ETP v. Enterprise Products: A Cautionary Tale for Prospective Joint Venturers
After a lengthy and much-publicized trial, a jury in Dallas, Texas reached a verdict this week that has drawn significant interest from the energy industry in Texas due in part to the parties involved and due, as well, to the principles involved. The case involves issues surrounding the use of ostensibly non-binding letters of intent in the early stages of project development and, in particular, the question of when a party’s conduct may trump an otherwise expressly-stated intention not yet to be bound, and thus result in a legally binding agreement. While this case involved prominent players in the energy space, the principles upon which this case was decided are not specific to the energy industry. All clients who do business in Texas, regardless of the industry, may face similar questions about when a state law partnership or joint venture can be formed regardless of a party’s express intent not to be bound, and the ultimate outcome of this case may have far-reaching implications.
Energy Transfer Partners, L.P. (“ETP”) and Enterprise Product Partners, L.P. (“Enterprise”) worked together in 2011 to develop and build a crude pipeline from Cushing, Oklahoma to the Gulf Coast that would be jointly owned by the parties. Although the companies signed a letter of intent stating that they were not obligated to pursue the project together and could terminate the project at any time, ETP claimed, and the jury found, that the parties’ ensuing conduct served to form a state law partnership. The jury awarded ETP $319 million after finding that Enterprise had formed a legally binding partnership with ETP and that Enterprise breached its duty of loyalty to ETP.
In the early stages of discussions, ETP and Enterprise negotiated and executed several documents that expressly stated the parties were not legally obligated to pursue the proposed joint venture and that no legal obligation would exist unless and until the parties signed definitive transaction documents. The parties also executed a cost reimbursement letter to enable Enterprise to begin preliminary engineering work for which ETP would reimburse Enterprise 50% of its costs. In addition, the parties continued to negotiate and exchange drafts of definitive documents, including a limited liability company agreement for the jointly-owned company, a contribution agreement, and other operating and transportation agreements. The drafts of the limited liability company agreement even included provisions that the parties did not intend to form a state law partnership and that the parties would not owe fiduciary duties to each other.
While negotiating these proposed agreements, the parties also began jointly marketing the project to potential shippers on the crude pipeline. The marketing materials revealed that in some instances the parties stated they had already “formed a Joint Venture LLC,” a “50/50 JV,” which they called Double E Crude Pipeline, LLC. Early press releases issued by the parties also referred to the parties as joint venture partners.
In August 2011, Enterprise issued a press release announcing the termination of the project due to lack of long-term commitments from potential shippers. Six weeks later, Enterprise and Enbridge Inc. announced they would jointly pursue a crude pipeline project from Cushing to the Gulf Coast. ETP filed suit shortly thereafter, alleging that Enterprise had formed a partnership with ETP and breached its fiduciary duties to ETP by taking the project to Enbridge. ETP also filed suit against Enbridge alleging that Enbridge conspired with and aided and abetted Enterprise in breaching its fiduciary duties to ETP.
The Texas Business Organizations Code (“TBOC”) outlines a five factor test under which a state law partnership may be formed. Factors taken into consideration include the right to share in profits, the parties’ intent to be bound, the right to participate in or control the business, the obligation to share losses or liabilities and an agreement to contribute money or assets to the business. A party does not have to prove all five factors to show that a partnership has been formed, and that decision instead turns on the totality of the circumstances.1 The TBOC also does not require that a partnership agreement be in writing. Most notably, whether the parties’ intend to form a partnership is not determinative, and the parties may still be found to have formed a partnership even if they expressly agreed otherwise.2
Following the close of the evidence, Enterprise moved for a directed verdict. In its motion, Enterprise argued that because the TBOC does not establish a bright line test to create a partnership, sophisticated commercial parties like ETP and Enterprise should be free to negotiate the precise conditions under which a binding partnership may be formed. Such sophisticated commercial parties, both represented by legal counsel, should not, Enterprise asserted, be subject to later attack because one party inferred that a partnership had been created based on the other party’s conduct in furtherance of the proposed project. Enterprise further claimed that the precise conditions precedent to forming a partnership negotiated by the parties and set out in the preliminary written agreements, namely, the execution of definitive documents, did not occur, which should preclude the formation of a partnership between the parties. The court denied that motion and sent the case to the jury.
The charge submitted to the jury identified the five factors in the TBOC and asked, based upon all of the evidence, if the parties had formed a partnership. The charge specifically stated that not all of the factors found in the TBOC must be satisfied and that no single fact may be stated as a complete or final test of partnership. The charge further stated that if the jury were to find that a partnership existed, then the jury should further determinate whether Enterprise complied with the duty of loyalty owed to its partner ETP. By a 10-2 verdict, the jury found that a partnership existed and that Enterprise had not complied with its duty of loyalty. The jury also found that Enbridge had not conspired with Enterprise to breach Enterprise’s fiduciary duties to ETP. The jury’s damages award of $319 million is intended to represent the approximate value ETP lost when Enterprise terminated its partnership with ETP and pursued an allegedly similar project with Enbridge instead.
While further post-verdict proceedings in the trial court are certain to follow, and appeals thereafter are likely, the present outcome of this case should sound a note of caution for all deal lawyers and their business clients. Clients may, and in all probability will, continue with the customary practice of using non-binding letters of intent to define an intended framework for their prospective projects. In such letters of intent they should be careful to specify which provisions are binding and which are not, and they should avoid stating that the parties have agreed to some terms that are subject to further documentation. In addition, regardless of the inclusion of non-binding language in preliminary agreements, clients should closely monitor all other external and internal communications relating to the proposed project, particularly public statements and marketing materials, to ensure that these materials do not misstate or undermine the preliminary nature of the parties’ negotiations and so potentially create misleading and problematic interpretations of the subsequent activities of the parties and the nature of their proposed relationship.
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1 Ingram v. Deere, 288 S.W.3d 886 (Tex. 2009)
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