The Texas Supreme Court issued an opinion today in Energy Transfer Partners, L.P v. Enterprise Products Partners, L.P., a case previously featured on the Blog. This case began in 2011 when ETP and Enterprise explored the possibility of partnering to modify and extend, or construct anew, a pipeline to transport oil southbound from Cushing, Oklahoma.
The parties executed three agreements, which collectively provided that no binding and enforceable obligations would be imposed on the parties until a definite agreement was reached and approved by both companies’ boards of directors. When FERC-required shipping commitments failed to materialize, Enterprise walked away and partnered with a third company.
ETP sued, contending that a partnership had been formed and that Enterprise breached its duty of loyalty. The jury agreed, awarding more than $500 million to ETP. The Court of Appeal reversed, and the Texas Supreme Court heard argument in the case on October 8, 2019.
The Court began its analysis by examining the Texas Business Organizations Code, which provides that an association of two or more to carry on a business for profit as owners creates a partnership, regardless of whether they intend to create a partnership or what the association is called. It also reviewed the Code’s non-exclusive factors for determining whether a partnership has been formed. ETP argued that, despite the language in the parties’ three agreements, a partnership had been formed under the TBOC. The Texas Supreme Court thus framed the issue: can parties override the default test for partnership formation by agreeing not to be partners until certain conditions precedent are met?
Citing Texas’s strong policy favoring freedom of contract, particularly as between parties of equal bargaining power, the Court answered the question in the affirmative and held that parties can contract for conditions precedent to preclude the unintentional formation of a partnership under TBOC section 152 and that, as a matter of law, ETP and Enterprise did so here. The Court further noted that the performance of such a condition precedent can be waived but that ETP failed to prove waiver in this case.
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