Texas Supreme Court Says Don’t Mess With a Written Contract

Originally published by Charles Sartain.

It is no surprise to Texas Supreme Court watchers that in Energy Transfer Partners et al v. Enterprise Products Partners LP et al. the court rejected claims that the parties had created a partnership by actions that varied from the terms of written contracts. The court concluded that parties can conclusively agree that no partnership will exist unless certain conditions are satisfied.

The contracts

Cushing, Oklahoma is a major crude oil trading hub. Enterprise co-owned the Seaway pipeline that sent oil north to Cushing from the Texas Gulf Coast. Driven by a changing market, Enterprise approached ETP about converting the Ocean Pipeline (a gas pipeline) to move crude oil south from Cushing. ETP owns Ocean but Enterprise holds a long-term lease. To convert would require a massive investment and committed customers.

In three written agreements the parties reiterated in myriad ways that neither would be bound until each company’s board of directors approved the potential transaction and a written contract was negotiated, executed and delivered, and then only to the extent of the specific terms of such agreement. Otherwise, neither party would be under any legal obligation by virtue of any written or oral expression.

Enterprise and ETP ran a FERC-required “open season” during which shippers were asked to commit to daily barrel volumes and tariffs. The effort failed. Enterprise then exited the ETP relationship and made a deal with Enbridge for the Seaway, obtaining commitments and investing “billions” to reverse the direction of the Seaway.

ETP sued Enterprise on the theory that despite contractual disclaimers, the parties through their conduct had formed a partnership to market and pursue a pipeline and that Enterprise breached its statutory duty of loyalty by pursuing the project with Enbridge. ETP prevailed at trial and was awarded $535 million in damages.

Freedom of contract prevails

The court of appeal reversed. The Supreme Court affirmed the reversal. The court acknowledged that according to the Uniform Law Commission, under common law parties could inadvertently create a partnership despite their express subjective intention not to do so. That position has never been popular with the court.

The court focused on the public policy that contracts freely entered into are to be enforced. The question: Could freedom to contract for conditions precedent to partnership formation override the Texas Business Organizations Code’s statutory default test? TBOC non-exclusive factors for formation of a partnership are:

• Receipt or right to receive a share of profits
• Expression of an intent to be partners
• Participation or right to participate in control of the business
• Agreeing to share or sharing losses or liabilities for claims by third parties
• Agreement to contribute or contributing money or property.

According to ETP, the TBOC’s totality-of-the-circumstances test controls partnership formation to the exclusion of the common law, and the parties’ intent is just one factor to be weighed with others. Enterprise responded with the primacy of freedom of contract and warned about the chaos and dire economic consequences that would result from litigation if ETP’s position were to prevail.

Wiggle room for future litigants

The court agreed that performance of a condition precedent could be waived or modified, by word or deed, by the party to whom the obligation was due. But that would require pleading and a jury finding or conclusive proof of waiver, neither of which happened.

The court further opined that where waiver of a condition precedent to partnership formation is at issue, only evidence directly tied to the condition precedent is relevant. Evidence that would be probative of expression of intent is not relevant. The court was essentially saying that there was no evidence that Enterprise specifically disavowed the requirements in the agreements or intentionally acted inconsistently with those requirements.

An inaccurate musical interlude? Everybody should know.

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