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

• Citation: 590 S.W.3d 471
• Decision Date: 28 June 2019
• Docket Number: No. 17-0332,17-0332
• Parties: BARROW-SHAVER RESOURCES COMPANY, Petitioner, v. CARRIZO OIL & GAS, INC., Respondent
• Court: Texas Supreme Court

590 S.W.3d 471

BARROW-SHAVER RESOURCES COMPANY, Petitioner,

v.CARRIZO OIL & GAS, INC., Respondent

No. 17-0332

Supreme Court of Texas.

Argued December 4, 2018

OPINION DELIVERED: June 28, 2019

Rehearing Denied January 17, 2020

Scott A. Brister, Hunton Andrews Kurth LLP, Austin, Collin Michael Maloney, Otis W. Carroll Jr., Carroll Maloney Henry & Nelson, PLLC, Deborah Johnson Race, Deborah Race, Attorney at Law, Tyler, David M. Gunn, Erin H. Huber, Beck Redden LLP, Houston, R. Clay Hoblit, Roberta S. Dohse, Hoblit Darling Ralls Hernandez & Hudlow LLP, Corpus Christi, for Petitioner.

Marcy H. Greer, Wallace B. Jefferson, Alexander Dubose Jefferson & Townsend LLP, Austin, Charles H. Clark, Law Offices of Charles H. Clark, Tyler, John M. Zukowski, Pascal Paul Piazza, Zukowski, Bresenhan & Piazza, L.L.P., Houston, for Respondent.

Paul W. Green, Justice

In this case, we must determine whether the court of appeals erred in: (1) holding that the plaintiff could not prevail on its breach of contract claim as a matter of law because the contract's consent-to-assignment provision unambiguously gave the defendant an unqualified right to refuse to consent; and (2) holding that the plaintiff cannot prevail on its fraud claim as a matter of law because it could not justifiably rely on an oral promise to do something that was addressed in the written contract. We hold that: (1) the plain language of the contract unambiguously entitled the defendant to withhold its consent to a proposed assignment, and therefore the defendant could not have breached the contract as a matter of law; and (2) the plaintiff could not justifiably rely on an oral statement where the written terms of the contract controlled. Accordingly, we affirm the judgment of the court of appeals.

I. Background

Barrow-Shaver Resources Co., formed in 1989, is an oil and gas exploration and drilling company. Scott Shaver, a co-owner of Barrow-Shaver, has been involved in developing, buying, and selling oil and gas prospects for thirty years. Barrow-Shaver operates approximately a hundred oil and gas wells and often sells its oil and gas interests to third parties. Chip Johnson founded Carrizo Oil & Gas, Inc. in 1993 as its president and chief executive officer. Carrizo became a publicly traded oil and gas company in 1997 and now has 248 employees.

Barrow-Shaver was prospecting in four counties in North-central Texas to put together one large drilling prospect. Carrizo had an interest as a lessee in the 22,000-acre Parkey lease, which was set to expire on April 23, 2011, if a producing well was not established in accordance with the lease agreement. Carrizo entered into a farmout agreement with Barrow-Shaver, in which Barrow-Shaver would earn a partial assignment of Carrizo's interest in the Parkey lease in exchange for its services in drilling a producing well. To memorialize this farmout, Carrizo and Barrow-Shaver executed a letter agreement in March 2011. Stewart Laufer, Carrizo's Southern United States Land Manager, and Harold Bertram, Barrow-Shaver's Vice President of Land and Marketing, negotiated the farmout. Both representatives had extensive experience in the oil and gas industry—Laufer had twenty-five years of experience, while Bertram had thirty-three. As negotiations ensued, the parties focused on the consent-to-assign provision, addressing Barrow-Shaver's ability to assign its rights in the future. Bertram submitted the first proposal for the letter agreement, which did not address consent to assign. Laufer then sent a revised draft containing a consent-to-assign provision that provided:

The rights provided to [Barrow-Shaver] 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.

