Introduction

In Barrow-Shaver Resources Company v. Carrizo Oil & Gas, Inc., 590 S.W.3d 471 (Tex. 2019), the Supreme Court of Texas addressed pivotal issues surrounding farmout agreements in the oil and gas industry. This case centered on whether a consent-to-assign provision within a farmout agreement unambiguously allowed the consent holder, Carrizo Oil & Gas, Inc., to withhold consent to an assignment of the agreement without any obligation to act reasonably or provide justification. The parties involved were Barrow-Shaver Resources Company (the Petitioner) and Carrizo Oil & Gas, Inc. (the Respondent).

Summary of the Judgment

The Supreme Court of Texas affirmed the decision of the Court of Appeals, holding that the consent-to-assign provision in the farmout agreement was unambiguous. The provision explicitly stated that Barrow-Shaver could not assign its rights without the express written consent of Carrizo. The court determined that there was no obligation for Carrizo to act reasonably or provide reasons when withholding consent. Consequently, Carrizo's refusal to consent to the assignment of the farmout agreement to Raptor Petroleum II, LLC., was upheld as not constituting a breach of contract or fraud.

Analysis

Precedents Cited

The Court referenced several key precedents to support its decision, notably emphasizing the importance of contract language clarity and the limitations of the parol evidence rule. Cases such as URI, Inc. v. Kleberg County, 543 S.W.3d 755 (Tex. 2018), and National Union Fire Insurance of Pittsburgh v. CBI Industries, Inc., 907 S.W.2d 517 (Tex. 1995), underscored the principle that unambiguous contract terms should be interpreted based on their express language, and extrinsic evidence like negotiations or industry customs should not override clear contractual provisions.

Legal Reasoning

The Court employed a de novo standard of review, assessing the consent-to-assign provision based solely on its plain language. It concluded that the provision granted Carrizo an unqualified right to refuse consent, with no implicit obligation to act reasonably or provide justification for withholding consent. The Court further held that evidence of industry custom and usage, as well as the parties' prior negotiations, was inadmissible under the parol evidence rule since the contract was deemed unambiguous.

Impact

This judgment reinforces the sanctity of contract language in the oil and gas sector, particularly concerning farmout agreements. By upholding an unqualified right to withhold consent, the decision provides greater predictability for consent holders in future agreements. However, it may also limit the assignee's ability to rely on industry customs that advocate for reasonableness in granting consent, potentially leading to more frequent disputes over unreasonably withheld consents.

Complex Concepts Simplified

Farmout Agreement

A farmout agreement is a contractual arrangement in the oil and gas industry where one party (the farmor) assigns some of its mineral rights to another party (the farmee) in exchange for the farmee performing certain obligations, usually drilling and operating wells. This enables the farmor to share the risks and costs associated with exploration and production.

Consent-to-Assign Provision

This is a clause within a contract that restricts the ability of one party to transfer its contractual rights or obligations to another party without obtaining consent from the consent holder. In this case, the provision required Barrow-Shaver to obtain Carrizo's express written consent before assigning the farmout agreement to a third party.

Industry Custom and Usage

These are established practices and norms within a particular industry that are so widely recognized and followed that they can be presumed to influence the interpretation of contracts within that industry. In this case, Barrow-Shaver argued that industry custom required consent holders not to withhold consent unreasonably.

Parol Evidence Rule

A legal doctrine that prevents parties in a contract dispute from presenting extrinsic evidence (like prior negotiations or industry customs) to contradict or modify the clear terms of a written contract. The Court applied this rule to exclude evidence of negotiations and industry customs that sought to impose a reasonableness standard on Carrizo's right to withhold consent.

Conclusion

The Texas Supreme Court's decision in Barrow-Shaver Resources Company v. Carrizo Oil & Gas, Inc. underscores the paramount importance of clear and unambiguous contract language in the oil and gas industry. By affirming that consent-to-assign provisions can grant unqualified rights to withhold consent, the Court emphasizes the need for parties to explicitly include any desired limitations or standards within their agreements. This ruling may lead to more meticulously drafted farmout agreements, ensuring that both parties clearly understand the extent of consent rights and obligations, thereby promoting certainty and reducing potential disputes in future transactions.