When can you sue over verbal representations made before a written contract is signed?  In Roxo Energy Company, LLC v. Baxsto, LLC, the Texas Supreme Court considered allegations of fraud based on oral representations in the context of a complex oil and gas deal, and found the representations were not actionable.

Roxo Energy Company, LLC v. Baxsto, LLC, Baxsto, LLC (Baxsto) sued Roxo Energy Company, LLC (Roxo) for alleged oral representations made by Roxo while negotiating a lease and ultimate sale of mineral rights. Baxsto asserted fraud claims against Roxo, including fraud, fraudulent inducement, statutory fraud, and fraud by non-disclosure. According to Baxsto, Roxo made false representations with the intent to induce Baxsto into an unproductive lease and sell its mineral rights at a lower price.

When Baxsto and Roxo began negotiating a lease of Baxsto’s mineral rights, Roxo represented that (1) it would give Baxsto a more favorable deal than other mineral owners in the area if Baxsto executed the lease quickly, (2) that Roxo was “not in the business of flipping mineral interests” and would make significant investments to develop the mineral lease, and (3) that Roxo planned to make its money “at the bit” by drilling and developing the land.

Baxsto and Roxo’s negotiations initially resulted in three written agreements, including (1) a “paid-up” oil and gas lease, (2) lease purchase agreement, and (3) a lease memorandum. The lease purchase agreement contained conditions for Roxo to purchase the paid-up lease, and the lease memorandum summarized the agreements for the purpose of recording in the real property records. In addition to an option period for Roxo to purchase the lease, the agreement required Roxo to pay Baxsto a bonus of $5,000 per acre before it could record the lease memorandum. However, Roxo recorded the lease memorandum before it made a bonus payment to Baxsto.

Baxsto gave Roxo two extensions on its option to purchase the lease, the first of which contained a “most favored nations” clause. Under the “most favored nations” clause, Roxo agreed that if, in the next six months, it paid a larger bonus to another mineral owner, Roxo would pay the same amount to Baxsto. Roxo paid Baxsto its bonus and obtained the lease after the second extension of its option to purchase the lease. Then, the parties began negotiations for Roxo to purchase the mineral rights from Baxsto. Thereafter, the parties closed on the sale of Baxsto’s mineral interests for $5,666,602.50. At no time did Roxo drill a well on Baxsto’s property or any other property.

After Roxo sold its mineral rights to another operator and Baxsto learned Roxo paid another mineral owner a bonus of $11,000 per acre, Baxsto filed suit against Roxo, alleging fraudulent representations falling into three categories.

1. Roxo would make significant investments to develop the mineral lease rather than “flip[ping]” it,
2. Roxo would pay Baxsto a larger bonus than other mineral owners in the area, and
3. Roxo would pay Baxsto the bonus after it recorded the lease.

The trial court granted summary judgment in favor of Roxo on all Baxsto’s claims. The court of appeals reversed the trial court’s decision, holding that the written contract did not directly contradict Roxo’s alleged oral representations such that Baxsto’s reliance on the representations was unjustifiable. The court of appeals also held there were not enough red flags to place Baxsto on notice that it could not rely on the oral representations. The Texas Supreme Court disagreed.

At the outset, the Texas Supreme Court recognized that, “[w]ritten agreements, relative to oral agreements, serve a purpose under the law to provide greater certainty regarding what the terms of the transaction are and that those terms will be binding, thereby lessening the potential for error, misfortune, and dispute.” The Court also noted that justifiable reliance is a required element of all of Baxsto’s fraud claims. To establish justifiable reliance, Baxsto must have actually relied on Roxo’s representations, and its reliance must have been justifiable.

As a party’s reliance on oral representations that are directly contracted by express, unambiguous terms of a written contract is not justified as a matter of law, the Court considered whether the written contract between Baxsto and Roxo sufficiently contradicted the alleged oral representations by Roxo.

The Court held that Baxsto’s claims against Roxo failed for lack of justifiable reliance because the agreement between the parties contained an unqualified right to transfer the lease.

First, the Court addressed Baxsto’s claims relating to Roxo’s alleged representations that it planned to develop rather than “flip” the lease. The Court pointed out that Baxsto could have included an obligation not to transfer the lease in the agreement but did not. Baxsto also could have refused to enter into the agreement containing the unqualified right to transfer the lease. Because the lease entered into the parties was inconsistent with the alleged oral agreement not to “flip the lease, the Court held that all of Baxsto’s claims based on the alleged oral agreement to develop the property rather than “flip” it failed for lack of justifiable reliance.

Next, the Court addressed Baxsto’s claims relating to Roxo’s alleged representations regarding bonus payments. Noting that the only reference to bonus payments in the written agreement was a “most favored nations” clause which stated that, for the following 6 months, if Roxo paid another lessor a larger bonus, Roxo would pay Baxsto the same amount. Baxsto did not contend Roxo breached the “most favored nations” clause. Instead, Baxsto alleged Roxo’s oral representations about the bonus induced Basto to enter into a less favorable agreement. According to the Court, the presence of the “most favored nations” clause in the agreement showed Baxsto was sophisticated enough to understand how to negotiate to be guaranteed in writing when it wanted to.  The Court found that Baxsto was in a position to intelligently assess the deal and in a position to understand the differences between the written agreement and the prior oral discussions. As a result, the Court found Baxsto’s claims based on the alleged representations about bonus payments also failed for lack of justifiable reliance.

Last, the Court addressed Baxsto’s claim of fraud by nondisclosure based on Roxo’s recording of the lease before the bonus was paid. The Court recognized that fraud by nondisclosure only arises when there is a legal duty to disclose facts to the plaintiff. In general, the duty of disclosure does not arise “without evidence of a confidential or fiduciary relationship.” Baxsto and Roxo were not aligned, but were counterparts in a business deal. Therefore, Roxo did not have a duty of disclosure to Baxsto. Moreover, there was no evidence that intended to induce Baxsto into the sale of its mineral rights by making misrepresentations about the recording of the lease. Therefore, Baxsto’s claims based on Roxo’s early recording of the lease failed as a matter of law.

The Texas Supreme Court reversed the court of appeals’ judgment and reinstated the trial court’s judgment.

Parties often feel duped when the written contract they sign does not align with verbal representations made during contract negotiations. The Court’s decision in Roxo Energy Company, LLC v. Baxsto, LLC, makes it difficult to prove justifiable reliance on such representations, especially when a provision in the written contract contradicts the verbal representation.

The attorneys in our Austin and Dallas office are available to answer any questions you may have. Please contact us at info@gstexlaw.com.

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