Face Challenges Confidently

458 PanAmerican Operating, Inc. v. Maud Smith Estate

Thursday, September 3rd, 2015

Richard F. Brown

The following is not a legal opinion.  You should consult your attorney if the case may be of significance to you.
PanAmerican Operating, Inc. v. Maud Smith Estate, 409 S.W.3d 168 (Tex. App.—El Paso 2013, pet. denied) held that an independent landman’s apparent authority and the company’s failure to promptly repudiate an oil and gas lease made the lease binding on the company.  PanAmerican Operating, Inc. (“PanAm”) hired landmen as independent contractors, including Robert Wormser (“Wormser”).  PanAm provided Wormser with a cubicle, an office landline, a company email domain name, and the president of PanAm knew exactly what Wormser was doing on behalf of PanAm.  Wormser contacted William Elder (“Elder”), the attorney responsible for negotiating leases on behalf of the Maud Smith Estate (“Maud”), to negotiate a lease on Maud’s property for PanAm.  Wormser identified himself as a PanAm representative, but never disclosed that he was an independent contractor.  Wormser and Elder agreed on terms, and Wormser sent Elder a form lease from his PanAm email account.  On June 2, 2008, Elder accepted and emailed a copy of the signed lease to Wormser and asked for the lease bonus.  On July 21, 2008, Elder sent the original lease to PanAm.  On August 12, 2008, PanAm acknowledged receipt of the lease.  After the price of oil dropped precipitously, PanAm asserted that Wormser had no authority to execute leases on its behalf.  Apparently, PanAm dodged the payment questions from Elder for about three months before repudiating the validity of the lease, and PanAm’s possession of the lease prevented Maud from leasing to a third party.  Maud sued PanAm for breach of contract based on failure to pay the lease bonus.  The issues on appeal were whether Wormser held the apparent authority to bind PanAm and whether PanAm ratified the lease by failing to timely repudiate the lease.
“Apparent authority arises when a principal either knowingly permits its agent to hold himself out as having authority or acts with such a lack of ordinary care as to clothe its agent with indicia of authority.”  Silence may also constitute a manifestation of apparent authority.  It was undisputed that Wormser had authority to obtain leases on PanAm’s behalf and to negotiate on PanAm’s behalf.  The court held that a reasonably prudent person would have believed Wormser possessed the authority to contract on PanAm’s behalf because PanAm acted with “such a lack of ordinary care as to clothe Wormser with indicia of authority.”
“Ratification is the adoption or confirmation, by a party with actual knowledge of all material facts, of a prior act that did not then legally bind that party and which that party had a right to repudiate.”  “A party ratifies a contract by acting under it, performing under it, or affirmatively acknowledging it.”  PanAm knew all the material facts surrounding Wormser’s acquisition of the lease, and “by keeping the lease and failing to repudiate it when presented with the opportunity to do so, [PanAm] affirmatively acknowledged its validity, thereby ratifying it.”
PanAm argued there was no clear evidence PanAm intended to ratify the lease.  The court dismissed this argument because Maud was only required to demonstrate that PanAm performed an “intentional act that was inconsistent with any intention to avoid the lease.”  The “intent may be inferred from the acceptance of benefits under the lease after having full knowledge of the act that would make the lease voidable.”  The benefit PanAm received was obtaining a signed lease without having to pay until PanAm determined if honoring the lease made economic sense.  Therefore, PanAm ratified the lease by failing to repudiate after obtaining sufficient knowledge of the facts.
The significance of this case is that it highlights the risk in failing to promptly repudiate a lease or a contract to lease.  The industry frequently uses contract landmen and the facts in this case were particularly bad for PanAm.  But the issues about authority can arise in a more narrow context, such as the specific business points (bonus, royalty, term) in a lease, other lease provisions, or the lease form itself.  Such issues would be more common than a complete repudiation of authority, but the landman’s apparent authority and the company’s acquiescence will be equally important on those issues.