In a recent Texas case, two sophisticated parties in the oil and gas business — let’s call them Alpha and Bravo — were negotiating a contract.
- Alpha’s first draft provided that Bravo could not assign the contract without Alpha’s consent, which Alpha would not unreasonably withhold. (NB: It’s pretty unusual for a drafting party to volunteer to submit to such a restriction in its own draft.)
- Later, however, Alpha revised its draft, deleting the no-unreasonable-withholding restriction, so that the new draft simply stated that Bravo could not assign the contract without Alpha’s express prior written consent, period.
- Bravo objected to the deletion, but Alpha held firm; the contract, as signed, did not include the requirement that Alpha not unreasonably withhold its consent to assignment by Bravo.
- Later, Bravo wanted to assign the contract to a third party. Alpha refused consent. (Bravo had declined Alpha’s request that Bravo buy out Alpha’s interest for $5 million.) Bravo’s incipient deal with the third party fell through.
After a jury trial, Bravo won a $31 million judgment against Alpha, but the court of appeals sided with Alpha — and the Supreme Court of Texas reached the same result, holding that the contract unambiguously allowed Alpha to withhold its consent to Bravo’s assignment without restriction:
We conclude that the express language of the consent-to-assign provision can be construed with only one certain and definite interpretation—a consent obligation only as to Barrow-Shaver and no qualifications as to Carrizo’s right to withhold consent.
Barrow-Shaver Resources Co. v Carrizo Oil & Gas, Inc., No. 17-0332, slip op. at 16 (Tex. June 28, 2019) (affirming court of appeals’ reversal of trial-court judgment on jury verdict) (emphasis added). The court noted similar holdings by Texas appeals courts. See id. at 32-33 (citing cases).
The supreme court also rejected Bravo’s attempt to use evidence of industry custom about the supposed meaning of the term “consent” to imply a reasonableness requirement:
JUSTICE GUZMAN’s use of industry custom to imply a reasonableness obligation into the consent-to-assign provision, see post at _, is a veiled attempt to use industry custom and usage to create a covenant of reasonableness and good faith applicable, at a minimum, to farmout agreements and probably to every contract with a consent provision, if not every contract of any type. Using industry custom in the manner JUSTICE GUZMAN proposes would open the door to litigating the meaning of every term in every contract and any obligation not in a contract, creating lucrative business opportunities for so-called experts in every industry and allowing juries to imply obligations to which parties did not agree.
Id., slip op. at 25 (emphasis added) (responding to a three-justice dissent).
Finally, the supreme court held that in this particular situation, Bravo was not justified in relying on oral representations, by a representative of Alpha, that consent would be granted; the court noted the “red flags” that precluded justifiable reliance:
Without even having to reach the parties’ substantive negotiations, we point out the following red flags: (1) the farmout agreement imposed an unambiguous obligation on [Bravo] and imposed no obligation on [Alpha]; (2) the oral representations contradicted the clear and unambiguous consent provision; (3) both [Bravo] and [Alpha] were sophisticated oil and gas companies, so [Bravo] should have understood that the oral representations had no bearing on the contract’s express language; (4) [Bravo’s] representative’s extensive experience in the oil and gas industry—specifically, thirty-three years of experience; (5) the fact that negotiations took place at arm’s length to create an agreement other than a form agreement; (6) the parties knew utilizing consent-to-assign provisions is a common industry practice; and (7) the substance of the representation was inherently unverifiable because it conveyed a vague intent for someone else to do something sometime in the future under some circumstances not yet known.
A similarly situated “savvy participant” would have recognized that [Alpha] could change its mind, if [Alpha’s representative] Laufer’s representations were binding at all, and would have weighed the risk of that happening before entering into the agreement. … Instead, [Bravo] chose to rely blindly on [Alpha’s] representations when the contract provision clearly entitled [Alpha] to withhold its consent, thereby preventing an assignment. Here, Laufer’s vague and general statements indicating that [Alpha] would give its consent were merely Laufer’s representations of [Alpha’s] future intentions, statements that were inherently unverifiable, which should have been a red flag to [Bravo] not to accept them blindly. We conclude that there are sufficient red flags in the entirety of the circumstances surrounding the farmout agreement’s formation to negate justifiable reliance on [Alpha’s] oral representations as a matter of law.
Id. at 50-51 (citation and parenthetical omitted).
Drafting lesson: If you’re in Bravo’s shoes in Texas, and you want to be sure Alpha won’t unreasonably withhold its consent to your assigning the contract, then you’d better negotiate such an obligation into the contract itself. In some other states — in some circumstances — you might be able to argue that there is indeed an implied obligation of reasonableness in granting or withholding consent. But that’s a much tougher sell in Texas.