Face Challenges Confidently

031 Hayes v. E.T.S. Enterprises, Inc

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 some significance to you.
Hayes v. E.T.S. Enterprises. Inc., 809 S.W.2d 652 (Tex. App.–Amarillo 1991, writ requested), is every land department’s worst nightmare. Pogo Producing Company released by mistake a lease it had farmed out to E.T.S. Enterprises, Inc. The release was filed of record while E.T.S. was drilling a well which was eventually completed as a gas well with a potential open flow of 17.5 MMcfd. Pogo discovered its mistake within a month of the filing and attempted to rescind the release by filing a unilateral “Revocation and Rescission of Release of Oil and Gas Leases.”
Held: A unilateral release of lease filed of record by mistake will be set aside. The court rejected the Texas rule expressed in Rolan d v. McCullough, 561 S.W.2d 207 (Tex. Civ. App.–San Antonio 1977, writ ref’d n.r.e.), which held that equitable relief for unilateral mistake would not be granted unless: (1) the mistake is of so great a consequence that to enforce the contract as made would be unconscionable; (2) the mistake relates to a material feature of the contract; (3) the mistake must have been made regardless of the exercise of ordinary care; and (4) the parties can be placed in status quo in the equity sense. The element that is most troublesome is, of course, number (3), which says the lessee gets no relief if the lessee is negligent.
The Hayes court followed Oklahoma law as set forth in Armbruster v. Thetis Energy Corp., 675 P.2d 476 (Okla. App. 1983). Armbruster holds that the lessee is entitled to cancellation of the release unless: (1) the cancellation would offend the rights of an innocent purchaser for value; (2) another party in good faith and in innocent reliance (no knowledge of mistake) had altered its position and such alteration of position could not be reversed without significant prejudice.
The Hayes court summarized its holding by saying that if a mistake of fact has occurred, which was simply human error, equity will rectify the mistake, if the lessor was not damaged by the mistake and would receive a great advantage if the results were otherwise. There was a dissenting opinion and the case has been appealed to the Texas Supreme Court (which has not yet granted a writ). The significance of the case is that it is the first Texas decision striking the requirement that lessee must establish that it exercised ordinary care.