Laufer later revised the draft, deleting the "shall not be unreasonably withheld" language. Barrow-Shaver fervently objected to the deletion of this language, insisting that Barrow-Shaver now wanted a consent-to-assign provision providing that Carrizo could not unreasonably withhold its consent. But Laufer assured Barrow-Shaver, on more than one occasion, that Carrizo would provide its consent to assign. Bertram specifically recalled three instances in which Laufer represented to him that Carrizo would give Barrow-Shaver consent to assign if Barrow-Shaver chose to assign its rights in the future. In executing the farmout, the parties ultimately agreed to a consent-to-assign provision stating:

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

After entering into the farmout, Carrizo's interest in the 22,000 acres was an overriding royalty interest and a future interest (a possibility of reverter) in the tract if Barrow-Shaver failed to drill a producing well in accordance with the farmout. If Barrow-Shaver's interest reverted back to Carrizo, it would require Carrizo to drill a well according to the terms of the Parkey lease or extend the lease; otherwise, its interest in the Parkey lease would terminate. Shortly after entering into the farmout, and before the Parkey lease expired, Barrow-Shaver drilled a well. Barrow-Shaver spent $22 million drilling the well yet had unsuccessful results.

Raptor Petroleum II, LLC approached Barrow-Shaver about assignment of the farmout and offered approximately $27 million for Barrow-Shaver to assign its rights. Carrizo would retain its interest provided for in the farmout under this proposed assignment. To assign its rights under the farmout, Barrow-Shaver would have to obtain Carrizo's consent, as well as the consent of other interest holders. All parties consented, except Carrizo. Instead, Carrizo proposed selling its interest in the Parkey lease to Barrow-Shaver for $5 million. Barrow-Shaver did not respond to that offer, in effect rejecting it. Carrizo ultimately refused to consent to Barrow-Shaver's proposed assignment to Raptor. As a result, Raptor's offer to purchase an assignment of the farmout from Barrow-Shaver fell through.

Barrow-Shaver sued Carrizo for breach of contract, fraud, and tortious interference with contract.¹ Carrizo asserted at trial that the farmout letter agreement is clear and unambiguous. In fact, both parties agreed that the consent-to-assign provision is unambiguous. Carrizo also argued that the prior drafts of the agreement should be admitted to inform the jury of the surrounding circumstances of the consent-to-assign provision. The trial court did not allow the jury to hear evidence of Barrow-Shaver's and Carrizo's negotiations of the farmout agreement. However, the jury did hear that there were prior drafts of the agreement that had different consent provisions. The court instructed the jury: "[T]he court and only the court may interpret the farmout agreement. Any evidence of prior drafts or versions of the farmout may not be used by you as to what the farmout means. These may be used only to impeach the believability of a witness that testifies in regards to those."²

Barrow-Shaver asserted that although the consent-to-assign provision was unambiguous, it was silent as to the basis on which Carrizo could withhold its consent. Barrow-Shaver, therefore, argued that the jury must hear evidence of industry custom and usage to determine whether Carrizo breached the contract. Carrizo disagreed, contending that the consent-to-assign provision is not silent, rather it clearly imposes a hard consent obligation on Barrow-Shaver such that Carrizo could withhold its consent for any reason. The trial court allowed testimony as to industry custom and usage in relation to the breach of contract claim. Professor Bruce Kramer provided expert testimony as to industry custom and usage on behalf of Barrow-Shaver, and K. Ray Campbell provided the expert testimony for Carrizo. Professor Kramer told the jury that although the farmout agreement was unambiguous, industry custom played a role in understanding the circumstances under which Carrizo could have withheld its consent under the consent-to-assign provision. Kramer stated that, in his opinion, charging for consent to assign is inconsistent with the custom and usage of the industry—opining that refusing consent based on something which is outside the industry custom and usage constituted a breach of the farmout agreement. Campbell testified that, in his opinion, it is not industry custom for a consent-to-assign provision in a farmout agreement to set out the conditions for when a party may or may not consent. In fact, Campbell stated that the consent-to-assign provision at issue is the most common found in farmout agreements, and it affords the farmor discretion to provide or withhold consent under any circumstances.

The trial court, finding the farmout agreement unambiguous, interpreted the agreement as a matter of law. According to the jury charge, the trial court found the farmout agreement silent as to the reasons under which Carrizo could refuse consent to Barrow-Shaver's assignment of the farmout. Therefore, the trial court submitted the breach of contract question to the jury, explaining that it may consider evidence of industry custom in deciding whether Carrizo breached the agreement.³ The jury reached a unanimous verdict in favor of Barrow-Shaver on all three of its claims, awarding $27,690,466.86 in total damages, in addition to pre-judgment interest and attorneys' fees.

The court of appeals reversed the trial court's judgment. 516 S.W.3d 89, 92 (Tex. App.—Tyler 2017, pet. granted). In addressing the breach of contract issue, the court of appeals agreed with Carrizo that the evidence of the prior drafts of the farmout agreement and the parties' negotiations conclusively established that Carrizo could withhold its consent to assign for any reason or no reason—that is, that the purposeful deletion...