Consent Expressly Given – A New Look

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Sometimes a party has the right to withhold its consent when the other party requires that party’s consent. And, sometimes the right to deny consent is desired to be absolute and unconditional. In such cases, and for a very long time, Ruminations has been using a formulation saying that such consent “may be withheld for any reason or no reason at all.” We just read a June 28, 2019 Supreme Court of Texas decision possibly chastising us for wasting those words. After analyzing a contract provision stating simply that a party could not assign its rights “without the express written consent” of the other, that court wrote that the added words, “for any reason or no reason,” were surplusage. As that court wrote, consent-required provisions with or without the extra words have identical meaning. Accordingly, “the same can be said” as to a provision reading that consent “can be granted or withheld at [a party’s] sole discretion.”

Before every reader starts searching for an eraser to take to their form agreements, there is a caveat. This decision came out of the state of Texas. That’s not going to be the law in every jurisdiction. Also, it was based on the premise that a provision, in an oil and gas “farm-out” agreement saying that one a party could not assign its interest without the other’s consent, is “unambiguous.” [Viewing Wikipedia would tell you that “a farmout agreement is an agreement entered into by the owner of one or more mineral leases, called the ‘farmor,’ and another company who wishes to obtain a percentage of ownership of that lease or leases in exchange for providing services, called the ‘farmee.’”] When a court decides that an agreement’s provision is not ambiguous, it refuses to look outside of the agreement itself to aid in interpreting that provision. It accepts the “plain meaning” of the words. At most, it will refer to a dictionary of its own choice, sometimes, as Ruminations, has noted, one with a definition that supports an already decided conclusion. What a court won’t do is to look at prior discussions or negotiations to aid interpretation.

Except in special circumstances, Texas law does not appear to require a party to be reasonable when deciding whether to grant its consent. Not every state shares that principle. So, as we’ve warned before, if you are going to understand how to deal with agreements, such as leases, governed by a particular state’s law, you’re going to have to know how that state handles certain legal concepts. [For more about that, click: HERE to see a prior blog posting.] Whether, and to what extent, a party can withhold its consent or must be “reasonable” or must act within a certain period of time will be governed by the law of a particular location.

That takes us to another lesson we’ve learned about Texas and makes us wonder about other places as well. Please don’t search our prior 435 blog postings to see if we have faithfully followed this approach when writing about the covenant of good faith and fair dealing. We think we’ve always said it is implied in almost all agreements (but now worry that we might not have done so). That’s because we’ve long been aware that some jurisdictions, perhaps most, don’t “embed” it into employment agreements. That’s likely because the principle of “at-will employment” is public policy almost everywhere, if not everywhere.

In Texas, this covenant of good faith and fair dealing is embedded in its statutory law. The Texas court wrote:

Accompanying every contract is a common-law duty to perform with care, skill, reasonable expedience and faithfulness the thing agreed to be done. … The Texas Business and Commerce Code provides that “[e]very contract or duty within this title imposes an obligation of good faith in its performance and enforcement.”

This seems pretty clear, doesn’t it, even to the Texas Supreme Court? There is also something clear to that court, and that is this “Business and Commerce Code provision is not applicable where no specific obligation exists.” In Texas, and therefore possibly elsewhere, the duty of good faith and fair dealing may only “arise when the contract governs or creates a special relationship.” The court explained:

Contracts that give rise to the duty in the oil and gas context include contracts between executive-right holders and non-participating royalty-interest owners, as well as contracts between working-interest owners and royalty owners. … The duty of good faith and fair dealing stems from the relationship of the parties and not from the contract. … However, this Court has been clear that absent a special relationship, parties to a contract have no duty to act in good faith.

Additionally, we have long held that there is not an implied covenant of good faith and fair dealing in every contract. … Texas law does not impose a generalized contractual duty of good faith and fair dealing and, in fact, rejects it in almost all circumstances. We have rejected the argument that we should imply into contracts a covenant that would require the parties not to do anything that injures the right of another party to receive the benefits of the agreement.

[T]o imply into every contract a covenant of good faith and fair dealing that “there is an implied covenant that neither party will do anything which injures the right of the other party to receive the benefits of the agreement” would be “contrary to our well-reasoned and long-established adversary system which has served us ably in Texas for almost 150 years. … Adoption of this covenant in every contract would “abolish our system of government according to settled rules of law and let each case be decided upon what might seem `fair and in good faith,’ by each fact finder.” … Likewise, to impose a covenant here that [the property owner] could not unreasonably withhold its consent would be contrary to our long-standing principles of contract law that parties are free to contract for their own duties and obligations.

And the language “without express written consent” indicates that the parties bargained to prohibit any implied consent at all.” Moreover, Texas courts have declined to read a reasonableness standard into consent provisions that failed to articulate a standard by which consent could be withheld. … Absent the promise not to unreasonably withhold consent to assign, there is no implied covenant by the lessor to act reasonably in withholding consent.

The limitation on the transfer of a leasehold estate is for the lessor’s sole benefit. A lessor may contract, by [a] provision in the lease, not to unreasonably withhold his consent to an assignment or sublease of the premises. This type of provision is in the nature of a promise or covenant which, if breached, could be grounds for an action for damages. Absent this promise, we hold that there is no implied covenant by the lessor to act reasonably in withholding his consent.

That’s probably the longest use of quoted material we’ve ever included from a court’s decision. We deny that this is a sign of our laziness and offer that we did so to emphasize how important it is for all of us to understand that when we do so, we “work” in states other than our own at our own risk. Oh, there may be some readers who are thinking: the law applicable to Texas oil and gas leases is irrelevant to us. Well, where the cited material refers to a lease, sometimes it was describing the ordinary space leases readers and we handle every day.

Does Ruminations have more to add? Is the Pope Catholic? Of course, we do.

What did the parties mean when they said that consent was required? Could there be a different meaning depending on “context”? The court said, “No,” but a strong dissenter said, “Yes.” The issue argued was whether, when a consent requirement is included in a Texas oil and gas agreement, was there a special meaning in that industry? One party’s expert and a whole bunch of Amicus Curiae (“a friend of the court”) submissions argued that where such agreements call for receipt of a party’s consent, there are “rules” and those rules were violated when the property owner here essentially requested to be paid for giving its consent. So, there is another issue for those of us laboring in the vineyards of real property agreements: “what role does industry custom and practice play?”

Here’s one last “gem” (in our own mind, if not in anyone else’s mind). It was suggested by a suggestive sentence in the Texas opinion, one hinting that there is a difference between the words, “consent” and “approval.” That hint sent us to the “web” where we found the following:

“Approve of” means “like” or “agree with”, but has no implication of giving permission, or of the authority to give permission. “Consent” and “grant” mean that you allow someone to do something, while “approve (of)” and “assent” just mean that you like or agree with what someone is most likely going to do anyway.

We think we’ve always used “consent,” but from now on we are going to double-check.

And, at the end of the day, we think we’ll be sticking with this Texas-redundancy, “for any reason or no reason at all.”

[For those desirous of reading 37 pages of sometimes tedious court writing (inclusive of two dissents), the Texas court decision can be seen by clicking: HERE.]

 

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