Last month, the Texas Supreme Court handed down a contract interpretation opinion involving consents to assign in the case of Barrow-Shaver Res. Co. v. Carrizo Oil & Gas, Inc., 17-0332, 2019 WL 2668317 (Tex. June 28, 2019). Barrow-Shaver Resources claimed Carrizo Oil & Gas breached the terms of a 22,000-acre farmout agreement by failing to consent to Barrow’s proposed sale.
During negotiations on the agreement, Barrow proposed the following consent-to-assign provision: “The rights provided to [Barrow] 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.” Carrizo struck the “shall not be reasonably withheld” language and the parties agreed to keep the language out, although Barrow claims Carrizo orally agreed to consent to assignments. When a third party approached Barrow, offering $27 million to purchase its rights under the farmout, Barrow asked Carrizo for its consent, which Carrizo denied. Barrow’s sale fell through and Barrow sued Carrizo for breach of contract, fraud, and tortious interference.
Both parties agreed that the consent-to-assign provision was unambiguous. However, at trial, Carrizo asked that the court admit evidence of the prior drafts of the agreement to inform the jury of the surrounding circumstances of the consent-to-assign provision. The trial court denied that request, but allowed the jury to hear that there were prior drafts of the farmout with different consent provisions. The Court allowed Barrow to admit testimony regarding industry custom and usage to argue industry practice would not allow Carrizo to unreasonably or arbitrarily withhold its consent. The jury ultimately found in favor of Barrow on its claims, awarding tens of millions in damages. On appeal, the court of appeals reversed the trial court’s judgment, reasoning that the prior drafts of the farmout and the parties’ negotiations conclusively established that Carrizo could withhold its consent to assign for any reason.
The Texas Supreme Court, in a 5-4 decision, ultimately determined that the consent-to-assign provision permitted Carrizo to withhold its consent for any reason or even no reason. However, in so holding, the Court found it was inappropriate to consider the parties’ negotiation or prior drafts of the provision as the final provision was unambiguous and such evidence violated the parol evidence rule.
In its analysis, the Court determined that the parol evidence rule barred consideration of evidence of the parties’ substantive negotiations of the consent-to-assign provision because these negotiations related to the creation of the parties’ unambiguous agreement. Thus, the jury should not have been permitted to consider the parties’ negotiations to determine what the parties probably meant or could have meant as such an interpretation was different from the plain language of the agreement. Further, finding that the term “consent” is not industry-specific, the Court determined that it would be inappropriate to consider evidence of industry custom and usage as this 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 dissent would have considered industry custom evidence, which imposes a duty of reasonableness in consenting to assignments.
Ultimately, this decision reinforces the Texas Supreme Court’s recent emphasis in interpreting contracts based on the intent of the parties as expressed in the plain language of the agreement.
Thompson & Knight, LLP
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