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Texas appeals court rules on consent provision in oil lease case

A Texas appeals court eliminated a $27.7 million judgment against an oil and gas company in a dispute over a drilling farmout agreement, ruling that the contract permitted the company to withhold consent to an assignment of the agreement.

Carrizo Oil & Gas Inc. had appealed a jury verdict finding it liable for fraud, breach of contract and tortious interference with contract. The jury awarded Barrow-Shaver Resource Co. (BSR) $27.7 million on the breach of contract claim. Carrizo had signed a drilling farmout agreement with BSR, but when BSR signed a deal assigning the agreement to Raptor Petroleum II LLC, Carrizo refused to honor it.

The Twelfth District Court of Appeals reversed the lower court’s decision, holding that BSR should receive nothing. Chief Justice James T. Worthen wrote that a provision in the farmout agreement permits Carrizo to withhold consent to assignment of the agreement to another party, and the trial court should not have submitted that issue to the jury.

Judge Worthen wrote that because the contract was unambiguous, the jury should not have had the opportunity to decide the breach of contract issue. The appeals court also noted that the evidence of previous drafts and negotiations indicated that Carrizo intended to preserve its right to withhold consent. The evidence was that a preliminary draft of the agreement said that Carrizo could not “unreasonably” withhold consent, but that clause was deleted. The appeals court said that this evidence was not barred from admissibility by the parol evidence rule, and the trial court should not have excluded it.

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