AUSTIN – After drilling $22 million worth of dry holes on leased acreage in North Texas’s Caddo Arch Bend in 2011, Barrow-Shaver Resources Co. jumped at an offer to assign its development rights for $27.7 million.
The proposed deal required consent from 32 affected parties and 31 quickly signed off. The holdout, Carrizo Oil & Gas, demanded $5 million for the lease before it would give consent. Barrow-Shaver refused and Raptor Petroleum withdrew its offer.
Barrow-Shaver sued Carrizo and won an award of $27.7 million from a Smith County Jury for contract breach. The trial featured testimony from an industry expert that the clause implied consent could only be withheld on a reasonable basis such as concerns about a company’s finances or technical expertise.
In 2017 the Seventh Court of Appeals in Amarillo threw out the award, finding that the contract was not ambiguous and that a clause requiring Carrizo to act reasonably was deleted during contract negotiations.
One member of the court of appeals panel dissented in part to the ruling. He supported remanding the case for a new trial because the trial court erred in excluding evidence of the parties’ prior drafts and negotiations.
Last month, the Texas Supreme Court heard arguments in the case, which has attracted numerous amicus letters from royalty owners and energy developers offering far different views of industry use and tradition regarding consent to assign clauses in so-called “farm out” agreements where a third party contracts to develop the oil and gas.
Scott Brister, a former justice on the high court, presented Barrow-Shaver’s case for reinstating the jury verdict.
“Carrizo Oil and Gas blew up the deal by saying we will consent only if you pay us $5 million. Every industry witness who testified in trial – ours, theirs, third party – nobody in the industry had ever heard of this being done before,” said Brister, a partner at Hunton Andrews Kurth.
“Is there a public policy ground to justify applying a reasonableness standard that the parties did not agree on in an arms-length transaction?” asked Justice Jeffrey Boyd.
“To encourage the development of minerals,” responded Brister. He said a ruling against his client would result in less drilling, as a party with the smallest interest could “turn a pittance into a payday.”
Brister said the court of appeals should not have considered the “text in the trash” when interpreting the consent language.
“It gives everybody the incentive to insert what the other side wants, then delete it and your intent controls,” said Brister. “That’s not a good rule for property deeds.”
Marcy Hogan Greer presented Carrizo’s case, arguing that the words in a contract matter. She said Barrow-Shaver understood the significance of having a requirement that Carrizo’s consent shall not be unreasonably withheld because it tried unsuccessfully to keep that language in the agreement.
“Contract interpretation starts and ends where the parties had a meeting of the minds,” said Greer, an attorney with Alexander Dubose Jefferson & Townsend.
Chief Justice Nathan Hecht, noting that reasonableness is sometimes implied in a contract, asked why it should not be in the current case. “Someone searching deed records is not going to know if this was a negotiated provision,” he said.
Greer pointed to an amicus letter from two University of Texas law professors who disputed the trial testimony of Barrow-Shaver’s expert, retired Texas Tech University law professor Bruce Kramer.
“To us, implying a reasonableness standard to a consent-to-transfer provision is tantamount to implying a duty of good faith and fair dealing,” Ernest E. Smith and Owen L. Anderson wrote in opposition to the Barrow-Shaver position. “In our 90-plus years of teaching and consulting, we have specifically taught our students and we believe that parties must explicitly include a reasonableness standard in a consent-to-assign provision governed by Texas law.”
Greer disputed that Carrizo tried to sell its consent. She said Chip Johnson, the company’s president and CEO, had concerns about Raptor’s drilling experience and came up with an “elegant solution.”
“This was not an outrageous extortion demand. If Raptor damaged the land, Carrizo would have been liable,” said Greer.
Amicus parties siding with Carrizo that consent clauses do not carry an implied standard of reasonableness include the National Association of Royalty Owners, Texas Land and Mineral Owners Association and Black Stone Minerals, the largest non-governmental mineral fee and royalty owner in the United States.
“A consent to assignment provision that omits the ‘which consent shall not be unreasonably withheld’ language, as in the case here, is common in Texas oil and gas leases. It is widely known in the industry that these provisions allow the lessor to withhold consent for any reason, whether or not it is reasonable,” said Black Stone’s brief, filed by Lauren Beck Harris of Porter Hedges.
Others, including Robert B. Rowling, said oil and gas exploration companies that put their money on the line to develop Texas oil and gas resources need some standard to avoid situations like the one experienced by Barrow-Shaver.
“What Carrizo did in this case is unheard of, and based on my 40 years of experience in the oil and gas business, nobody in the industry thinks a consent clause allows the holder to use it in order to extract a blackmail payment for themselves,” said Rowling, a Dallas billionaire and former UT regent.
Watch the arguments in Barrow-Shaver Resources v. Carrizo Oil & Gas here.