The Texas Supreme Court on Friday upheld a lower court’s decision to vacate a $500 million judgment because two energy titans had not created a formal partnership.
Energy Transfer Partners, LP (ETP) sued Enterprise Products Partners, LP in 2011 after efforts to collaborate on the creation of reversing of a pipeline from Cushing, OK, to the Gulf Coast dissolved. Recognizing a need to transport crude fuel from a storage hub in Cushing to the Gulf Coast, the two companies began discussing and marketing a project to build a new pipeline or reverse an existing pipeline. After marketing the project as a “50/50 [Joint Venture]” and failed attempts to receive sufficient commitments from other producers to use the pipeline, Enterprise exited the agreement and formed a new partnership with another producer. Enterprises new partnership with Enbridge reversed another pipeline and has been financially successful. ETP sued, claiming that they had formed a partnership with Enterprise and suffered financial damages because of Enterprise’s exit.
A jury held that Enterprise did enter into an agreement and did violate its “duty of loyalty” and rendered a judgment of nearly $536 million. The court of appeals reversed the judgment stating that the Texas Business Organizations Code allows parties to contract with terms that must occur prior to the formation of the partnership, and those conditions did not occur. The court of appeals stated that the ETP had the burden to prove the conditions were met or waived, and they failed to do so.
In the opinion by Chief Justice Nathan Hecht, the Texas Supreme Court stated that conditions precedent must occur in order to form a partnership. In reaching its decision, the Supreme Court had to reconcile common law condition precedent with the Texas Business Organizations Code (TBOC). As stated in the opinion, the Court had “never squarely addressed whether parties’ freedom to contract for conditions precedent to partnership formation can override the statutory default test, in which intent is a mere factor.”
The Supreme Court concluded that the partnership agreements required that the boards of directors of the companies formally agree to the partnership. The court stated that ETP was required to show that Enterprise either formally agreed or that the Enterprise waived the requirement. ETP did not do either. The court held that “holding the other party out as a partner” was not relevant, in the absence of either a formal agreement as required as a condition precedent to the partnership or a waiver of the requirement.