On March 4, 2014, a Dallas jury awarded Energy Transfer Partners, L.P. (“ETP”) $319 million in damages after finding that Enterprise Products Partners, L.P. (“Enterprise”) had formed a binding partnership with ETP to build a pipeline from Cushing, Oklahoma to the Gulf of Mexico, and then breached its duty of loyalty by exiting the project and building a pipeline along the same route with a different company. The jury reached its verdict despite the fact that ETP and Enterprise had executed a letter agreement at the beginning of their relationship disclaiming any intent to become partners, and setting specific conditions precedent to formation of a partnership. That verdict casts a spotlight on the challenges faced by even the most sophisticated entities who wish to explore business opportunities with other parties without becoming partners and acquiring unwanted fiduciary obligations under Texas law. While the ETP verdict will likely be appealed, it serves as a reminder that companies should carefully police both their preliminary agreements and their conduct in furtherance of those agreements if they do not intend to establish a partnership. After briefly exploring Texas partnership law and the ETP case, this article offers practical guidance on how to structure preliminary relationships to avoid forming unwanted and unintended partnerships.
Partnership Formation under Texas Law -
Partnership formation in Texas is governed by a five-factor test set forth in the Texas Business Organizations Code (“TBOC”). Those factors, which were borrowed from the common law, include sharing of profits; expressions of intent to become partners; an agreement to share liability or losses; an agreement to contribute money or property; and shared control. In its 2009 opinion in Ingram v. Deere, the Texas Supreme Court provided detailed guidance on how to apply the TBOC factors. At issue in Ingram was whether a psychiatrist and a psychologist had formed a partnership when the parties entered into an oral agreement for the psychiatrist to serve as the medical director for the psychologist’s clinic. The Court began its analysis by noting that partnership formation under Texas common law required proof of all five common law factors, with a “prime element” being evidence of the parties’ intent. The Court held, however, that the statutory code required a different, “less formalistic and more practical approach” than the common law.
Originally published in the Dallas–Fort Worth Chapter of the Association of Corporate Counsel.
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Topics: Duty of Loyalty, Jury Awards, Letter of Intent, Partnership Agreements, Partnerships, Pipelines
Published In: Business Organization Updates, Business Torts Updates, Civil Remedies Updates, General Business Updates, Energy & Utilities Updates
DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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