Texas Supreme Court Affirms That Parties May Block Partnership Via Conditions Precedent

February 6, 2020

On Jan. 31, 2020, the Texas Supreme Court issued its highly anticipated decision in Energy Transfer Partners, L.P. v. Enterprise Prod. Partners, LP, No. 17-0862, 2020 WL 500259. In rejecting the request by Energy Transfer Partners (ETP) to reinstate its $535 million verdict for breaches of partnership obligations, the court found that no partnership had been formed because the preliminary agreements between ETP and Enterprise Production Partners specified conditions to forming such a relationship. The court firmly held that Texas law “permits parties to conclusively agree that … no partnership will exist unless certain conditions are satisfied.” The decision further enshrines in Texas law a party’s freedom to contract, including for conditions precedent to contract formation.

In 2011, ETP and Enterprise entered into three preliminary agreements for the purposes of developing a crude oil pipeline between the Cushing and Houston Ship Channel crude oil storage hubs. A letter agreement, which attached a “general” term sheet, stated that “no binding or enforceable obligations” would exist between the parties “unless and until” contracts were negotiated, executed and approved by the parties’ respective boards. The other preliminary agreements similarly disclaimed legal obligations between the parties.

Nevertheless, in seeking shipper commitments, the parties’ joint team referred to their “Double E” pipeline project as a joint venture. The open season failed to obtain the necessary commitments, despite being extended twice, and Enterprise terminated the project. However, prior to doing so, Enterprise began negotiations with Enbridge. Referred to as the Wrangler Pipeline, the Enterprise-Enbridge project obtained a 100,000 barrel-per-day commitment previously promised to the Double E pipeline. The Wrangler Pipeline was constructed and remains a commercial and financial success to this day.

Before the Texas Supreme Court, ETP argued that the Texas Business Organizations Code (TBOC) created a five-part totality-of-the-circumstances test that overrode the common law of partnership developed by Texas courts, and that the preliminary agreements met only one, non-dispositive portion of that test. The court rejected that position, emphasizing Texas public policy favoring freedom of contract and finding that the TBOC test is supplemented by “principles of law and equity,” rather than superior to them. The court further stated:

An agreement not to be partners unless certain conditions are met will ordinarily be conclusive on the issue of partnership formation as between the parties. Performance of a condition precedent, however, can be waived or modified by the party to whom the obligation was due by word or deed. We agree with the court of appeals that under Texas Rule of Civil Procedure 279, ETP was required either to obtain a jury finding on waiver or to prove it conclusively. It has done neither.

(Internal citations and quotations are omitted.)

ETP also argued unsuccessfully that Enterprise had waived the conditions precedent contained in the preliminary agreements by its subsequent conduct. In particular, ETP cited the joint marketing effort pitching the Double E pipeline to customers amounted to Enterprise “holding the other party out as a partner.” Justice Nathan Hecht, writing for the court, rejected such outside conduct as indirect and irrelevant, noting that ETP failed to prove a waiver at trial. He also opined that allowing consideration of such extrinsic conduct as evidence of a waiver could result in contracting parties being able to “claim waiver in virtually every case.”

The significant but concise opinion provides legal and business certainty for companies looking to explore business opportunities on a nonbinding and preliminary basis, including in the capital-intense oil and gas industry. The case rejects the theory of “partnership by ambush” and reinforces Texas’ strong public policy favoring freedom to contract — including for conditions precedent to further contract formation.