Carrizo Oil & Gas, Inc. v. Barrow-Shaver Res. Co.

• Citation: 516 S.W.3d 89
• Decision Date: 31 January 2017
• Docket Number: NO. 12–15–00083–CV,12–15–00083–CV
• Parties: CARRIZO OIL & GAS, INC., Appellant v. BARROW–SHAVER RESOURCES COMPANY, Appellee
• Court: Court of Appeals of Texas

516 S.W.3d 89

CARRIZO OIL & GAS, INC., Appellant

v.BARROW–SHAVER RESOURCES COMPANY, Appellee

NO. 12–15–00083–CV

Court of Appeals of Texas, Tyler.

Opinion delivered January 31, 2017.

Rehearing overruled March 23, 2017

David M. Gunn, Collin M. Maloney, Scott A. Brister, Otis Carroll, Deborah J. Race, Robin C. Hoblit, for Barrow–Shaver Resources Company.

Charles H. Clark, Pascal Paul Piazza, John M. Zukowski, Marcy H. Greer, for Carrizo Oil & Gas, Inc.

Panel consisted of Worthen, C.J. and Neeley, J.

OPINION

James T. Worthen, Chief Justice

Barrow–Shaver Resources Company (BSR) sued Carrizo Oil & Gas, Inc. (COG) for breach of a consent-to-assignment provision in a farmout agreement. Following a jury trial, judgment was rendered against COG for $27,690,466.86 plus prejudgment interest and attorney's fees. In thirteen issues, COG contends the trial court erred. We reverse the trial court's judgment and render judgment that BSR take nothing.

BACKGROUND

BSR, founded in 1989, operates more than one hundred oil and gas wells. Its business model is to find oil and gas prospects, drill them, and then sell the project when it becomes too big.

COG, founded in 1993, is a publicly traded oil and gas production company valued at 2.4 billion dollars and traded on the NASDAQ. It has approximately 250 employees in operations throughout the United States.

COG owned the Parkey Lease, which was set to expire April 24, 2011. It had drilled three dry holes on the lease, but had no plans for any further drilling operations to extend the lease. In February 2011, COG made contact with BSR at a trade show, suggesting that BSR take a farmout in order to drill on the lease. Negotiations ensued between Stewart Laufer, COG's southern United States land manager, and Hal Bertram, BSR's vice-president of land and marketing. Both men were highly experienced in the oil and gas field. Laufer had twenty-five years of experience while Bertram had thirty-three years of experience.

After initial discussions, Bertram sent a draft of their agreement to Laufer, one and a half pages in length, that contained no consent-to-assignment provision. Laufer countered with a three page draft agreement which included the following consent-to-assignment provision:

The rights provided to BSR 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.

Bertram followed with a third draft containing the exact same consent-to-assignment provision as in Laufer's counter-proposal. Laufer responded to Bertram with a fourth draft in which the "shall not be unreasonably withheld" language in the consent-to-assignment provision was deleted. Scott Shaver, BSR's managing partner, joined Bertram in vehemently objecting to Laufer for this change in the consent-to-assignment provision.

Laufer told Bertram that COG's legal department in Houston insisted that the reasonableness language be deleted from the consent-to-assignment provision of the farmout agreement. However, Bertram testified at the jury trial that on three separate occasions before the agreement was signed, both over the telephone and face to face, Laufer assured him that COG would give BSR consent to assign the farmout. BSR signed the farmout agreement on March 30, 2012 with the following consent-to-assignment provision:

The rights provided to BSR under this Letter Agreement may not be assigned, subleased or otherwise transferred in whole or in part, without the express written consent of Carrizo.

BSR immediately drilled on the lease before April 24, 2011, and thus allowed COG to keep the lease alive. Over the next year, BSR spent $22,000,000.00 drilling wells on the lease, but with no tangible results. Chip Johnson, president and chief executive officer of COG, testified during the jury trial that his company was pleased with BSR's performance under the farmout.

Raptor Petroleum II, LLC, approached BSR about an assignment and, after negotiations, Raptor agreed to pay BSR $27,690,466.86 for an assignment of its farmout with COG. On May 7, 2012, BSR contacted COG for its consent to the assignment of the farmout to Raptor. COG eventually demanded BSR pay $5,000,000.00 for the lease before it would give its consent for the assignment from BSR to Raptor. BSR declined to pay COG $5,000,000.00. Without COG's consent to the assignment of the farmout, Raptor withdrew its offer to BSR.

BSR filed suit against COG for breach of contract, fraud, and tortious interference with a contract. During the jury trial, BSR contended any consent-to-assignment provision in the farmout was silent as to the type of consent COG was required to give. COG asserted that the negotiations and previous drafts informed the trial court that the reasonableness clause for the type of consent it would give had been removed and therefore it could withhold consent for any reason or for no reason. COG further contended that the farmout agreement was unambiguous and that the trial court could construe it as a matter of law without resort to a jury acting as a fact finder on what the consent-to-assignment provision meant.

