On January 31, 2020, the Texas Supreme Court resolved an issue which may have implications for anyone considering a business collaboration. In 2011, Enterprise Products Partners (“Enterprise”) and Energy Transfer Partners (“ETP”) began discussions about converting an existing pipeline to another use, which would have required a massive investment and committed customers. Through three written agreements they set out to explore the venture, but in the agreements reiterated their intent not to be bound until there was a formal written contract.
Over the ensuing months they formed a team to pursue the project. They marketed the pipeline to potential customers and prepared engineering plans. One shipper committed, but Enterprise began refocusing on a business arrangement with a third party. Enterprise ended its relationship with ETP and opened a pipeline with that third party.
ETP sued, claiming that despite the written disclaimers, it had in fact formed a partnership with Enterprise through the conduct of the parties, and that Enterprise had breached its fiduciary duties to ETP. A jury agreed and awarded over $535 million in damages.
The legal issue was whether parties may agree by contract that their conduct does not create partnership and fiduciary duties even when their conduct would have been enough to create a partnership. The answer will certainly impact whether and how your company explores potential collaborations with other businesses.
By all statutory or common law standards, except for the contractual provision negating such intent, the efforts of Enterprise and ETP would have amounted to a partnership or joint venture. But the Texas Supreme Court ruled that parties are free to contract for conditions precedent to partnership formation and override the usual standards relating to conduct or intent of the parties. “We hold that parties can contract for conditions precedent to preclude the unintentional formation of a partnership under Chapter 152 [of the Texas Business Organizations Code].” The implications are enormous, particularly if a business fails to adequately document future collaborations. The language of the partnership disclaimer will be critical.
Before you unintentionally bind yourself to a partnership you never intended, please contact Lee Herman or Bradley Rauch at Hirsch & Westheimer, for assistance in drafting an agreement that will protect you and your company from the jury verdict that nearly cost Enterprise, or contact Judge Jeff Shadwick (Ret) to discuss strategies in addressing or responding to a claimed or threatened partnership. We want you and your business collaborations to be profitable and intended.