• It Is Not A Duck! $535 Million Pipeline Verdict Reversal Portends New Era of Joint Venture Conflicts.
  • July 26, 2017 | Authors: David A. Baay; Jack Massey; Maryann B. Zaki; Steven L. Roberts; Jim L. Silliman; Robert A. Lemus
  • Law Firm: Eversheds Sutherland (US) LLP - Houston Office
  • On July 18, 2017, the Dallas Court of Appeals reversed a 2014 jury verdict that resulted in a $535 million judgment in favor of Energy Transfer Partners, L.P. (“ETP”) against its counterparty (appellate decision linked here). In so doing, the appellate court reaffirmed that any contractual conditions precedent must be fulfilled before a partnership contract is binding. For companies involved in joint ventures, their legal departments must pay closer attention than ever to early stage contract language and be prepared for a new wave of joint venture conflicts.

    Critical Contract Terms
    ETP and its counterparty entered into negotiations to set-up a joint venture to build a pipeline from Oklahoma to Texas. They signed a Letter Agreement that set out the proposed terms of the partnership. The Letter Agreement contained this key phrase:

    “[N]o binding or enforceable obligations shall exist between the Parties with respect to the Transaction 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 by both of the Parties.”

    Joint Venture Fallout
    The joint venture ultimately fell apart after the counterparty withdrew when it became apparent that the pipeline was not economically feasible. The day after the counterparty’s withdrawal, the counterparty met with executives from another North American pipeline company to discuss building an identical pipeline. The counterparty and the North American pipeline company ultimately worked together to build the pipeline.

    Ensuing Litigation

    • Claims: ETP sued its counterparty for breach of joint enterprise and breach of fiduciary duty, arguing that its counterparty wrongly usurped a business opportunity belonging to the joint venture and used knowledge gained in the joint venture to build a separate pipeline in violation of its duty of loyalty to ETP.
    • Argument against Partnership: The counterparty argued that no partnership had ever arisen with ETP because, among other things, the conditions precedent in the Letter Agreement had not been met.
    • Argument for Partnership: ETP claimed that a partnership arose under the five-factor partnership formation test (set forth in Section 152.052 of the Texas Business and Organizations Code) which controls whether a partnership is formed, and that conditions precedent did not preclude the formation of a partnership. Arguing to the jury, it said that the two parties did everything necessary to form a partnership under Texas law and that “[i]f it looks like a duck and walks like a duck, it must be a duck.”
    • Court’s Holding: The appellate court rejected ETP’s pro-partnership argument, concluding that the Texas Business and Organizations Code is “not the sole source of rules for determining partnership formation.” The appellate court specifically noted that Section 152.003 of the Code provides that “[t]he principles of law and equity” supplement the statutory partnership provisions “unless otherwise provided by this chapter or the other partnership provisions.” The court explicitly found that the law of conditions precedent is an applicable “principle of law.” After finding that the conditions precedent were not met, the Court found that no partnership existed and reversed the judgment. Given the stakes, it is likely that this decision will be appealed.

    Takeaway and Looking Forward
    For companies that are involved in joint ventures, the lessons of this case should be heeded. As a practical matter, the use of conditions precedent is reaffirmed as an effective prophylactic against the formation of an unintended partnership. This is especially the case where the joint project must be completed before any profits are derived, even when the parties agree to share capital costs, liabilities, profits, and losses on a 50/50 basis. On the other hand, the door remains open for a party to prove either that the conditions precedent had been performed, or that the conditions precedent themselves had been waived.

    Therefore, it is paramount for companies to pay close attention to contract language and the contracting parties’ conduct in light of that language, especially until the Texas Supreme Court provides further guidance on the issue. Companies should work with their legal advisors to develop contractual mechanisms to ensure certainty in this arena and avoid the litigation rollercoaster that ETP and its counterparty are riding.