The trial court sided with BSR and, based on the parol evidence rule, did not allow evidence of the parties' negotiations or the four drafts of the farmout agreement to be admitted. The trial court allowed BSR's expert, Professor Bruce Kramer, to testify that the custom in the industry was that consent could not be withheld absent a reasonable concern about the potential assignee's capabilities. COG filed a motion for a directed verdict, following the close of testimony in the trial, asserting that the farmout established as a matter of law that COG could withhold its consent for BSR to assign the farmout agreement to Raptor for any reason, or for no reason. The trial court denied COG's motion and submitted issues to the jury on breach of contract, fraud, and tortious interference with contract. The jury found COG liable on each of those theories. The trial court rendered a judgment based on the jury verdict against COG on BSR's breach of contract claim, awarding BSR $27,690,466.86 plus prejudgment interest and attorney's fees. COG timely appealed.

BREACH OF CONTRACT

In its first issue, COG contends the trial court erred in failing to construe, as a matter of law, the consent-to-assignment provision to mean that it had an unqualified right to refuse consent for BSR to assign the farmout to Raptor. The trial court erred, the argument continues, by submitting the contract claim to the jury, and there is no evidence supporting the jury's finding of breach. In its third issue, COG argues that the trial court erred when it excluded evidence of the parties' negotiations showing the deletion of the phrase "which consent shall not unreasonably be withheld." It asserts that the parol evidence rule permits evidence of the facts and circumstances regarding a contract's negotiation to demonstrate the parties' intent, and the excluded evidence demonstrates an intent not to impose any conditions on COG's right to withhold written consent.

Standard of Review

When a party is attacking the legal sufficiency of the evidence supporting a finding on an issue for which it did not have the burden of proof, it must show that no evidence supports the finding. Exxon Corp. v. Emerald Oil & Gas Co. , 348 S.W.3d 194, 215 (Tex. 2011). We may sustain a no evidence challenge only when 1) the record discloses a complete absence of evidence of a vital fact; 2) the court is barred by rules of law or of evidence from giving weight to the only evidence offered to prove a vital fact; 3) the evidence offered to prove a vital fact is no more than a mere scintilla; or 4) the evidence establishes conclusively the opposite of a vital fact. Uniroyal Goodrich Tire Co. v. Martinez , 977 S.W.2d 328, 334 (Tex. 1998). Evidence is legally sufficient if it would enable reasonable and fair-minded people to reach the verdict under review. Exxon Corp. , 348 S.W.3d at 215. We credit favorable evidence if reasonable jurors could, and disregard contrary evidence unless reasonable jurors could not. Id.

We review the trial court's rulings on admissibility of evidence under an abuse of discretion standard.

Brookshire Bros., Ltd. v. Aldridge , 438 S.W.3d 9, 27 (Tex. 2014). We review de novo parol evidence rulings. Dyer v. Cotton , 333 S.W.3d 703, 718 (Tex. App.–Houston [1st Dist.] 2010, no pet.). The construction of an unambiguous contract is a question of law for the court, which we may consider under a de novo standard of review. Tawes v. Barnes , 340 S.W.3d 419, 425 (Tex. 2011).

Applicable Law

A trial court errs when it does not construe an unambiguous provision as a matter of law, and instead, submits the issue to a fact finder. Grohman v. Kahlig , 318 S.W.3d 882, 887 (Tex. 2010) (per curiam); Transcon. Gas Pipeline Corp. v. Texaco, Inc. , 35 S.W.3d 658, 665 (Tex. App.–Houston [1st Dist.] 2000, pet. denied). The error is harmless if the jury answers the question as the trial court should have answered it. Grohman , 318 S.W.3d at 887. However, extraneous prejudice exists when the answer given by the jury is incorrect as a matter of law. Hicks v. Pilgrim Poultry, G.P. , 299 S.W.3d 249, 258 (Tex. App.–Texarkana 2009, no pet.). Whether the jury answered the question as the trial court would have been required to answer it effectively requires a review of the jury's answer under a no evidence standard. Id. at 259.

Texas's strong public policy favoring freedom of contract is firmly embedded in our jurisdiction. Philadelphia Indem. Ins. Co. v. White , 490 S.W.3d 468, 471 (Tex. 2016). Absent compelling reasons, courts must respect and enforce the terms of a contract the parties have freely and voluntarily entered. Id. As a rule, parties have the right to contract as they see fit as long as their agreement does not violate the law or public policy. Coyote Lake Ranch, LLC v. City of...