On July 18, 2017, the Dallas Court of Appeals (the “Court”) reversed the more than $535 million jury verdict against Enterprise Products Partners L.P. (“Enterprise”), leaving Energy Transfer Partners, L.P. (“ETP”) empty-handed. Since 2014, companies doing business in Texas have worried that binding partnerships could be inadvertently formed despite express language to the contrary. The Court reversed the jury verdict and held that there could be no binding or enforceable obligations based on the parties’ Letter Agreement because their boards did not approve the partnership and definitive agreements had not been negotiated or executed.
In early 2011, ETP and Enterprise began discussing a pipeline to transport oil from Cushing to Houston. The parties agreed to explore the viability of the project and negotiated and executed written agreements, including a Nonbinding Term Sheet and Letter Agreement (the “Letter Agreement”). The Letter Agreement provided that “no binding or enforceable obligations shall exist…unless and until the Parties have received their respective board approvals and definitive agreements…have been executed.” Thereafter, the parties participated in an “open season” to attract shipping commitments on their potential pipeline. The commitments obtained during open season fell short of the agreed minimum requirement. Shortly after conclusion of the open season, Enterprise terminated its participation in the project.
Weeks before such termination, Enterprise entered into discussions with Enbridge (US) Inc. (“Enbridge”) regarding a similar pipeline. These conversations were not disclosed to ETP. The day after Enterprise terminated its project with ETP, Enterprise agreed to work with Enbridge on a Cushing-to-Houston pipeline. Shortly thereafter, ETP sued Enterprise for breach of joint enterprise and fiduciary duty.
In 2014, a Dallas jury found a partnership had formed and that Enterprise had failed to comply with its duty of loyalty. The Texas Business Organizations Code (the “Code”) sets forth a five-part test for determining whether a partnership is established. Looking to the parties’ conduct, and applying these five factors in a totality of the circumstances test, the jury found that a partnership had been created notwithstanding the limiting language of the Letter Agreement. The jury further concluded that, as a partner to ETP, Enterprise breached its duty of loyalty by pursuing a similar project with Enbridge. ETP was awarded $535.8 million.
The Court considered whether “the trial court erred by denying Enterprise’s motions for directed verdict and JNOV because the parties’ written agreements contained unperformed conditions precedent that as a matter of law precluded the forming of the disputed partnership.” While the trial court looked to the five-factor test for determining if a partnership had been created, the Court noted that those factors were not exclusive. The Court looked also to Section 152.003 of the Code, which says that principles of law and equity – including the law of conditions precedent – supplement statutory principles of partnership law. It noted that conditions precedent “place an impediment on the parties’ ability to ‘create any binding or enforceable obligations.’”
The Court held that the requirements listed in the Letter Agreement between Enterprise and ETP were conditions precedent. The Court further concluded that “unperformed conditions precedent to forming a partnership will prevent the partnership from forming unless the parties waive the performance of the conditions precedent or other rules of law or equity nullify them.” It was undisputed that the conditions precedent were not performed. ETP had to demonstrate, then, that such conditions had been waived, which the Court determined ETP did not do. Accordingly, the Court reversed the trial court and rendered judgment that ETP take nothing.
“Non-binding” provisions do actually mean something in Texas. They may protect parties from creating an obligation to complete a deal until definitive agreements are executed and express conditions precedent are satisfied. Nevertheless, a couple of best practices should be kept in mind. First, preliminary documents should continuously and unambiguously assert that there is no binding obligation to move forward with a deal until conditions precedent are met. Second, since a party’s subsequent actions can unintentionally waive conditions precedent, preliminary agreements should include “no waiver” provisions that require waivers to be in writing (instead of orally or by virtue of subsequent conduct).
Keep an eye on the Texas Supreme Court to see if ETP appeals this ruling.