Texas Supreme Court Update Part I

Texas Supreme Court Update Part I

Texas Supreme Court: Contract Parties Can Disclaim Partnership Among Themselves, Notwithstanding the Presence of Facts Establishing Statutory Elements of Partnership  

 

By Henry Flores & Kenneth Krock

On January 31, 2020, the Texas Supreme Court issued an opinion that will interest transactional lawyers and litigators alike.

In Energy Transfer Partners, L.P., and Energy Transfer Fuel, L.P., v. Enterprise Products Partners, L.P., and Enterprise Products Operating LLC, the Court held that absent clear evidence of waiver, Texas courts will enforce contract provisions that disclaim the existence of a partnership (as between the parties to the contract) until conditions precedent are met.  Notably, the Court observed, “[w]e have never squarely addressed whether parties’ freedom to contract for conditions precedent to partnership formation can override the statutory default test, in which intent is a mere factor.”  In unambiguous terms, the Court answered that question in the affirmative.

The facts of the case merit careful review.

In March 2011, Enterprise and ETP began discussing the possible conversion of an ETP-owned pipeline from (a) transportation of natural gas from the Gulf Coast to the Dallas area to (b) transportation of oil from Cushing, Oklahoma to the Gulf Coast (which would be an important development in the oil & gas industry, as the opinion notes).  The parties executed three agreements to enable them to explore the viability of what would be an expensive and time-consuming venture:  (1) a confidentiality agreement, (2) a letter agreement with a “non-binding term sheet” outlining the terms of a potential joint venture, and (3) a reimbursement agreement under which ETP agreed to reimburse Enterprise for half of the costs associated with the engineering work required to move forward with the pipeline conversion.  Each of the three agreements disclaimed any partnership or obligations between ETP and Enterprise until the parties executed definitive agreements and the parties’ respective boards of directors approved the transaction.

As part of their work, the parties established an integrated team, marketed the project as a “50/50 JV” to potential pipeline customers, prepared engineering plans for the project, and explored the possibility of building a new pipeline (as opposed to retrofitting ETP’s existing pipeline).   Ultimately, the parties were unable to secure sufficient shipping commitments from potential customers, and Enterprise verbally terminated its relationship with ETP in August 2011.

Throughout the Enterprise-ETP relationship, Enterprise was the co-owner of a different pipeline that transported oil north from the Gulf Coast to Cushing (known as Seaway).  When Enterprise’s long-dissenting co-owner sold its interest in Seaway to Enbridge in September 2011, Enterprise and Enbridge began the process of converting Seaway to transport oil south from Cushing to the Gulf Coast.  The new pipeline came on line as “Wrangler” in June 2012.  ETP then sued Enterprise, alleging that Enterprise breached its statutory duty of loyalty among partners under the Texas Business Organizations Code (notwithstanding the partnership disclaimers in their three 2011 agreements).

At trial, the jury found that ETP and Enterprise created a partnership, and that Enterprise had not complied with its statutory duty of loyalty.  The trial court rendered judgment against Enterprise in the amount of $535,794,777.40, plus post-judgment interest.  The Texas Court of Appeals reversed and rendered in favor of Enterprise, holding that the Texas Business Organizations Code allows parties to contract for conditions precedent to partnership formation.  ETP appealed that decision.

In affirming the decision of the Court of Appeals, the Texas Supreme Court noted the strong presumption in favor of freedom of contract under Texas law, stating, “Texas courts regularly enforce conditions precedent to contract formation and reject legal claims that are artfully pleaded to skirt unambiguous contract language, especially when that language is the result of arm’s-length negotiations between sophisticated business entities.”   The Court specifically held that parties can contract for conditions precedent to prevent unintentional partnership formation, and that ETP and Enterprise had done precisely that.

The Texas Supreme Court next addressed whether Enterprise had waived or otherwise disavowed the requirement of definitive, board-approved agreements, or had intentionally acted inconsistently with that requirement.  The Court noted that ETP could only point to the fact that “the parties held themselves out as partners and worked closely together” on the project, and summarily rejected that evidence as insufficient under Texas law.

One final note – the Texas Supreme Court specifically limited its holding to the parties to the agreement disclaiming partnership, noting, “[s]uch an agreement would not, or course, bind third parties, and we do not consider its effect on them.”  Accordingly, creditors and other third parties remain free to allege the existence of a partnership, notwithstanding a disclaimer of partnership among the partners themselves.

To read the full Supreme Court opinion click here.

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