Business Litigation Alert: "Texas Supreme Court Confirms - No Partnership by Ambush"
In a case critical to Texas contract and partnership law, on January 31 the Texas Supreme Court confirmed that parties can negate the formation of a partnership through their contractual language. The Court affirmed an appellate court ruling that overturned a $535 million jury verdict against Enterprise Products Partners, LP (“Enterprise”) and in favor of Energy Transfer Partners LP (“ETP”). The Court noted that “perhaps no principle of law is as deeply engrained in Texas jurisprudence as freedom of contract,” and held that “parties can contract for conditions precedent to preclude the unintentional formation of a partnership” that can occur under Texas statute.
This case stems from a 2011 project in which ETP and 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, which, among other things, disclaimed any “binding or enforceable obligations” unless certain conditions precedent were met, specifically: (i) the board of directors of each company approving; and (ii) definitive agreements memorializing the terms of the parties’ transaction. The agreements further 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 entering those agreements, ETP and Enterprise began joint efforts to secure commitments for the proposed pipeline, including joint marketing materials and presentations with 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 and about a month after the ETP/Enterprise project was abandoned, Enterprise announced that it had entered into an agreement with another party on another similar project. ETP filed suit. 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 and a jury awarded ETP approximately $535 million.
That jury verdict was overturned by the Texas Fifth Court of Appeals in 2017. ETP argued that Texas partnership law provides for the formation of partnerships – even unintentional partnerships – in the absence of a written agreement. 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 Texas Supreme Court agreed with the appellate court that no legal obligation really means no legal obligation. When parties sign an agreement in which they disclaim any “binding or enforceable obligations” unless conditions precedent occur, they are bound by that agreement. Texas companies regularly rely on the types of contractual disclaimers found in this case to avoid the very consequences of the putative partnerships that the jury found. The Court held that the conditions precedent – board approval and definitive agreements – had not occurred and accordingly did not form a partnership.
Takeaways for Texas Businesses
- Understand that without clear contractual language, business conduct is part of determining whether a partnership exists – even if it is unintentional. Take care with marketing materials or other representations.
- Most importantly, be precise in drafting preliminary agreements. Make crystal clear that key provisions constitute conditions precedent to the formation of any partnership.
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