The briefing is now complete in a closely watched appeal of a landmark judgment issued last year in Energy Transfer Partners, L.P. v. Enterprise Products Partners L.P., in which a Texas jury concluded that, notwithstanding express contractual language disclaiming the formation of a partnership in connection with preliminary exploration of an oil pipeline project, the conduct of the parties could – and did in fact – establish a legally binding partnership.
The jury’s verdict, which awarded plaintiff Energy Transfer Partners (ETP) over $500 million in compensation, left many industry players with Texas-sized heartburn over a potential surge in joint venture disputes and scrambling to reassess their business practices to mitigate litigation risks while the appeal remains pending.
Companies contemplating or engaged in joint ventures, and those that explored such ventures during the shale energy boom, should closely monitor the result of defendant Enterprise Products Partners, LP’s (Enterprise) appeal of the trial court judgment, as the appeals court’s decision regarding whether a partnership existed is likely to have both immediate and lasting implications in terms of liability risk and future business practices.
In spring 2011, with the North American energy sector flourishing from the application of new extraction technology to U.S. shale deposits and Canadian tar sands, Enterprise and ETP agreed to explore an oil pipeline project that would transport oil between Cushing, OK and the Gulf Coast.
In support of the prospective joint venture, the two companies executed three written agreements: (i) a confidentiality agreement governing information-sharing, (ii) a reimbursement agreement regarding cost sharing, and (iii) a non-binding term sheet pertaining to a potential limited liability company. On their face, all three of the agreements expressly limited the obligations the contracting companies owed to one another and made any formal venture contingent on the meeting of certain conditions.
For example, the confidentiality agreement stated that “no Party…will be under any legal obligation of any kind whatsoever with respect to any transaction[.]” The reimbursement agreement, in turn, expressly disavowed the creation of a “joint venture, a partnership, a corporation, or any entity[.]” And consistent with its non-binding nature, the term sheet stated that “no binding or enforceable obligations shall exist between the Parties,” unless and until certain pre-conditions were satisfied, including board approvals and execution of definitive agreements of the transaction terms.
Against this backdrop, ETP and Enterprise jointly pursued the pipeline venture, working collectively to market and design the project and agreeing to split the costs of such endeavors. In particular, according to ETP, the two companies jointly prepared marketing materials for shippers, collaborated on releasing information about the project to the press, set oil shipping rates, and negotiated agreements with other parties in support of the project.
ETP further asserts that the two companies established an integrated project team that worked together in a shared space, with the team developing and planning operational matters together. With respect to the project finances, ETP cites as further evidence of a partnership the establishment of an equal earnings split between the companies covering revenues and profits, as well as the fact that both companies agreed to make substantial capital contributions in aid of the project.
According to Enterprise, notwithstanding its initial collaboration with ETP, in August 2011, the project came to a halt after the companies determined that prevailing market conditions would not support the endeavor. Enterprise, however, remained interested in pursuing a pipeline and subsequently pursued a separate pipeline opportunity along a similar Cushing to Gulf Coast route with a Canadian pipeline company.
After Enterprise successfully brought this alternative pipeline to fruition, ETP filed suit, alleging that the conduct of Enterprise and ETP had resulted in the formation of a partnership to market and pursue a pipeline along that route, and that Enterprise’s pursuit and construction of another pipeline breached its obligations to ETP.
Ultimately, at trial, despite the contractual language disclaiming the formation of a legally enforceable relationship, the jury concluded a partnership was nonetheless created through the conduct of the parties, and awarded nearly a $500 million to ETP, including over $300 million in damages and an additional monetary award based on the financial benefit Enterprise purportedly gained from its breach.
Not surprisingly, in attacking the jury’s verdict on appeal, Enterprise relies heavily on what it describes as carefully worded contractual disclaimers and express prerequisites to the formation of a partnership, while also emphasizing the broader policy implications of such a verdict for future commerce and freedom of contract.
