Introduction. As a matter of first impression, the Texas Supreme Court, in Energy Transfer Partners, L.P., et al (“ETP”) v. Enterprise Products Partners, L.P., et al (“Enterprise”), affirmed the reversal of a judgment exceeding $500 million involving a pipeline partnership dispute, on the grounds that in Texas parties can contract for conditions precedent to preclude the unintentional formation of a partnership. Energy Transfer Partners, L.P. v. Enter. Products Partners, L.P., 593 S.W.3d 732 (Tex. 2020).
Background. In this case, ETP and Enterprise agreed to explore the possibility of forming a joint venture to provide pipeline services to transport oil from Cushing, Oklahoma to the south. In March 2011, Enterprise approached ETP to discuss converting the Old Ocean pipeline into one that could transport oil south from Cushing. ETP owned the pipeline but Enterprise held the lease on it.
Enterprise was also a joint owner with ConocoPhillips in a pipeline called Seaway that transported oil north from the Texas Gulf Coast to Cushing. Enterprise wanted to reverse the direction of the pipeline from Cushing but ConcocoPhillips was not interested in doing so.
In three written agreements, ETP and Enterprise expressed that neither party would be bound to proceed until each company’s board of directors approved the execution of a formal written contract regarding this joint venture. This never happened.
The first of these agreements was a Confidentiality Agreement entered in March 2011. The second and third agreement were a Letter Agreement with an attached Non-Binding Term Sheet entered and a Reimbursement Agreement, entered in April 2011.
By May 2011, ETP and Enterprise began marketing the project to potential customers as a 50/50 joint venture. They needed commitments from shippers to ship at least 250,000 barrels per day to make the venture profitable. The first two marketing attempts were unsuccessful. But, during their last attempt, Chesapeake committed to ship 100,000 barrels per day.
However, just prior to this commitment, Enterprise had begun preparing for its exit from the proposed transaction and negotiating with Enbridge to form a pipeline venture. In August 2011, Enterprise terminated its relationship with ETP.
In September 2011, Conoco sold its interest in the Seaway pipeline to Enbridge making Enbridge the joint owner in Seaway with Enterprise. Enbridge and Enterprise then moved forward to obtain shipper commitments sufficient to to support the modification of this pipeline for transporting oil south from Cushing. They spent billions to reverse the direction of this pipeline. The new pipeline–Wrangler–opened in June 2012 and became financially successful.
ETP sued on the grounds that ETP and Enterprise had formed a partnership by their conduct to “market and pursue” a pipeline, irrespective of their contractual disclaimers. It was ETP’s position that, in moving forward on the Wrangler pipeline with Enbridge, Enterprise breached the statutory duty of loyalty owed by a partner. The jury found in favor of ETP and the trial court entered a judgment awarding ETP a total of $535,794,777 against Enterprise.
The Court of Appeals reversed the judgment apparently on the grounds that the Texas Business and Commerce Code allows parties to contract for conditions precedent to the formation of a partnership. Since the parties did not meet the conditions precedent requiring that a formal agreement be entered and approved by each party’s board of directors, then the parties did not form a partnership.
In analyzing the decision of the Court of Appeals, the Texas Supreme Court first discussed Section 152.051(b) of the Texas Business and Organizations Code which states:
Except as provided by Subsection (c) and Section 152.053(a), an association of two or more persons to carry on a business for profit as owners creates a partnership, regardless of whether:
(1) the persons intend to create a partnership; or
(2) the association is called a “partnership,” “joint venture,” or other name.
The Court also discussed § 152.052 which lists those factors that may be considered in determining whether a partnership has been formed.
Next, the Court discussed Texas Business Organizations Code § 152.0003 that provides:
The principles of law and equity and the other partnership provisions supplement this chapter unless otherwise provided by this chapter or the other partnership provisions.
Given that the common law of Texas strongly favors freedom of contract, the Court held that parties can in fact contract for conditions precedent to preclude the unintentional formation of a partnership. Thus, the Texas Supreme Court affirmed the Court of Appeals reversal of the trial court’s judgment.
Lessons learned. The Texas Supreme Court has a history of going to great lengths to uphold the freedom of contract. (See previous blog article texas-supreme-court-reverses-another-multi-million-dollar-business-fraud-verdict.html). Thus, each party to a major transaction should always have their attorney participate in drafting and reviewing any related agreements. Otherwise, one of the parties may find itself in the shoes of ETP losing out on a five-hundred million dollar deal.