The Dallas Court of Appeals has reversed a half-billion dollar judgment that was based on a jury’s finding a partnership had been created by conduct (despite memorialized conditions precedent that required a written agreement). The July 18 decision is the latest chapter in a hotly-contested partnership formation dispute that has major implications for energy companies doing business in Texas. In the closely-watched decision, the three-judge panel unanimously reversed a $535 million judgment won by Energy Transfer Partners, L.P. (“ETP”) and rendered judgment in favor of Enterprise Products Partners, L.P. (“Enterprise”). The Court held that because the parties did not perform the conditions precedent in the parties’ preliminary agreements (i.e., definitive agreements and board approval), and because ETP failed to prove a waiver of those conditions, partnership was precluded under Texas law.

The failed joint venture and $535 million judgment

In 2011, Houston-based Enterprise and Dallas-based ETP, two of the largest oil and gas pipeline companies in the U.S., explored a joint venture on an oil pipeline project from Cushing, Oklahoma to the Houston area. Enterprise and ETP signed a series of preliminary agreements relating to the potential pipeline, including a confidentiality agreement, letter agreement with an attached term sheet, and reimbursement agreement. Those preliminary agreements contained standard provisions disclaiming partnership or joint venture absent (i) executed definitive documents and (ii) board approvals by both companies. Ultimately, the parties did execute definitive agreements but never obtained board approval for the project. Enterprise terminated the joint venture project and then announced an agreement with Enbridge for a competing pipeline project.

ETP sued Enterprise for breach of joint enterprise and breach of fiduciary duty, culminating in a four-week trial in 2014. ETP argued that the actions by the two companies, including the promotion of the pipeline as a partnership and the formation of joint project teams, demonstrated a business partnership under the Texas Business Organizations Code (“TBOC”). ETP’s argument to the jury was that the parties—through their behavior—had created a partnership, notwithstanding the conditions precedent.

The jury sided with ETP, finding that the parties created a partnership for the pipeline project and that Enterprise violated its duty of loyalty. The trial court ultimately entered a judgment for $535 million in compensatory damages and disgorgement of profits. For a detailed look at the ETP v. Enterprise trial court proceeding, click here.

The Dallas Court of Appeals enforces conditions precedent in written agreements

On appeal, Enterprise argued that the judgment amounted to a refusal to enforce the parties’ agreements, which were “carefully-negotiated” by the parties and “relied on” in “structuring their business affairs.” Enterprise contended that the trial court erred by allowing the case to reach the jury because the parties’ unfulfilled conditions precedent precluded a partnership. In response, ETP did not deny that the conditions precedent were not met, but rather argued that partnership formation is controlled solely by the five-factor test provided in Section 152.052 of the TBOC. ETP pointed to evidence of the parties’ conduct, including their close working relationship, joint marketing efforts, and public references to their “50/50 JV,” to demonstrate that the parties formed a partnership despite their preliminary statements to the contrary. Under that analysis, according to ETP, the jury properly resolved the fact dispute regarding whether a partnership existed.

In a 20-page opinion, the Court addressed whether contractual disclaimers are enforceable to prevent the formation of a “partnership through conduct.” The Court held that because the parties failed to both execute definitive agreements and obtain board approvals, as contemplated in the letter agreement, partnership was precluded under Texas law unless waiver is established. The Court noted that conditions precedent “place an impediment on the parties’ ability to ‘create any binding or enforceable obligations,’” including a binding partnership agreement.

The Court rejected ETP’s argument that the TBOC provisions are exclusive: “Section 152.052 is not the sole source of rules for determining partnership formation. . . . One of those other ‘principles of law’ is the law of conditions precedent.” While the Court’s view does not signal a departure from the totality-of-the-circumstances approach to partnership formation, it does suggest that conditions precedent will be given deference even if some conduct evidences intent to form a partnership.

As a result, in order to form an enforceable partnership, ETP had the burden to prove that (i) the parties waived performance of the conditions precedent, or (ii) other rules of law or equity nullified them. The Court found that ETP did not request a jury factual finding regarding waiver, nor did ETP legally establish that Enterprise waived the conditions precedent. Consequently, the Court concluded that the trial court erred in denying Enterprise’s motions for directed verdict. Lessons Learned

It is no surprise that the Dallas Court of Appeals closely scrutinized this judgment, which attracted amicus briefs warning of the “uncertainty” and “chilling effect” that the judgment would have on energy joint venture projects in Texas. The Enterprise decision affirms the enforceability—and importance—of contractual provisions in preliminary agreements surrounding partnerships and joint ventures, while acknowledging that certain circumstances might amount to waiver. Companies should consider the following steps when preparing initial joint venture documents:

  • Carefully identify and define (i) the parties, scope, and timing of a potential joint venture project, and (ii) the specific conditions that must be met prior to enforceable obligations (i.e., avoid non-specific boilerplate).
  • Craft additional provisions to mitigate the risk of surprise partnership through conduct, including (i) express statements negating the intention to become partners; (ii) specific disclaimers of fiduciary duties and duties of loyalty; (iii) disclaimers specifying certain joint activities (i.e., third party marketing) that do not give rise to a partnership; (iv) mutual waivers of causes of action based on partnership or joint venture theories; and (v) a specific end-date for negotiations if no definitive agreement is executed or other condition precedent is not satisfied.
  • Work closely with project teams and business clients to ensure that business structure, internal documents, and third-party communications accurately reflect the current commercial arrangement. The Enterprise decision leaves open the risk that a party could waive conditions precedent through conduct clearly demonstrating an intent to form a partnership absent those conditions.

Although the Enterprise decision provides additional certainty on partnership formation by signaling that contract provisions will be enforced as written, it is unlikely to be the last word. ETP is expected to seek further review of the decision.