A Texas Court of Appeals ruled this week that when companies agree in writing that they have no legal obligations to proceed with a project, they mean it. That may appear to be a simple concept but a jury came to a different conclusion to the tune of $535 million dollars in damages.
In early 2011, Energy Transfer Partners (ETP) and Enterprise Products (Enterprise) began negotiating the construction and operation of a crude oil pipeline to run from Oklahoma to the Texas Gulf Coast. These negotiations led to a series of written agreements between the companies. The agreements, however, disclaimed any “binding or enforceable obligations” unless certain conditions precedent were met, specifically (i) the board of directors of each company approving; (ii) definitive agreements memorializing the terms of the parties’ transaction. Further, the agreements stated that the parties could depart from negotiations “at any time for any reason.” Indeed, one of the agreements specifically stated that the parties agreed that the agreement did not create a joint venture, partnership, or any other entity.
After those agreements were entered, ETP and Enterprise began joint efforts to secure commitments for the proposed pipeline. Joint marketing materials were distributed and joint presentations conducted, which included statements that the companies had formed a joint venture or a “50/50 JV.” They also split the costs of the initial design work as agreed.
In August 2011, Enterprise informed ETP that it would not move forward with the project because the parties had not been successful in generating commitments from enough crude shippers. About a month after the ETP/Enterprise project was abandoned, Enterprise announced that it had entered into an agreement with another party on another project – a crude oil pipeline running from Oklahoma to the Texas Gulf Coast. Unsurprisingly, ETP sued the next day.
After a multi-week trial, a Texas jury found that despite the agreed language to the contrary, a partnership did exist between ETP and Enterprise due to the parties’ conduct. The jury found that Enterprise breached a fiduciary duty it owed to ETP as a result of the partnership and that ETP was damaged in a total amount of approximately $535 million. Enterprise appealed the judgment.
On appeal, Enterprise asked the Dallas Court of Appeals a critical question: “How can companies protect against the risk of a partnership by ambush if they cannot contract around it?” It posited that there simply is no answer to that question. Instead, only the written agreements between the parties can govern their relationship and those agreements specifically state that there was no binding legal obligation. It merely did exactly what ETP agreed it could do – depart from negotiations at any time for any reason.
ETP vehemently disagreed. It argued that Texas partnership law provides for the formation of partnerships in the absence of a written agreement. Indeed, the Texas Business Organizations Code section 152.052 provides that the following factors should be reviewed to determine if a partnership has been formed: (1) the right to share profits; (2) the expression of an intent to be partners; (3) the right to participate in the control of the business; (4) an agreement to share in losses or liabilities; and (5) an agreement to contribute money or property to the business.
ETP argued that the signed agreements were “preliminary agreements that the parties disregarded” by their later conduct. That conduct expressed the intent to be partners and demonstrated an agreement to share profits, costs, and contribute money to the joint venture.
The Dallas Court of Appeals rejected ETP’s reliance on the parties conduct and focused instead upon what the parties agreed in writing. The appellate court agreed – as amicus parties had informed the Court – that Texas companies regularly rely on such contractual disclaimers to avoid the very consequences of the putative partnerships that the jury found. The Court held that a “condition precedent to the right to maintain an action must be performed and the fact of performance or excuse of performance must be alleged and proved in order to warrant a recovery.” The Court held that the conditions precedent – board approval and definitive agreements – had not occurred. Further, ETP failed to request a jury question regarding waiver of the conditions precedent or prove that those conditions were waived. Because ETP did not prove waiver, the Court held that the plain language of the agreement, including its conditions precedent, trumped the conduct of the parties and the verdict in favor of ETP was reversed.
It is anticipated that ETP will petition the Texas Supreme Court to review this decision. Because the outcome of this case is critical to how all Texas businesses –not just midstream energy companies – are able to coordinate work on large projects, the high court is widely expected to make the final decision about whether what Texas businesses agree to in writing trumps the parties conduct in preparing for the project. Until then, Texas businesses must continually monitor their relationships with third-parties to ensure that they do not stumble into a “partnership by ambush.”