Language edges out custom in drilling case, Texas high court says
AUSTIN — The Texas Supreme Court continued its deference to the plain language in a contract, but only by a narrow majority, as it rejected a $27.7 million verdict in a dispute involving an oil and gas “farmout” agreement.
The court split 5-4 on the issue of whether industry custom and use should be considered in interpreting the contract, with five justices rejecting industry norms when they conflict with a written contract.
Justice Eva Guzman, in a strongly worded dissent, accused the majority of ignoring “a centuries-old practice firmly rooted in our jurisprudence, recognized by learned treatises, and applicable to commercial contracts nationwide, including in Texas.”
Barrow-Shaver Resources Co. won the verdict from a Smith County jury against Carrizo Oil & Gas, which had demanded $5 million to sign off on a $27.7 million deal with Raptor Petroleum. The verdict was overturned by the 7th Court of Appeals in Amarillo.
Carrizo was the only one of 32 affected parties that refused to sign off on the deal assigning development rights over 22,000 acres in North Texas’s Caddo Arch Bend. After drilling $22 million worth of dry holes in 2011, Barrow-Shaver had jumped at Raptor’s offer. When the deal fell through, Barrow-Shaver sued Carrizo for contract breach and fraud.
Carrizo held their interest under a farmout agreement. A farmout agreement is a contract between a working-interest owner and a drilling operator with no interest in the minerals until it completes its services under the agreement.
At trial, Barrow-Shaver and Carrizo agreed that the contract allowed Carrizo to block the sale but differed on whether doing so was customary in the oil and gas industry. The jury heard conflicting expert testimony on that issue.
The Supreme Court ruling upheld a 2017 decision from the 7th Court of Appeals in Amarillo, which found that the contract was not ambiguous and that a clause requiring Carrizo to act reasonably was deleted during contract negotiations.
The case attracted numerous letters from royalty owners and energy developers offering far different views of industry use and tradition regarding consent to assign clauses in farmout agreements.
During oral arguments last December, Scott Brister said a ruling against his client BarrowShaver would result in less drilling, as a party with a small interest could blow up a deal by trying to “turn a pittance into a payday.” Brister is a former Supreme Court justice and current partner at Hunton Andrews Kurth.
Marcy Hogan Greer presented Carrizo’s case, arguing that the words in a contract matter. “Contract interpretation starts and ends where the parties had a meeting of the minds,” said Greer, an attorney with Alexander Dubos Jefferson & Townsend. The majority agreed with Greer. Justice Paul Green delivered the court’s opinion, in which Justices Debra Lehrmann, John Devine, Jimmy Blacklock and Jeff Brown joined.
Guzman was joined by Chief Justice Nathan Hecht and Justice Brett Busby in dissent. Justice Jeffrey Boyd wrote his own dissenting opinion.
The Supreme Court of Texas case is Barrow-Shaver Resources Co. v. Carrizo Oil & Gas Inc.