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James Niu discusses a significant Texas case that addresses the following question, can parol evidence be admitted in a contractual dispute over whether a consent to assign is absolute or qualified if the contract itself is silent on qualifiers to the consent to assign, even if the parties’ original intent was for the consent to assign to be qualified?

Barrow-Shaver Res. Co. v. Carrizo Oil & Gas, Inc. held that “express written consent” to assign under a farmout agreement allowed farmor an unqualified right to withhold consent.  Carrizo (“Farmor”) owned an oil and gas lease and entered into farmout negotiations with Barrow-Shaver (“Farmee”) to drill on the lease.  An initial draft of the agreement contained a consent-to-assign provision which stated Farmor’s consent to assign “shall not be unreasonably withheld.”  During revisions of the provision, Farmor’s representative represented, on more than one occasion, that Farmor would consent to assign if Farmee chose to assign its rights in the future.  The parties eventually agreed to a consent-to-assign provision which stated Farmee may not assign its rights “without the express written consent of [Farmor].”  The final agreement did not contain a qualifier on Farmor’s right to withhold consent.  Farmee later found a buyer, it agreed to sell for $27 million, and approached Farmor for its consent to assign.  Farmor offered its consent in return for $5,000,000.  Farmee refused to pay Farmor, lost the potential sale, and sued Farmor for breach of contract and fraud.

At trial, Farmor contended that evidence of its prior negotiations with Farmee should be admissible and that the contract was unambiguous.  The trial court held that the prior negotiations were inadmissible, admitted expert testimony as to custom and practice in the industry, and submitted the case to a jury.  The jury reached a verdict in favor of Farmee.  Farmee was awarded more than $27 million in damages, in addition to prejudgment interest and attorneys’ fees.  The court of appeals reversed, holding that the trial court abused its discretion by refusing to admit evidence of prior negotiations, that the breach of contract issue should not have been submitted to the jury, and that no evidence supported the justifiable reliance element of Farmee’s fraud claim.  The Texas Supreme Court held that, as a matter of law, Farmee could not prevail on its breach of contract claim or its fraud claim.

Farmee’s breach of contract claim hinged on whether the Court agreed an implied qualifier should be read into the consent-to-assign provision.  Here, there was no express qualifier on “consent.” Farmee argued that because the final agreement was silent as to the type of consent Farmor could exercise, such silence should be interpreted as including a qualifier.  In analyzing the argument, the Court stated that silence as to a material term differed from silence as to a nonmaterial term. Unlike a material term, “a term that is immaterial or non-essential may not be supplemented or given further precision.”  The Court then held that since the primary purpose of the farmout is drilling in exchange for a transfer of an interest, the consent-to-assign provision was not “material and essential” to the agreement, and a qualifier cannot be read into the provision.

The Court next addressed the trial court’s use of extrinsic evidence, including evidence of prior negotiations and testimony as to industry custom.  “The parol evidence rule bars consideration of evidence that contradicts, varies, or adds to the terms of an unambiguous written agreement.”  “Industry custom and usage may inform the meaning of words that may carry their plain meaning in some contexts but may carry a special meaning in the context of a particular industry.”  However, in this case, the Court declined to allow extrinsic evidence, reasoning that “express written consent” was so clear and unambiguous that introducing parol evidence would be unnecessary and could possibly allow the jury an opportunity to create ambiguity where none exists.

Farmee additionally argued that industry custom supports an implied duty that Farmor not withhold consent unreasonably.  The Court refused to impose an implied duty in this case.  The duty of good faith and fair dealing only applies to a specific obligation.  Here, no such obligation on the part of Farmor existed.  Additionally, imposing a duty on Farmor contradicts long-standing principles of contract law that the parties are free to contract for their own duties.

Finally, the Court considered whether Farmor committed fraud by withholding consent after orally promising Farmee that it would not unreasonably withhold consent. One of the elements of fraud is justifiable reliance.  To establish fraud, in addition to the other elements, a plaintiff must show that it justifiably relied on the representation which caused the plaintiff injury.  Here, the Court stated that “reliance upon an oral representation that is directly contradicted by the express, unambiguous terms of a written agreement between the parties is not justified as a matter of law.”  As such, Farmee did not reasonably rely on Farmor’s promises because they directly contradicted the consent-to-assign provision.

The significance of the case is the holding that “consent” in a consent-to-assign provision is unambiguous and may only be qualified expressly in an agreement.  Parties should be cautious not to rely on earlier drafts of a consent-to-assign provision, oral representations, or industry custom in interpreting an otherwise unambiguous consent-to-assign provision.


Author

James H. Niu

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