Common Law Business Partnership – Can You Have a Partner Despite a Contrary Agreement?

Originally published by Cleve Clinton.

Believing that a non-binding term sheet and earlier written agreements precluded any unwritten partnership, Original Oil Production Services (OOPS) cut out its colleague Petroleum United Transfer Zenith (PUTZ) and secretly negotiated its own sweet deal with a competitor.

Aghast upon discovering that OOPS took sole ownership and advantage of the joint efforts of these midstream oil and gas transporting giants to solve the puzzle to reverse the normal flow of crude and send it from North Dakota and Canadian oil patches back to the Gulf, PUTZ sued. Concluding that despite prior agreements the parties’ conduct evidenced an unwritten partnership, a jury found that OOPS breached its fiduciary duty of loyalty to the tune of $500 million. Did the jury get it right?

Unwritten Partnership?

A Dallas County judge and jury think so. A partnership is “an association of two or more persons to carry on a business for profit,” regardless of whether they intend to create a partnership. OOPS argues that previously signed documents prohibit any partnership. The jury agreed with PUTZ’s argument that the parties plowed right past some initial agreements and satisfied not just one, but all five partnership statutory factors to establish a partnership: (1) sharing in profits; (2) expressing intent to be partners; (3) participating in control; (4) agreeing / sharing in losses or liability; and (5) agreeing to contribute money or property – consequently overruling any previous, preliminary agreements.

PUTZ argues that a partnership forms when the parties act like partners, despite what they said when conditions precedent were never satisfied. For example, Texas law recognized a  partnership when parties acted as a partnership in the face of an unsatisfied condition precedent to sign a written partnership; in the face of agreeing not to be partners when they agreed to share profits and expenses, contribute property, and obligate each other for debts; and even when calling their agreement a “lease” yet the “lease” terms evidenced profit and loss sharing and a joint enterprise benefiting both.

Fiduciary Duty Breached Until Proven Innocent?

Given the finding of a partnership, OOPS breached its fiduciary duty of loyalty to its partner PUTZ. And, since OOPS violated the trust and confidence owed by its duty of loyalty, OOPS must prove that its conduct was honorable to avoid PUTZ’s breach of duty claim. OOPS, as the accused, must prove its innocence. Guilty until proven otherwise innocent is the much tougher legal standard for fiduciaries.

Disgorgement of Profits?

In Texas, a person is not permitted to profit by his own wrong. All profits from misconduct, such as a stolen business opportunity, are subject to disgorgement. A fiduciary (OOPS) must account for, and yield to its beneficiary partner (PUTZ), any profit made as a result of a breach of a fiduciary duty. Disgorgement discourages disloyalty and strengthens fiduciary relationships by stripping the defendant of any wrongful gain.

Tilting the Scales in Your Favor

Actions speak louder than words when it comes to taking care of your partner. Regardless of the paperwork crafted and signed, if you and your partner start wheeling and dealing your ideas, and the ideas take form in a way different from your initial documents, know that you better act in the best interest of you both. Loose fitting first agreements hardly trump the demands of competitive, heavily negotiated subsequent transactions. How do you prove that you don’t have a partnership and you did not breach your fiduciary duty of loyalty? Sign a new written agreement that either details the evolving arrangement, or clearly disavows any ongoing business relationship.

Epilogue

Circumstances like these happen all the time, particularly in the oil and gas industry. Understandably, the energy industry and lawyers across the state are closely following the real case with very similar facts – Enterprise Products Partners LP v. Energy Transfer Partners, LP before the 5^th Court of Appeals in Dallas. Appellant briefs for the trial court Plaintiff Energy Transfer and the appellant- trial court Defendant Enterprise Products Partners can be found on the appellate website. Many predict the appeal will make its way to the Texas Supreme Court.

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