In Major Partnership Decision, Texas Supreme Court Affirms That Businesses Can Contract for Conditions Precedent to Preclude the Unintentional Formation of a Partnership

February 1, 2020 | Insights

By Richard A. Howell, Byron Egan, Jennifer Caughey, & Amy Baird

Disputes often arise over whether parties have agreed to, or by their conduct they have, committed themselves to a transaction. On January 31, 2020, the Texas Supreme Court delivered its decision in Energy Transfer Partners, L.P. et al. v. Enterprise Products Partners, al. In this closely watched appeal, the Supreme Court affirmed the decision of the Dallas Court of Appeals and “h[e]ld that parties can contract for conditions precedent to preclude the unintentional formation of a partnership under Chapter 152 and that, as a matter of law, they did so here.”

Factual Background

Energy Transfer Partners, L.P. (“ETP”), Enterprise Products Partners, L.P. (“Enterprise”), and Enbridge Inc. (“Enbridge”) are three of the largest pipeline companies in North America. A dispute among them led to one of the largest judgments in Texas history. In 2011, Enterprise approached ETP about converting one of ETP’s pipelines or building a new pipeline for the purpose of moving oil from the Cushing, Oklahoma crude oil storage hub to refineries in Houston. ETP and Enterprise executed a letter agreement and term sheet defining the ownership structure and operation of their potential venture, and the companies agreed to contribute to and market their venture. They also expressly contracted that “[n]either this letter nor the JV Term Sheet create any binding or enforceable obligations” and “no binding or enforceable obligations exist” under their transaction until the parties “received their respective board approvals and definitive agreements memorializing the terms and conditions of the transaction.…” ETP and Enterprise also executed a reimbursement agreement that provided that the parties were “negotiating mutually agreeable definitive agreements,” and nothing in this agreement would “be deemed to create or constitute a joint venture, a partnership, a corporation, or any entity taxable as a corporation, partnership, or otherwise.”

After executing the letter agreement and other agreements, ETP and Enterprise worked together to secure commitments for their pipeline. The parties did not receive enough commitments to meet their minimum threshold, and Enterprise terminated its participation in the project. Upon termination, Enterprise and Enbridge—which already had begun discussions to pursue another Cushing-to-Gulf Coast pipeline—moved forward with their alternative Seaway crude oil pipeline, secured considerable commitments, and began operating the pipeline.

Trial & Judgment for ETP

ETP sued Enterprise in Dallas County District Court for breach of joint enterprise and breach of fiduciary duty. ETP argued that Enterprise formed a partnership with ETP and held themselves out to the public as partners, that Enterprise hid its dealings with Enbridge, and that Enterprise usurped a business opportunity by teaming with Enbridge to operate the Seaway pipeline. Enterprise contested the formation of any partnership.

After a four week jury trial, the jury found that ETP and Enterprise had created a partnership to pursue a pipeline project from Cushing to the Gulf Coast and awarded ETP damages. In July 2014, the district court signed a judgment for ETP awarding more than $319 million in actual damages, $150 million in disgorgement of wrongfully obtained benefits, and more than $66 million in interest. Enterprise appealed.

The trial court’s judgment caused serious concern across Texas, with executives and attorneys from numerous industries examining whether their potential projects and letters of intent created common law partnerships and what steps they could take to avoid partnership liability.

Dallas Court of Appeals Judgment Rendered Judgment that ETP Take Nothing

In July 2017, the Dallas Court of Appeals held that the parties’ agreements had valid conditions to the effect that the parties will not be bound to consummate a transaction unless and until they each negotiated and executed a definitive agreement, and ETP had failed to prove that the conditions had been satisfied or were waived. Based on its decision, the appeals court reversed the judgment and rendered judgment that ETP take nothing from Enterprise.[1] ETP appealed to the Texas Supreme Court.

Texas Supreme Court Decision

On January 31, 2020, Chief Justice Nathan Hecht delivered the opinion of the Texas Supreme Court. The Court’s decision highlights Texas’s commitment to freedom of contract: it enforced the terms the parties agreed to and affirmed that Texas parties may contract around default rules and may count on their contracts. The Court noted that when sophisticated businesses reach agreements, Texas courts will routinely reject claims that attempt to avoid conditions precedent and other unambiguous contract terms. Further, although Texas Business Organizations Code § 152.051 allows persons to potentially “create a partnership regardless of whether they intend to,” that risk is limited and the Court has “expressed skepticism that the Legislature ‘intended to spring surprise or accidental partnerships on independent business persons.[2] It certainly does not apply when parties expressly agree otherwise. Ultimately, the Court “h[e]ld that parties can contract for conditions precedent to preclude the unintentional formation of a partnership under Chapter 152 and that, as a matter of law, they did so here.”

The Court found because ETP and Enterprise agreed not to be partners unless certain express conditions were met, ETP could not prevail unless it proved that the conditions were satisfied or the conditions were waived. ETP proved neither. The Court found that ETP not only failed to secure a jury finding on waiver or to prove waiver conclusively, ETP also could not point to any evidence in the record that was directly relevant to the issue of waiver of the conditions requiring definitive, board-approved agreements.

Based on its analysis, the Texas Supreme Court affirmed the judgment of the Dallas Court of Appeals.

Impact of the Texas Supreme Court Decision

This decision was closely watched because it provides critical guidance for Texas businesses on whether they can count on contracts to mean what those contracts say. The decision re-affirms that companies can use conditions precedent to avoid an unintended partnership. More broadly, it makes clear that companies can trust that their legal documents will be applied as they are written, and parties can expect well-drafted documents to protect them from an accidental partnership.

In response to today’s decision, Jackson Walker’s Appellate Chair, Jennifer Caughey, said that the “opinion confirmed that Texas is committed to the freedom of contract and will enforce contracts as written. The Court did not change the default rules for creating a partnership; the Court made clear that if parties expressly contract as to prerequisites for partnership formation, Texas courts will enforce the terms of the parties’ contract.”

For more information, please contact Richard A. Howell, Byron Egan, Jennifer Caughey, or Amy Baird.[3]

[1] For further information regarding the Court of Appeals decision and relevant contractual provisions, see pages 29-36 of EGAN ON ENTITIES: Corporations, Partnerships and Limited Liability Companies in Texas (2nd ed. 2018).
[2]Opinion at p. 8 (quoting Ingram v. Deere, 288 S.W.3d 886, 898 (Tex. 2009)).
[3] Please also see: Byron Egan’s “Drafting Preliminary Agreements, Including Confidentiality Agreements and Letters of Intent” (2018) & Richard A. Howell’s “Dallas Court of Appeals Reverses Landmark Judgment on Common Law Partnership and Joint Venture Claims” (2017).

The opinions expressed are those of the authors and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for informational purposes only and does not constitute legal advice.

In This Story

Amy L. Baird
Partner, Houston

Jennifer Caughey
Partner, Houston

Byron F. Egan
Partner, Dallas

Richard A. Howell
Partner, Houston