Avoiding multimillion-dollar liability for de facto partnership breach under Texas law: one useful tip


After a lengthy trial, a Dallas jury has found that a de facto partnership existed between Energy Transfers Partners, L.P. (ETP) and Enterprise Products Partners, L.P. “to market and pursue a pipeline project to transport crude oil from Cushing, Oklahoma to the Gulf Coast.” 

The jury then concluded that Enterprise had breached its partnership duty of loyalty by instead pursuing the pipeline project with another company, Enbridge (US), Inc., and awarded ETP, at its election, US$319 million in actual damages or $595 million in disgorgement damages for the breach.

Finding that Enterprise had not acted maliciously, the jury did not award punitive damages.

The case highlights the need for parties to be very careful and specific in their contracts and letter of intent to exclude the existence of a joint venture or partnership relationship between them.

Here, Enterprise and ETP were both represented by counsel when they negotiated and executed three written agreements that attempted to define the limited scope of their relationship concerning the pipeline project:

(1) Confidentiality agreement

(2) Nonbinding term sheet and letter agreement

(3) Letter agreement regarding reimbursement of engineering costs.

While all three agreements were important, Enterprise was unable to convince the trial judge that the following language in the nonbinding term sheet and letter agreement negated the existence of a joint venture/partnership as a matter of law:

No binding or enforceable obligations shall exist between the Parties with respect to the Transaction [pipeline project] unless and until the Parties have received their respective board approvals and definitive agreements memorializing the terms and conditions of the Transaction have been negotiated, executed and delivered.

Instead, the court submitted the issue for the jury to determine whether the parties’ conduct  created a partnership or joint venture, even though the pipeline project was never approved by the respective boards of directors, nor finalized. As noted above, the jury found that their conduct did create such a relationship.

While the court correctly determined that formal documentation is not always necessary to find intention to create a partnership under Texas law, its disregard of the foregoing language and submission to the jury is especially troubling when a specific condition precedent to partnership –approval by the boards – never occurred.

Pending further clarification via appellate decisions, one possible lesson learned from this case is to use language in letters of intent that even more specifically negates the existence of a partnership or joint venture, instead of conditions precedent to their formation.

Here is possible language:

The parties agree that there is no partnership or joint venture or special relationship, of any kind, or intent to create one, between the parties and that no conduct between them should be interpreted as creating such a relationship or intent, which must instead be documented and approved by the respective boards of the parties. 

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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