The following is a case update written by the Hon. Meredith Jury (United States Bankruptcy Judge, C.D. Cal., Ret.), analyzing a recent decision of interest:

In a case of first impression, the Texas Supreme Court upheld the right of parties to contract for conditions precedent to preclude the unintentional formation of a partnership without an explicit waiver of the conditions. Energy Transfer Partners, L.P. v. Enterprise Products Partners, L.P., 2020 WL 622763 (Tex. 1/31/20).

To review the opinion, click here.

FACTS

For the purpose of distributing crude oil from the Dakotas and Canada south from Cushing, Oklahoma, long the hub for sending imported crude oil north from the Gulf Coast but not for sending it south, Enterprise Products Partners, L.P. (Enterprise) and Energy Transfer Partners, L.P. (ETP) entered into three written agreements to explore the vitality of converting a natural gas pipeline, owned by ETP and leased long term by Enterprise, into one which could carry crude oil. The project, which would also extend the length of the pipeline, would require a massive investment from the parties and committed customers to pay the tariff. In each of the three agreements, the parties reiterated their intent that neither party be bound to proceed until (1) each company’s board of directors approved the execution of a formal contract and (2) definitive terms of the agreement were specified. These agreements stated in no uncertain terms that unless those conditions were met, no joint venture or partnership would be formed.

It is undisputed that those terms were never met. Notwithstanding, the two companies marketed the potential pipeline to the necessary customers as a 50/50 joint venture and prepared engineering plans for the project. However, when it appeared the requisite customer commitments could not be met, Enterprise, first orally and then in writing, terminated its relationship with ETP so that it could negotiate with another competitor.

ETP sued, arguing at trial that, despite the written disclaimers, the parties had formed a partnership to “market and pursue” the pipeline by conduct and Enterprise had breached its statutory duty of loyalty. A jury returned a verdict for ETP, finding that a partnership had been formed and Enterprise had breached its duty. A judgment for $535,794,777.44 was entered in favor of ETP.

Enterprise appealed. The court of appeals reversed. ETP sought further review by the Texas Supreme Court, which granted the petition. It affirmed the court of appeals, concluding that the Texas Business Organization Code (TBOC), enacted in 2003, allows parties to contract for conditions precedent to partnership formation.

REASONING

From 1994 to 2009 (for some provisions), partnerships in Texas were governed by the Texas Revised Partnership Act (TRPA) which was patterned after the Revised Uniform Partnership Act. The relevant section of the Uniform Partnership Act, § 202(a) stated: “[T]he association of two or more persons to carry on as co-owners [of] a business for profit forms a partnership, whether or not the persons intend to form a partnership.” Despite this section, in a case decided under the TRPA, Ingram v. Deere, 288 S.W. 3d 886 (Tex. 2009), the Texas Supreme Court expressed skepticism that its legislature meant to “spring surprise or accidental partnerships on independent business persons.” Moreover, despite the inapplicability of the TBOC to the issues before it, Ingram acknowledged that the TBOC imposed a totality of circumstances test to establish a partnership, noting that the standards under TBOC were substantially the same as they were under TRPA. The totality test included intent of the parties but gave it no greater weight than other factors.

The Texas Supreme Court was tasked with balancing the totality of circumstances test set by statute with a well-developed body of common law that “strongly favors parties’ freedom to contract.” It noted that it had received amicus briefs “weighing in on both sides from academics, industry representatives, a former legislator, and others,” emphasizing the importance of this decision to the Texas business community. In the end, it concluded that the freedom of sophisticated business parties to contract was paramount and honored the conditions precedent to preclude the unintentional formation of a partnership.

The court next ruled that under long standing law, performance of a condition precedent could be waived or modified but the burden to show waiver was on ETP. Since ETP had not obtained a jury finding on waiver or proved it conclusively, there was no waiver by Enterprise. No partnership had been formed.

AUTHOR’S COMMENTS

As is evident, this case drew substantial interest (I counted thirteen amicus briefs noted in the opinion) and mega dollars were in play. However, the principle upheld by the Texas Supreme Court is important to any agreement between business parties with relatively equal bargaining positions. The agreed intentions of the parties to the contract, where expressed in unambiguous language, should be enforced by the courts. Otherwise, what is the purpose of all the give and take of negotiations and the fine-tuning of the exact language in a contract, passed back and forth between lawyers for both sides ad nauseum prior to execution, if that carefully crafted agreed language can just be tossed aside by a court? As the Texas Supreme Court recognized, paramount in our free society is the right of such parties to contract and specify the terms of their agreement. In my opinion, it got it right.

These materials were authored by the Hon. Meredith Jury (United States Bankruptcy Judge, C.D. Cal., Ret.), a member of the ad hoc group. Editorial contributions were made by Monique D. Jewett-Brewster, an attorney with Hopkins & Carley, ALC, a member of the ad hoc group and the 2018-19 Chair of the CLA Business Law Section. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.