Can Consent of an Assignment be Withheld Arbitrarily?

In Carrizo Oil & Gas, Inc. v. Barrow-Shaver Res. Co., No. 12-15-00083-CV, 2017 App. LEXIS 821 (Tex. Civ. App. -Tyler January 31, 2017) the Court of Appeals concluded that if a consent-to-assignment provision fails to include a reasonableness clause, the consenting party has an unqualified right to withhold consent. Texas law does not require reasonableness or good cause to withhold consent.

The dispute in Carrizo Oil & Gas, Inc. arose from the interpretation of a consent-to-assignment provision in a farmout agreement between Carrizo Oil & Gas, Inc. ("COG") and Barrow-Shaver Resources Company ("BSR"). After initial discussions and negotiations over a farmout agreement on a lease owned by COG, BSR sent a draft of their agreement to COG, which did not contain a consent-to-assignment provision. COG countered with an agreement that contained 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."

BSR countered with a third draft that contained the exact same consent-to-assignment provision provided in COG's counterproposal. COG then responded with a fourth and final draft in which the "shall not be unreasonably withheld" language in the consent-to-assignment provision was deleted. Although BSR vehemently objected to this change in the provision, COG insisted that the reasonableness language be deleted from the consent-to-assignment provision of the farmout agreement. The Vice-President of Land for BSR testified at trial that on three separate occasions before the agreement was signed, both in person and over the telephone, the Land Manager from COG assured him that COG would give BSR consent to assign the farmout. Finally, on March

30, 2012, BSR signed the farmout agreement 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."

In May 2012, Raptor Petroleum II, LLC ("Raptor") approached BSR about an assignment of the farmout with COG. After negotiating the terms, including payment of $27,690,466.86, BSR contacted COG for its consent to the assignment of the farmout to Raptor. Before COG would consent to the assignment, COG demanded BSR pay $5,000,000.00 for the lease. 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 then filed suit against COG for breach of contract, fraud and tortious interference with a contract. COG argued that the negotiations and previous drafts of the farmout agreement informed the trial court that the reasonableness clause for the type of consent it would give had been removed and therefore the farmout agreement was unambiguous on the issue of when consent could be withheld. However, the trial court ruled that, based on the parol evidence rule, the court would not admit to trial evidence of the parties' negotiations or the previous four drafts of the farmout agreement. The trial court then sided with BSR and held that because the farmout agreement was silent as to the type of consent COG was required to give, the farmout agreement was ambiguous, and therefore, a jury would need to act as a fact finder on the issue of the meaning of the consent-to-assignment provision. The jury found COG liable.

On appeal, COG contended that the trial court erred by excluding evidence of the parties' negotiations showing the deletion of the phrase "which consent shall not be unreasonably withheld" and by failing to construe the consent-to-assignment provision as providing COG with an unqualified right to refuse consent to BSR. On the other hand, BSR argued that, because there was no stated qualifier regarding the consent-to-assignment provision, the agreement was silent as to the type of consent COG would give. In furtherance of that theory, BSR introduced evidence that it was an industry-accepted practice that consent could not be withheld absent a reasonable concern about the potential assignee's capabilities. See Energen Res. MAQ, Inc. v. Dalbosco, 23 S.W.3d 551, 557 (Tex. App. - Houston [1st Dist.] 2000, pet. denied).

The Court held that the negotiations of a contract can matter in determining whether a contract is silent on a material term. See Houston Expl. Co. v. Wellington Underwriting Agencies, Ltd., 352 S.W.3d 462, 469-70 (Tex. 2011). Here, evidence of the negotiations and the previous drafts between the parties showed that the consent-to-assignment provision was not silent as to the type of consent. Therefore, the Court held that COG's evidence of the negotiations and preliminary drafts of the agreement was not barred from admissibility by the parol evidence rule.

Finally, the Court noted that while some jurisdictions impose an obligation of good faith and fair dealing in contract disputes, Texas does not. See English v. Fischer, 660 S.W.2d 521, 522 (Tex. 1983). Under Texas law, a lessor may withhold consent arbitrarily if the consent-to-assignment provision fails to set a standard by which to measure consent. Benjamin Robertson, Katy Pier Moore, & Corey F. Wehmeyer, Consent to Assignment Provisions in Texas Oil and Gas Leases: Drafting Solutions to Negotiation Impasse, 48 Tex. Tech L.R. 335, 339 (2016). Because the

parties explicitly negotiated the removal of the "shall not be unreasonably withheld" language from the agreement, COG had an unqualified right to refuse BSR's proposed assignment. Therefore, the trial court erred in finding COG liable.

Carrizo Oil & Gas, Inc. highlights the importance of the "shall not be unreasonably withheld" language in all contracts. Without the inclusion of the language, a party may withhold consent arbitrarily.