Texaco Inc. v. Pennzoil Co. 729 Texaco, Inc. v. Pennzoil Co. 729 S.W.2d 768 (Tex. Ct. App. 1987)

On December 28, 1983, in the wake of well-publicized dissension between the board of directors of Getty Oil Company and Gordon Getty, Pennzoil announced an unsolicited, public tender offer for 16 million shares of Getty Oil at $100 each. Gordon Getty was a director of Getty Oil and the owner, as trustee of the Sarah C. Getty Trust, of 40.2 percent of the 79.1 million outstanding shares of Getty Oil. Shortly thereafter, Pennzoil contacted both Gordon Getty and a representative of the J. Paul Getty Museum, which held 11.8 percent of the shares of Getty Oil, to discuss the tender offer and the possible purchase of Getty Oil.

The parties drafted and signed a Memorandum of Agreement providing that Pennzoil and the Trust (with Gordon Getty as trustee) were to become partners on a 3/7 ths to 4/7ths basis, respectively, in owning and operating Getty Oil. The museum was to receive $110 per share for its 11.8 percent ownership, and all other outstanding public shares were to be cashed in by the company at $110 per share. The memorandum provided that it was subject to the approval of Getty Oil's board. On January 2, 1984, the board voted to reject the memorandum price as too low and made a counterproposal to Pennzoil of $110 per share plus a $10 debenture. On January 3, the board received a revised Pennzoil proposal of $110 per share plus a $3 "stub" that was to be paid after the sale of a Getty Oil subsidiary. After discussion, the board voted 15 to 1 to accept Pennzoil's proposal if the stub price was raised to $5. This counteroffer was accepted by Pennzoil later the same day. On January 4, Getty Oil and Pennzoil issued identical press releases announcing an agreement in principle on the terms of the Memorandum of Agreement. Pennzoil's lawyers began working on a formal transaction agreement describing the deal in more detail than the outline of terms contained in the Memorandum of Agreement and press release.

On January 5, the board of Texaco, which had been in contact with Getty Oil's investment banker, authorized its officers to make an offer for 100 percent of Getty Oil's stock. Texaco first contacted the Getty Museum, which, after discussion, agreed to sell its shares to Texaco. Later that evening, Gordon Getty accepted Texaco's offer of $125 per share. On January 6, the Getty Board voted to withdraw its previous counteroffer to Pennzoil and to accept Texaco's offer. Pennzoil later filed suit against Texaco for tortious interference with its contract with the Getty entities. At trial, Texaco argued, among other things, that no contract had existed between Pennzoil and the Getty entities. The jury disagreed, awarding Pennzoil $7.53 billion in actual damages and $3 billion in punitive damages. Texaco appealed.

Warren, Justice   Texaco contends that there was insufficient evidence to support the jury's finding that at the end of the Getty Oil board meeting on January 3, the Getty entities intended to bind themselves to an agreement with Pennzoil. Pennzoil contends that the evidence showed that the parties intended to be bound to the terms in the Memorandum of Agreement plus a price term of $110 plus a $5 stub, even though the parties may have contemplated a later, more formal document to memorialize the agreement already reached. If parties do not intend to be bound to an agreement until it is reduced to writing and signed by both parties, then there is no contract until that event occurs. If there is no understanding that a signed writing is necessary before the parties will be bound, and the parties have agreed upon all substantial terms, then an informal agreement can be binding, even though the parties contemplated evidencing their agreement in a formal document later. It is the parties' expressed intent that controls which rule of contract formation applies. Only the outward expressions of intent are considered—secret or subjective intent is immaterial to the question of whether the parties were bound.

Several factors have been articulated to help determine whether the parties intended to be bound only by a formal, signed writing: (1) whether a party expressly reserved the right to be bound only when a written agreement is signed; (2) whether there was any partial performance by one party that the party disclaiming the contract accepted; (3) whether all essential terms of the alleged contract had been agreed upon; and (4) whether the complexity or magnitude of the transaction was such that a formal, executed writing would normally be expected.

Any intent of the parties not to be bound before signing a formal document is not so clearly expressed in the press release to establish, as a matter of law, that there was no contract at that time. The press release does refer to an agreement "in principle" and states that the "transaction" is subject to execution of a definitive merger agreement. But the release as a whole is worded in indicative terms, not in subjunctive or hypothetical ones. The press release describes what shareholders will receive, what Pennzoil will contribute, that Pennzoil will be granted an option, etc.

We find little relevant partial performance in this case that might show that the parties believed that they were bound by a contract. However, the absence of relevant part performance in this short period of time does not compel the conclusion that no contract existed.

There was sufficient evidence for the jury to conclude that the parties had reached agreement on all essential terms of the transaction with only the mechanics and details left to be supplied by the parties' attorneys. Although there may have been many specific items relating to the transaction agreement draft that had yet to be put in final form, there is sufficient evidence to support a conclusion by the jury that the parties did not consider any of Texaco's asserted "open items" significant obstacles precluding an intent to be bound.

Although the magnitude of the transaction here was such that normally a signed writing would be expected, there was sufficient evidence to support an inference by the jury that that expectation was satisfied here initially by the Memorandum of Agreement, signed by a majority of shareholders of Getty Oil and approved by the board with a higher price, and by the transaction agreement in progress that had been intended to memorialize the agreement previously reached.

Judgment for Pennzoil affirmed.

[Note: The court's decision was contingent on a reduction in the punitive damages awarded by the jury from $3 billion to $1 billion. Texaco ultimately sought reorganization under the protection of the Bankruptcy Court and the parties finally settled the case for $3 billion.]