Logic is the beginning of wisdom, not the end.
— Dr. Spock, Star Trek, Starfleet Officer
The long-running legal saga between Enterprise Products Partners (“Enterprise”) and Energy Transfer Partners (“ETP”) may finally be nearing its end after the Texas Supreme Court issued a unanimous decision last Friday, January 31, 2020, holding that no partnership ever arose between the parties. (Read more) This dispute between two of the major players in the energy industry focused on the legal standard for determining when a partnership is formed. ETP argued that the test for partnership formation should be based on the parties’ conduct, while Enterprise maintained that specific conditions the parties agreed to include in their contracts had to be established before a partnership was created, and it contended that those conditions had never been met.
The Supreme Court’s opinion may be the final chapter in eight years of hard-fought litigation between Enterprise and ETP, although ETP will have the right to file a petition for rehearing of the Court’s decision. We will share our third blog post about the case and also review some important lessons for business owners gleaned from this lengthy legal conflict. ¹
Predictable Legal Result
The staggering $535 million jury verdict that ETP secured against Enterprise in 2014 had always rested on tenuous legal ground because it conflicted with the terms of the parties’ written agreements. At trial, ETP claimed that Enterprise had breached its fiduciary duty as a partner when it jettisoned ETP to enter into a new pipeline deal with a competitor, Enbridge. The result at trial rested on the jury’s finding that the parties’ conduct created a partnership between them, which gave rise to a duty of loyalty owed that Enterprise owed to ETP as a partner. The jury’s verdict, however, disregarded the parties’ written agreements, which set forth specific conditions precedent to the formation of a partnership, including approval by both companies’ boards. Enterprise therefore argued that it had become subject to a “partnership by ambush.”
The Texas Supreme Court has long championed the sanctity of contract. In numerous previous cases, the Court expressed the view that sophisticated business parties who enter into contracts must honor their bargain. Therefore, the Court’s decision on behalf of Enterprise was not surprising to Court watchers. In addition, a decision in ETP’s favor upholding its common law partnership claim would have created significant uncertainty in the business community as to when a partnership, and related partnership duties, would arise between contracting parties if the terms of their written agreements were not viewed as controlling.
In its decision, the Court cited common law strongly favoring the freedom of contract, and held that parties can adopt conditions precedent that must be met before a partnership will be formed. The Court also cited language from a case it decided more than a decade ago, and noted that: the Legislature did not “intend to spring surprise or accidental partnerships” on parties. While the Court acknowledged that the conditions precedent the parties agreed to could have been waived or modified, it held that ETP was required to either obtain a jury finding that the conditions had been waived or prove waiver conclusively at trial, and ETP had done neither. ²
Business Lessons Learned
While Enterprise ultimately prevailed in defeating ETP’s partnership claims, the legal battle required an enormous amount of time, caused considerable distraction and resulted in very large legal bills. Thus, the Court’s holding in ETP v. Enterprise provides some key take-aways for business owners. If the practices below are followed when parties consider entering into a new business relationship, they may help avoid future litigation. At a minimum, adopting these practices will make it more likely that a court or arbitration panel will grant a summary judgment dismissing partnership claims before trial based on the parties’ conduct.
- Get it clearly stated in writing – The clear guidance from the Supreme Court’s decision is that if a party does not want to be saddled with partnership duties, it should confirm in writing that: (i) no partnership has been formed as of the date documents are signed, and (ii) no partnership will ever be formed unless specific conditions are met, e.g., the requirement that a written partnership agreement must be signed and approved by the company’s board and/or managers.
- Emphasize disclaimer in bold – To avoid any later disagreement, the parties should confirm in boldface in their agreement the statement above that no partnership has been formed between them or will be formed until the specific conditions that set forth have been met.
- Address waiver – All agreements can be waived or modified, but the parties can expressly agree there will be no waiver or amending of any conditions to forming a partnership unless the waiver or amendment is signed and in writing;
- Disclaim all fiduciary duties – In addition to making it clear that no partnership has been formed without specific conditions being met, the parties can also state expressly that they do not owe each other any fiduciary duties unless and until they sign off on a binding written agreement between them;
- Consider use of arbitration – The parties may require that all disputes arising between them will be decided by sophisticated business lawyers in an arbitration proceeding, and they can require that the arbitration hearing be held promptly, within 60 or 90 days;
- Impose damage caps – The parties can agree to limit recoverable damages in a variety of days in any future dispute that arise between them, which can include their agreement to eliminate all claims for consequential damages, for lost profits and for punitive damages; and
- Award fees to prevailing party – The parties can also award reasonable legal fees to the prevailing party, which will require the losing party to pay all of the legal fees that are incurred in the litigation or arbitration.
One man cannot summon the future. But one man can change the present!
Alternate Mr. Spock, “Mirror, Mirror”
The Supreme Court’s decision in the Enterprise case confirms the critical importance of securing written agreements that document the parties’ business relationship. Business owners who sign letters of intent, or enter into other preliminary documents before formally starting a new business relationship need to document the fact that they are not forming a partnership or joint venture unless specific conditions are met. The failure to incorporate these conditions in a signed agreement may result in adverse consequences for the business owner, including being saddled with claims that a partnership was formed and that, as a result, the business owner is burdened with meeting fiduciary duties to the other party.
¹ This post has a Star Trek reference based on the USS Enterprise, the name of the flagship in the show. As Star Trek fans know, the series was written in 1964, and first debuted on television in 1966. Perhaps is is a coincidence, but the first United States nuclear powered aircraft carrier, the USS Enterprise, entered into service just a few years before, in 1962.
² In issuing it decision, the Supreme Court upheld the opinion of the Dallas Court of Appeals, which had overturned the trial court’s judgment. The appellate court determined that ETP had not met the conditions precedent set forth in the parties’ agreements and there was no jury finding that these conditions had ever been waived or modified.