Texaco, Inc. v. Pennzoil Co., 729 S.W.2d 768 (Tex. App.—Houston [1st Dist.] 1987, writ ref'd n.r.e.)
Texaco Inc. v.
Whether Pennzoil and Getty Oil had formed a binding and enforceable contract (despite references to an "agreement in principle" and the anticipation of later definitive documentation), and, if so, whether Texaco knowingly and intentionally interfered with that contract, proximately causing Pennzoil's damages and supporting an award of actual and punitive damages under Texas law.
Under New York contract law, parties may form a binding contract when they agree on essential terms and intend to be bound, even if they contemplate executing more formal, definitive documents later; the presence of phrases like "agreement in principle" or conditions relating to later documentation does not preclude formation if intent to be bound is otherwise shown by words and conduct. Under Texas law, the tort of intentional interference with contract requires: (1) the existence of a valid, enforceable contract; (2) the defendant's knowledge of the contract; (3) willful and intentional interference causing a breach; (4) proximate cause; and (5) actual damages. Punitive damages may be awarded upon a showing of malice or willful and wanton disregard, and a defendant may assert the affirmative defense of justification, which fails where the interference is not in good faith or employs wrongful means.
Applying New York law to contract formation and Texas law to the tort, the court held that there was legally and factually sufficient evidence for the jury to find a binding contract between Pennzoil and Getty; that Texaco knew of this contract and intentionally induced Getty to breach it; that Pennzoil's damages were proximately caused by Texaco's interference; and that the awards of actual and punitive damages were supported. The judgment was affirmed in all material respects.
Texaco v. Pennzoil is a foundational case on two fronts: (1) under New York law, it demonstrates that preliminary writings, board approvals, and public announcements can create a binding contract notwithstanding plans to later execute formal documents; and (2) under Texas tort law, it clarifies the elements and scope of intentional interference with contract and the availability of punitive damages. Practically, the case reshaped M&A practice: parties now draft letters of intent and press releases with explicit non-binding language, conditions precedent, and carefully structured fiduciary-out and no-shop provisions to avoid unintended contract formation. It also stands as a cautionary tale about the litigation risks of topping bids and the limits of the economic-interest or competition justifications.