On January 31, 2020, the Texas Supreme Court (the “Court”) affirmed a ruling from the Fifth Court of Appeals in Dallas in the case of Energy Transfer Partners LP et al. v. Enterprise Products Partners LP et al, No. 529 S.W.3d 531 (Tex. App.—Dallas, 2017), holding that “parties can contract for conditions precedent to preclude the unintentional formation of a partnership” under Texas law.
In early 2011, Enterprise Products Partners, L.P. (“Enterprise”) and Energy Transfer Partners, L.P. (ETP) discussed building a pipeline to transport crude oil from Cushing, Oklahoma to the Gulf Coast. However, after a weak response during the “open season,” Enterprise ultimately proceeded to build the pipeline with a competitor of ETP instead. ETP then sued Enterprise, arguing that, due to their working relationship, ETP and Enterprise were partners under a five-factor statutory partnership test, despite signing agreements that clearly provided for conditions precedent to establishing a partnership.
In 2014, a Dallas jury agreed with ETP, and ETP was awarded approximately $535 million in damages. Subsequently, the Fifth Court of Appeals in Dallas reversed the jury’s determination, holding that the Texas Business Organizations Code (the TBOC) allowed parties to contract for conditions precedent to partnership formation, and that, in this case, there was no partnership because a preliminary letter agreement regarding the development of the pipeline included certain conditions precedent that were neither met nor waived.
On January 31, 2020, the Court delivered an opinion upholding the decision of the Fifth Court of Appeals. In its succinct opinion, the Court once again reaffirmed the ability of parties to make contracts, noting that “no principle of law is as deeply engrained in Texas jurisprudence as freedom of contract,” and reiterated the Court’s long-held view that the Texas Legislature did not intend to “spring surprise or accidental partnerships” on parties.
In its analysis, the Court noted that the statutory test relied on by ETP in its arguments is non-exclusive, and that Texas courts regularly enforce conditions precedent to contract formation, especially in the case of arm’s length negotiations between sophisticated business parties. With those principles in mind, the Court held that, under Texas law, parties may override the default partnership test for partnership formation by agreeing to conditions precedent to forming a partnership.
The Court found that since no evidence suggested that Enterprise had waived the conditions precedent in the various documents related to the transaction, Enterprise and ETP had not formed a partnership.
The Court’s decision in Energy Transfer Partners LP et al. v. Enterprise Products Partners LP serves to bring clarity to Texas law regarding formation of partnerships and reinforces longstanding Texas law regarding freedom of contract. Players in the energy sector, where partnerships are often used to finance expensive, high-risk investments, were unsettled by the jury decision in favor of ETP. From the industry perspective, it meant that preliminary business discussions, which occur on a regular basis, could be misconstrued as creating formal partnerships, making them unwitting partners in potentially undesirable business relationships.
The Court’s opinion provides reassurance that sophisticated parties can choose if and when to enter into partnerships, allowing them the ability to make conscious decisions about the risks they are willing to take and with whom, and avoiding the risk of partnership by ambush as it has become known. From a practitioner’s point of view, the Court’s decision validates the practice of clearly disclaiming the formation of a partnership in preliminary agreements until parties are sure they want to proceed with a partnership.