PanAmerican Operating Inc. v. Maud Smith Estate highlights the perils of working through independent landmen:  maintaining enough control to be sure the work is done as you like it, but also wanting authority to disavow his actions should you desire. 

PanAmerican hired an independent contractor, Wormser, to obtain oil and gas leases from mineral owners, including Maud Smith. Wormser contacted Elder, Ms. Smith’s attorney, and negotiated a lease. After executing and mailing the lease to PanAmerican and attempting for seven months to get paid, Ms. Smith sued for breach of contract.

PanAmerican claimed the lease was invalid because Wormser did not have authority to bind the company. The trial and appellate courts found that Wormser had apparent authority, which bound PanAmerican, and that PanAmerican ratified the lease.

Agent or Not an Agent - The Factors

Evidence that the independent contractor had apparent authority:

• Used a “@panampo.com” e-mail address,

• Had a cubicle in the PanAmerican offices,

• Used a company telephone line,

• The founder and president of PanAmerican knew he was negotiating the lease,

• In reports he was required to submit to PanAmerican, the landman described all of his efforts to secure the lease,

• His e-mails used words such as “we,” “our,” “they,” and “our attorney”.

PanAmerican argued that it had done nothing to give Maud Smith reason to rely on the landman’s authority. The court found that the formal business relationship between PanAmerican and Wormser, with no limitation of Wormser’s power known to the third party, presented a reasonable inference that Wormser was authorized to execute leases on PanAmerican’s behalf.

The Real Story?

The medieval morality play goes like this: Man begins in innocence, Man falls into temptation, Man repents and is saved. The court apparently thought PanAmerican didn’t stick around for the third act. It failed to timely repudiate the lease when the opportunity presented itself. Instead, it did nothing until the price of oil made honoring the lease uneconomical.

Intent to ratify will be inferred if there is an acceptance of benefits while having full knowledge of any act that would make the lease voidable. PanAmerican retained the benefit of the lease while it waited to see if economics would make honoring the lease favorable.

How to Avoid The Predicament

See the factors above for how to maintain separation between the independent landman and his client. No single factor will carry the day one way or another. And there are surely others, depending on the situation.

And remember, this case was about apparent authority. The principal has the duty to give notice to third parties of the agent’s limitations when the agent is dealing on behalf of the principal. If your landman has limited authority, make certain that the parties he deals with know that.

J J Cale – RIP.