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Recent Oil Contract Case Provides Important Lessons

The Law Office of C. William Smalling, P.C. Jan. 25, 2019

A case that was recently filed in the Texas Supreme Court involves an issue familiar to those in the oil industry: farmout agreement interpretation. The case, Barrow-Shaver Res. Co v. Carrizo Oil & Gas, Inc., involves a question of whether one party to an agreement may arbitrarily withhold consent from the other to take certain actions or whether consent may only be withheld if reasonable. And although the Court has not yet ruled on this specific case, there are several lessons to be learned from this dispute—particularly for those who utilize contracts as part of their day-to-day business. Below is an overview of these lessons. 

Account for Early Drafts of The Agreement

When finalizing afarmout agreement or other contract, always account for previous versions, as draft versions of contracts are sometimes used to clarify ambiguities in executed agreements. For example, the Texas Supreme Court has previously found admissible a draft version of an insurance policy to clarify ambiguous language. In the Barrow-Shaver case, a prior draft of the farmout agreement was argued to clarify the meaning of the term “consent.” One way to avoid this outcome is the inclusion of a merger clause. To avoid the admission of such evidence, it is advisable to add a merger clause that prohibits the use of prior drafts of the agreement in its construction.

Consider the Issue of Implied Reasonableness 

As noted above, the lack of contractual language explicitly requiring a reasonable basis to withhold consent led to the dispute in the Barrow-Shaver case. While courts sometimes apply an implied standard of reasonableness to contractual language, this is never a guarantee. Therefore, it is advisable to be explicit in such matters when drafting an agreement of any kind. To avoid a dispute that may lead to litigation, simply include the term “reasonable” or the phrase “reasonable and necessary” when reasonableness is expected or desired. 

Texas Oil and Gas Attorney

Oil and gas laws in Texas are always changing. Therefore, it’s imperative that professionals involved in the energy industry have reliable, experienced, and knowledgeable legal representation to help guide them through the ever-changing energy landscape. In the areas of oil and gas, it’s particularly important to ensure that all contracts, including farmout agreements, are properly drafted. Oil and gas contracts are highly sophisticated documents, and it’s important that they bedrafted in a manner that ensures the rights and responsibilities of all parties involved. At the Law Office of C. William Smalling, P.C., our lawyers are experienced in the drafting and review of contracts typically used in the energy industry, including farmoutagreements, joint operating agreements, master service agreements, drilling contracts, licensing agreements for use of seismic or technical data, and nondisclosure agreements. If you are in need of expert oil and gas legal representation, contact us today for a consultation.