Case Summary Getty Oil Company had two major shareholders, Gordon Getty, Getty Museum. Gordon Getty who was also the trustee of the Sara Getty Trust owned about 40% of the outstanding shares of Getty Oil. The Getty Museum held about 12% of shares of Getty Oil. In January 1984, Pennzoil Company rendered an offer to buy 3/7ths of Getty at $110 per share. Then representatives of Pennzoil, Gordon Getty and Museum reached the Memorandum of Agreement by signing on the agreement.
The agreement stated that $110 per share offer was subject to the approval of the board of Getty oil and it would expire by its own terms if not approved at the board meeting in later days. Few days later, the board of directors of Getty Oil voted to reject the agreement price of $110 per share on the meeting as it was too low. Afterwards, Getty Oil’s investment banker, Geoffrey Boisi, started looking for other companies that are able to offer a higher price. Meanwhile, the board reconvened to revise Pennzoil proposal to $110 per share plus a $3 “stub” to be paid from the proceeds of the sale of ERC, a Getty Oil subsidiary. On the same day, the board accepted an updated proposal in which the guaranteed minimum for the stub was increased to $5. Towards the end of the meeting, representatives from Pennzoil and Getty Oil agreed on the proposal by shaking hands. After the meeting, lawyers began preparing definitive merger documents and press release to announce the deal.
Next day, both Getty Oil and Pennzoil made the same announcement about this deal; however, the merger documents were not ready yet. At the course of the merger document preparation, the Getty’s investment banker Boisi still continued to contact other companies that could offer a higher price than Pennzoil offered. As a result, Texaco decided to offer simpler deal of $125 per share in cash. One day after the Texaco’s offer, Getty board changed their mind to accept Texaco’s offer instead, then Texaco issued a press release stating the merger between Getty Oil and Texaco immediately.
Next day, the merger agreement was signed together with stock purchase agreement with the Museum and stock exchange agreement with the Trust. This had resulted in lawsuit in Delaware and Texas brought by Pennzoil against Getty Oil, Gordon Getty, Getty Museum, and Texaco in order to get the deal back to Pennzoil. Later on, Pennzoil added tortious interference with a contract to its claims against Texaco as Texaco had agreed to indemnify Getty Oil from any claims arising out of its sale to Texaco. In Texas court, Texaco affirmed that Pennzoil never had a contract because the parties had not yet agreed on the essential terms of the deal and that, even if a contract did exist, Texaco did not tortuously interfere with it. Neither Getty nor Texaco treated handshake as a symbol of agreement. Pennzoil presented the amount of damages caused by the agreement withdrawal. It was totaled at 7.53 billion in compensatory damages. In the end, the jury awarded Pennzoil $7.53 billion in compensatory damages and $1 billion in punitive damages. Analysis The issue here is whether both Pennzoil and Getty were bound to the Memorandum of Agreement, whether there was a binding contract, and whether Texaco tortuously interfered with a contract between Pennzoil and Getty.
The determination of these three factors is a question of fact for three parties. The terms of a contract could determine whether the contract is binding or not. Once it shows that there is a binding contract, we could start focusing on whether Texaco intentionally or unintentionally interfered with the contract. There was a substantial evidence of Pennzoil and Getty’s intention to be bound subject to approval by their boards of directors. This intent was clearly shown by the Memorandum of Agreement and press release by both parties.
However, the most confusing part is “subject to”. There is an arguable difference between a transaction being subject to various requirements, and the formation of an agreement being conditioned upon completion of such requirements. Any intent of the parties not to be bound before signing a formal document was not so clearly expressed in their press releases to establish 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 announcement as a whole is allegedly stated 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. Pennzoil’s witnesses testified that when business people use “agreement in principle,” it means that the parties have reached a meeting of the minds with only details left to be resolved. Other than the preliminary financial arrangements made by Pennzoil, there was 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. At the end of the January 3 board meeting, the Getty Oil Company, the Museum, the Trust, and Pennzoil intended to be bound to an agreement that provided that Getty Oil would purchase the Museum’s shares forthwith as provided in the Memorandum of Agreement. There is evidence in the record to support this finding.
Based on the criterion to determine whether the parties intended to be bound only by a formal signed writing, we should know whether a party expressly reserved the right to be bound only when a written agreement is signed; whether there was any partial performance by one party that disclaimed the contract was accepted; whether all essential terms of the alleged contract had been agreed upon; and whether the complexity or magnitude of the transaction could require that a formal and executed writing would normally be expected. In order to figure out whether Texaco interfered with the merger agreement between Pennzoil and Getty Oil, we need to identify elements of the tort of interference with contract: existence of a contract, tortfeasor’s knowledge of the contract, tortfeasor’s intentional inducement of a breach of contract, and damages. As we discussed above, there were a binding contract and pecuniary damages resulting from the breach of contract. Under the common law, a party who suffers a breach of contract is entitled to recover in tort from a third party whose improper interference induced the breach.
