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Texas Supreme Court Rejects "Accidental Partnerships" and Affirms Reversal of $535-Million Pipeline Judgment

Client Updates

Ending a long-running and widely-watched dispute over partnership formation in Texas, the Texas Supreme Court last Friday held “that parties can conclusively negate the formation of a partnership . . . through contractual conditions precedent.”  The January 31 decision in Energy Transfer Partners, L.P. v. Enterprise Products Partners, L.P. likely provides finality to hotly-contested litigation between two of the largest pipeline companies in the United States.  The Texas Supreme Court affirmed the Dallas Court of Appeals taking away a $535-million judgment based on a jury’s finding that a partnership had been formed through conduct.  The jury concluded that a partnership had been formed without a written partnership agreement, despite contractual conditions precedent that required a written agreement to form a partnership.  This led some commentators to refer to the case as the “accidental partnership” litigation.

In a concise 15-page opinion, the Court confirmed its prior holdings regarding the importance of freedom of contract and elevated the importance of written contracts in partnership formation, holding that an “agreement not to be partners unless certain conditions are met will ordinarily be conclusive on the issue of partnership formation as between the parties.”  We have been following this case through its eight-year lifespan because, as discussed below, it has major implications for energy companies doing business in Texas.

The Failed Joint Venture, $535-Million Judgment, and Appeals

This much-anticipated decision concludes eight years of litigation pitting Dallas-based Energy Transfer Partners, L.P. and Energy Transfer Fuel, L.P. (collectively, “ETP”) against  Houston-based Enterprise Products Partners, L.P. and Enterprise Products Operating LLC (collectively, “Enterprise”) regarding a joint venture pipeline project.

In March 2014, a Dallas jury sided with ETP, finding that the parties created a partnership for the pipeline project through their conduct despite conditions precedent in preliminary agreements.   The trial court ultimately entered a judgment for $535 million. For a detailed look at the ETP v. Enterprise trial, see our client update Actions Speak Louder Than Words or Partnership by Ambush?: Formation of Partnerships in Texas after ETP v. Enterprise.

In July 2017, a three-judge panel in Dallas unanimously reversed and rendered judgment for Enterprise.  The panel held that, because it was undisputed that the parties did not perform the conditions precedent in the preliminary agreements (i.e., definitive agreements and board approvals), and because ETP failed to prove a waiver of those conditions, partnership was precluded under Texas law. For a detailed look at the Dallas Court of Appeals’ July 18, 2017 decision, see our client update Partners No More: Dallas Court of Appeals Wipes out Half-Billion Dollar Pipeline Judgment.

On October 8, 2019, the Texas Supreme Court heard oral argument.  ETP argued that the intermediate court’s decision effectively abrogated the five-factor statutory partnership test set out in the Texas Business Organizations Code ("TBOC"), and an early-stage, non-binding letter should not nullify later conduct of the parties evidencing a partnership.  Enterprise argued that a reversal would endanger freedom of contract and the ability of sophisticated parties to bargain for conditions precedent to avoid accidental partnerships.  Enterprise also argued that ETP needed, but failed, to prove that the parties’ conduct “waived” the conditions precedent.  Fourteen amici from academia, trade associations, and businesses also weighed in, largely echoing the briefing of the parties that they supported.

The Court’s January 31 Decision

On January 31, 2020, the Texas Supreme Court issued its opinion affirming judgment for Enterprise.  Focusing on the longstanding Texas policy strongly favoring freedom of contract, the Court held that parties, as a matter of law, “can contract for conditions precedent to preclude the unintentional formation of a partnership.”

The Court explained that its decisions “recognizing this policy are decades older than the TBOC or its predecessor statute.”  Consistent with its previous decision in Ingram v. Deere, 288 S.W.3d 886, 898 (Tex. 2009), the Court reiterated its view that “the Legislature did not ‘intend[] to spring surprise or accidental partnerships’ on parties.”  And, the Court highlighted that the TBOC expressly authorizes supplementation of the partnership-formation rules with “principles of law and equity.”  In that regard, the Court noted that “perhaps no principle of law is as deeply engrained in Texas jurisprudence as freedom of contract.” 

Although an agreement not-to-be-partners would ordinarily preclude the partnership-formation analysis, the Court held open the possibility that conduct can waive conditions precedent.  The Court held that ETP needed—yet failed—to “obtain a jury finding on waiver or to prove it conclusively.”  The Court clarified that, “where waiver of a condition precedent to partnership formation is at issue, only evidence directly tied to the condition precedent is relevant.”  Evidence generally probative of the five partnership factors “is not relevant,” because, “otherwise, a party in ETP’s position could claim waiver in virtually every case.”  ETP ultimately needed to demonstrate that “Enterprise specifically disavowed the Letter Agreement’s requirement of definitive, board-of-directors-approved agreements or that Enterprise intentionally acted inconsistently with that requirement.”  The Court rejected ETP’s evidence, that the “parties held themselves out as partners and worked closely together on the [pipeline] project” as irrelevant “to the issue of waiver of definitive, board-approved agreement[s].”

Lessons Learned

It is no surprise that the Texas Supreme Court, like the Dallas Court of Appeals, closely scrutinized this judgment, which attracted amicus briefs warning of the “uncertainty” and “chilling effect” that the judgment would have on energy joint venture projects in Texas.  The Enterprise decision clarifies Texas partnership law in two important respects.

First, it affirms the enforceability—and importance—of contractual provisions like conditions precedent in preliminary agreements associated with partnerships and joint ventures.  Given the prevalence of joint ventures for midstream infrastructure transporting oil, gas, and more recently produced water, this decision offers a clear roadmap to avoid accidental partnerships.  As a practical matter, this decision will prompt parties to pursue dismissals at earlier stages of litigation because conditions precedent can be enforced “as a matter of law.”

Second, although the decision acknowledges that certain circumstances might waive conditions precedent, the Court took a narrow view of what evidence would be relevant.  The narrow exception sets a high bar for any party seeking to avoid the enforcement of such provisions, and, as a result, it may discourage challenges to the enforcement of conditions precedent.

With the Court’s guidance in hand, companies doing business in Texas should consider the following steps when preparing initial joint venture documents:

  • Carefully identify and define: (i) the parties, scope, and timing of a potential joint venture project; and (ii) the specific conditions that must be met prior to enforceable obligations (i.e., avoid non-specific boilerplate).  The Enterprise decision confirms that conditions precedent will be enforced as written.
  • Although not directly addressed in the Enterprise decision, companies should consider additional provisions to mitigate the risk of accidental partnership through conduct, including: (i) express statements negating the intention to become partners; (ii) specific disclaimers of fiduciary duties and duties of loyalty; (iii) disclaimers specifying certain joint activities (i.e., third-party marketing) that do not give rise to a partnership; (iv) mutual waivers of causes of action based on partnership or joint venture theories; and (v) a specific end date for negotiations if no definitive agreement is executed or other condition precedent is not satisfied.
  • Work closely with project teams and business clients to ensure that business structure, internal documents, and third-party communications accurately reflect the current commercial arrangement.

The Enterprise decision provides certainty on partnership formation by signaling that contract provisions will be enforced as written, meaning that parties can avoid accidental partnerships through the use of conditions precedent.  We are closely monitoring other cases in which waiver issues will further define the contours of partnership formation in Texas.

 

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