Energy Litigation Alert: "SCOTX Reviews a Texas-Sized Drilling Dispute - Three Takeaways from Barrow-Shaver Res. Co v. Carrizo Oil & Gas, Inc."

The Texas Supreme Court recently heard oral argument in Barrow-Shaver Res. Co v. Carrizo Oil & Gas, Inc., No. 17-0332, on the interpretation of a farmout agreement providing that an assignment could not be made “without the express written consent.”  The issue—whether the provision means consent can be withheld arbitrarily or only reasonably.  Regardless how the Texas Supreme Court rules, there are three lessons in Barrow-Shaver for contract drafters: (1) be precise in contractual language; (2) address the use of non-final drafts in interpretation disputes; and (3) consider other provisions that may be impacted by the implied reasonableness issue.Be precise in contractual language. Implied terms in contracts are not favored under Texas law.¹  Consequently, when drafting consent provisions, instead of writing “without the express written consent,” be more precise about what the parties mean.  If the parties mean that consent is not to be unreasonably withheld, then write that language into the contract.  If the parties mean that consent can be withheld for any reason, no reason, or arbitrarily, write that language into the contract.  If the parties cannot agree on the language, then that becomes a negotiation point.Address the use of non-final drafts in interpretation disputes. Contract interpretation is about the parties’ intent expressed in the language used.²  Ordinarily, a “merger clause” invalidates the use of a redline draft as parol evidence to vary unambiguous language.³  The Texas Supreme Court has held, however, that redline strikeouts in a form insurance policy negotiated by the parties may indicate the parties’ intent in a policy covering “all risks” to not cover the stricken risks.⁴  The Barrow-Shaver farmout was not a form agreement, but redlines in a prior draft were argued to inform the meaning of the consent term.  To avoid redlines being considered, add a provision to the merger clause prohibiting the use of prior drafts of the agreement in the interpretation or construction of the agreement.Consider other provisions that may be impacted by the implied “reasonableness” issue.How many contracts provide that the prevailing party in any dispute may recover its “attorney’s fees and costs” or “all attorney’s fees and costs”?  Did you automatically think that the provision means reasonable and necessary attorney’s fees and costs?  While that standard is applicable to the recovery of statutory fees, the law in Texas is less clear regarding whether such a standard is implied in to contractual attorney’s fees provision lacking that qualifier.⁵  To avoid a dispute, simply include the reasonable and necessary language in the contract.