This right is over and above any claim for contract damages the aggrieved party may have against the breacher. Damages for the same injury may not be recovered twice, but it is possible for the aggrieved party to recover compensatory damages from the breacher, and exemplary or punitive damages from the inducer. Note that under the Restatement, liability in tort can attach even if there is no breach of contract; all that is needed is nonperformance. A defendant who induces a contracting party to exercise her bargained-for right of termination may be liable for the other party’s losses, if the inducement is found to be improper. The contract need not even be fully enforceable; courts have held that one who induces a contracting party to avoid a voidable contract (for example by asserting the Statute of Frauds or a defense of mistake) may be liable for the counterparty’s pecuniary losses.
There are differences between New York law and Texas law. Under New York Law, 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. In the beginning, Pennzoil tried to block the Getty-Texaco merger at court in Delaware, but the Delaware court denied the request, and the next day Pennzoil filed suit in Houston seeking for awards of damages. Under Texas law, Judges dealt with the case and granted damages award to Pennzoil. Texaco could not appeal until it posted a bond for the full amount of the judgment, plus interest, which the company could not afford. Then, Texaco tried to move the case to New York and complained to a Federal judge about unfair ruling.
Federal District Judge Charles Brieant ruled that Texaco did not have to post bond for the full amount, but could put up $1 billion as security. A Federal appeals court in New York affirmed his ruling. This triggered that not only Pennzoil but many outside legal experts argued that it threatened the principle of federalism by invading territory reserved for the state courts. This goes to important constitutional questions about federalism and the fairness of the legal process in different states. A big mistake Texaco made was not able to deal with evidence of damages at trial, a professor from Columbia law school said. With the benefit of hindsight, Texaco’s trial strategy was obviously catastrophic, said Prof.
Robert Mnookin, who teaches at the Stanford law school. Additionally, most impartial observers would agree that the jury’s damage award was absurdly high and was not proportionally related to Pennzoil’s actual damages (Lewin Tama 1989) From ethical viewpoint, this is a true story of deceit and treachery. Pennzoil spent so many days in negotiating with Getty Oil and preparing for the merger. They ended up making Memorandum of Agreement and shaking hands to agree with new terms. Both issued the merger announcement on their website.
All of these could prove that they were very likely inclined to be bound by the agreement. However, Getty Oil backed out of the agreement for the offer by Texaco, which made Pennzoil’s efforts worthless.
Despite whether they should be bound by the agreement or not, Getty Oil misled Pennzoil. Another issue stemmed from the lawsuit is the big winners in this case. They are all the lawyers who got paid $60 million, a professor at the University of Michigan law school said. It is hard to justify $60 million for this. Conclusion This case suggests that Pennzoil and Getty Oil had made a preliminary agreement. If the merger turns out to be profitable after uncertainties are resolved, the parties would make a formal contract later. But if the transaction turns out to be unprofitable, the parties would abandon the project together.
Disputes aroused under the preliminary agreement after Pennzoil had invested time and efforts. Disappointed Pennzoil believed that they were entitled to compensation either for their expectation or for the investment cost, while Getty Oil thought that they were entitled to exit without liability. In order to decide whether the parties have reached a fully binding contract or not, we should looked into two things. First, the parties had agreed on all material terms and intended to memorialize the merger agreement in a formal document. Texaco court treated this type of agreement as a fully binding contract when the evidence supports a finding that the parties did not intend the formalization of their agreement to be essential. Second, the parties have made a preliminary agreement as defined above when they have agreed on certain terms but left other terms open, so that the best inference from their negotiations is that they have made a binding preliminary commitment to pursue a profitable transaction.
First, the parties have engaged in “preliminary negotiations” when they have discussed a deal but have not agreed to one. In this event, the disappointed party can recover nothing.4 1. Does your draft essay identify and have a discussion of each of the 4 elements of the tort of interference with contract, Pennzoil’s cause of action against Texaco? 2. Does it have a “deeper” discussion of one of the elements, possibly whether there was a contract at all, possibly whether the law on wrongful inducement to breach a contract was correctly applied? Did you explain what another analyst said about that issue in a law review article? Bagley Restatement (Second) of Torts Section 766 defines interference with contract. “One who intentionally and improperly interferes with the performance of a contract…between another and a third person by inducing or otherwise causing the third person not to perform the contract, is subject to liability to the other for the pecuniary loss resulting to the other from the failure of the third person to perform the contract.” Restatement (Second) of Torts 766 (1979). Based on those elements, it seems you have one of two areas in which you might explain the lack of clarity in the law: 1. What is a contract and whether there was one in this story. 2. Whether Texaco honestly believed Getty and Pennzoil had a contract and intentionally induced Getty to breach it Reference TAMAR LEWIN. 1989. Pennzoil-Texaco Fight Raised Key Questions. [online] Available at: https://www.nytimes.com/1987/12/19/business/pennzoil-texaco-fight-raised-key-questions.html. [Accessed on March 2014] Cornell University Law School. 1987. PENNZOIL COMPANY, Appellant v. TEXACO, INC. [online] Available at: https://www.law.cornell.edu/supremecourt/text/481/1#writing-type-1-POWELL. [Accessed on March 2014] https://openjurist.org/784/f2d/1133/texaco-inc-v-pennzoil-company
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