In the context of farmout agreements, consent-to-assign provisions do not impose an implicit obligation on the consent holder to have a reasonable basis for exercising its rights, and a party may not rely on prior oral statements that directly contradict the unambiguous terms of the agreement to support a fraud claim.
In Barrow-Shaver Resources Company v. Carrizo Oil & Gas, Inc.,1 Barrow-Shaver Resources Company (BSR) and Carrizo Oil & Gas, Inc. (Carrizo) entered into a farmout agreement (the Farmout). BSR prepared the initial draft of the Farmout, which did not address BSR’s ability to assign its rights in the future. Thereafter, Carrizo submitted a revised draft that contained a consent-to-assign clause providing that the rights of BSR under the Farmout could not be assigned without Carrizo’s express written consent, “which consent shall not be unreasonably withheld.” In a subsequent draft, Carrizo deleted the “which consent shall not be unreasonably withheld” language. Though BSR insisted on reinserting the language, the parties ultimately executed the Farmout without doing so.2 During the course of negotiations, however, Carrizo assured BSR that Carrizo would consent if BSR chose to assign its rights in the future. Sometime after execution of the Farmout, Raptor Petroleum II, LLC (Raptor) approached BSR about receiving an assignment of BSR’s rights under the Farmout in exchange for $27 million. Initially, Carrizo declined to grant its consent but later offered to consent on the condition that BSR pay Carrizo $5 million, which BSR refused. Ultimately, Carrizo refused to consent to the proposed assignment, and Raptor’s offer fell through. BSR subsequently sued Carrizo for breach of contract and fraud.3
The essence of BSR’s breach of contract claim was that, notwithstanding the Farmout’s silence as to refusal or withholding of consent, the consent-to-assign provision should nevertheless be interpreted to qualify, through an implied reasonableness standard, Carrizo’s right to withhold consent to an assignment. The court focused on whether the Farmout addressed, to a reasonable degree of certainty and definiteness, the terms that were essential and material to the agreement sufficient to understand the parties’ obligations. If so, the Farmout was enforceable, and extrinsic evidence, such as industry custom or usage or negotiations history, could not be introduced to supplement the agreement’s terms.4 The court explained that “[b]ecause only material and essential terms need be sufficiently definite and certain,” and because the court “refrain[s] from rewriting or adding to parties’ contracts, it follows that a term that is immaterial or non-essential may not be supplemented or given further precision.”5 The court considered the primary purpose of the Farmout – BSR’s obligation to drill on the land to complete the transfer of an interest. Finding those terms to be sufficiently definite and certain,6 the court concluded that the consent-to-assign provision was not a material or essential term, as the Farmout could be enforced without that provision. Thus, the court disallowed extrinsic evidence to supplement or clarify the Farmout and rejected BSR’s view that Carrizo had an implied obligation to not unreasonably withhold its consent.7 The court similarly rejected BSR’s argument that Carrizo had an implied duty of good faith and fair dealing, reasoning that “[a] farmout agreement does not create inherently unequal bargaining power or give one of the parties an opportunity to take advantage of the other, especially when both parties are highly sophisticated oil and gas entities.”8 Accordingly, the Farmout’s plain language unambiguously entitled Carrizo to withhold its consent for any reason, and Carrizo did not breach the Farmout by doing so.
As to the fraud claim, BSR argued that it signed the Farmout without the qualifying “cannot be unreasonably withheld” language based on Carrizo’s oral assurance that it would consent. The court focused on whether BSR satisfied the “justifiable reliance” element necessary to establish fraud – BSR must have shown that it actually relied on Carrizo’s oral representation that it would consent to a proposed assignment, and that such reliance was justifiable. The court looked to the meaning and effect of the consent-to-assign provision and found that BSR could not have justifiably relied upon Carrizo’s oral representations because those representations were in direct conflict with the unambiguous language of the consent-to-assign provision. Moreover, the court pointed out several “red flags” negating BSR’s justifiable reliance, including the fact that the BSR representative who negotiated the Farmout had 33 years of industry experience, yet chose to “rely blindly on Carrizo’s representations when the contract provision clearly entitled Carrizo to withhold its consent.”9 Because BSR could not justifiably rely on Carrizo’s misrepresentation concerning an unambiguous provision, the court rejected BSR’s fraud claim.
Though consent-to-assign provisions are conceptually straightforward, Barrow-Shaver Resources demonstrates the significant value ascribed to a party’s ability to assign its rights. Oil and gas industry practitioners would be wise to ensure that their agreements accurately reflect the parties’ understanding concerning these rights. For example, the consent clause can be drafted to include “which consent shall not be unreasonably withheld, conditioned or delayed”, similar to the clause BSR originally wanted in the Farmout, or alternatively, “which consent may be granted or not, at [Carrizo’s] sole discretion”. If not documented properly, the party subject to the consent right may find itself unable to monetize an asset.