Court read the term “consent” as it is traditionally defined, to mean simply “approval.” It rejected Barrow-Shaver’s argument that Carrizo’s right to withhold that approval or consent was somehow qualified or constrained.
The Court then distinguished between material terms to a contract, which might be supplemented or made more precise to ensure enforceability, and immaterial terms, which may not. The Court found all material terms in both the farmout agreement and the consent-to-assign provision were present and sufficiently definite to determine the parties’ rights and obligations. With respect to the consent-to-assign provision specifically, the Court viewed the obligations of each party as clear: “Barrow-Shaver has the right to assign its rights under the farmout agreement, but Barrow-Shaver must first satisfy its obligation to obtain Carrizo’s express and written consent; Carrizo has no obligation.” In the Court’s view, terms related to withholding consent did not require supplementation.
Both parties also sought to have extrinsic evidence considered alongside the language of the contract. Carrizo urged consideration of the prior drafts, which showed that a limitation on Carrizo’s ability to withhold consent had been considered and rejected. Barrow-Shaver proffered expert testimony on industry usage and custom, which it argued could explain the contract’s silence regarding circumstances in which consent could and could not be withheld. Citing the parol evidence rule, the Court declined to consider the earlier drafts of the contract because it found the agreement was unambiguous. The Court also declined to consider the expert testimony regarding industry usage because ‘“express written consent’ within a contract is clear, is not susceptible to more than one meaning, and is not industry or vocation specific.” It further explained that allowing a jury to consider such testimony would invite the creation of ambiguity where none exists.
Because the Court ultimately concluded the consent-to-assign provision “unambiguously allowed Carrizo to refuse its consent for any reason,” Carrizo’s refusal to consent to the assignment could not constitute a breach of contract as a matter of law.
Rejecting Barrow-Shaver’s fraud claim, the Court found Barrow-Shaver was not justified in relying on the oral statements of Carrizo’s contract negotiator. The Court cited long-standing principles requiring that a party take reasonable diligence in protecting his affairs and interests, as well as precedent holding that reliance on oral promises that are directly contradicted by an unambiguous written agreement is not reasonable as a matter of law. The Court viewed Carrizo’s agent’s promises that Carrizo would provide consent to be directly contradicted by the plain language of the consent-to-assign provision, such that Barrow-Shaver could not have reasonably relied upon them.
Justice Guzman, writing for himself, Justice Hecht, and Justice Busby, dissented from the court’s holding on the breach of contract claim and argued forcefully that use of trade usage and custom evidence considered by the jury was appropriate and that the majority was wrong to reject it and the conclusions the jury reached from hearing it. The three Justices would have reached the same outcome on the fraud claim, but for different reasons. Justice Boyd dissented to argue for the inclusion of both custom and usage evidence and evidence of the contract negotiations and would have remanded for a new trial including both types of evidence.
While this case arose in an oil and gas context, the Supreme Court’s opinion underscores the importance of insuring that any agreement reflects the actual intent of the parties. As Barrow-Shaver found out the hard way, often if it isn’t in the written contract, it isn’t part of the deal.