In particular, Enterprise criticized ETP’s partnership theory as one that allows for an accidental, “after-the-fact” partnership that ignores agreed-upon pre-conditions, such that the companies are “subject to an open-ended uncertainty that only a jury can ultimately resolve.” Enterprise further cautioned the Appeals Court that affirming the partnership verdict and accepting ETP’s position “would make it impossible even for the most sophisticated actors to contract against unwanted partnerships.”
For its part, ETP, in defending the jury’s partnership verdict, frames the three written agreements with Enterprise as preliminary agreements that the parties disregarded in favor of partnership-forming actions, and which, in any event, did not as a matter of law preclude the jury’s finding of a partnership. In ETP’s view, Texas law recognizes that parties may form “a partnership when they act like partners, even if they previously agreed not to form a partnership” or created pre-conditions that were never fulfilled.
Under this interpretation of the law, which Enterprise asserts ETP misconstrues, expressions of intent are but one factor to consider among others, including conduct, in deciphering the “true nature” of the parties’ relationship. ETP further argues that Enterprise’s warning about broader policy implications is exaggerated and companies can take concrete steps to avoid unwanted partnerships, such as avoidance of profit sharing, refraining from contributing assets to ventures before definitive agreements are in place, and not marketing the project as a joint venture or partnership to third parties.
The Appeals Court’s decision on the jury’s partnership verdict is likely to reverberate throughout the oil and gas community, affecting businesses with previously abandoned projects, those evaluating the viability of current projects and those exploring future projects. The recent collapse of oil prices, associated tightening of credit for numerous firms, and other economic stress factors have caused the dissolution of various ventures that arose out of the shale boom. These market conditions, in turn, inevitably create a fertile ground for disputes among those considering or already involved in joint ventures.
Even companies that successfully recalibrate during the market slump may find themselves facing increased litigation risk as an unwelcome byproduct of success. Indeed, if the Appeals Court upholds the jury’s verdict on the basis of ETP’s “accidental partnership” theory, well-capitalized companies are likely to face an immediate uptick in litigation risk-based on prior dealings.
And while many industry players may dread the possibility of finding themselves defending claims over legal obligations they never intended to create, others will no doubt relish the opportunity to mine the graveyard of abandoned projects in hopes of exploiting value through litigation.
Similarly, with many prognosticators opining that the current state of low oil prices and tight credit is likely to continue unabated in the near future, the number of projects that are vulnerable to dissolution is likely to grow as companies increasingly feel the longer-term strain of the downturn and reassess their commitments to various projects.
Industry participants that are considering the cessation of jointly pursued projects in light of the economic reality in the energy markets would be well advised to factor in the pending Appeals Court decision and negotiate appropriate releases with the assistance of counsel in connection with termination. Conversely, companies actively pursuing joint ventures in the face of market headwinds may wish to take preemptive action in re-evaluating their current agreements and course of conduct to mitigate the risk of subsequent litigation in the event that projects lose viability as conditions evolve.
With respect to future projects, the outcome of the ETP v. Enterprise litigation is likely to set precedential parameters in terms of how companies conduct themselves in exploring joint ventures. Prospectively, an opinion that provides clear guidance on where and when obligations begin and end would allow businesses to make informed adjustments to existing practices and pursue future projects with confidence. A muddled decision, however, may only serve to create further uncertainty as to the state of partnership and joint venture law and produce a corresponding chilling effect on such projects.
In the same vein, a settlement before the appeal process is exhausted and a final decision on the merits is rendered would leave businesses pondering whether to treat the jury verdict in ETP v. Enterprise as an accurate reflection of the law or an isolated anomaly.
Ultimately, if the Appeals Court allows the jury verdict regarding partnership to stand (and the decision withstands further challenge before the Supreme Court of Texas), the repercussions are likely to resonate beyond the borders of Texas, as enterprising plaintiffs seek to persuade courts in other jurisdictions to look past disclaimers and unsatisfied pre-conditions in determining whether partnerships or joint ventures were formed.
In the meantime, companies that routinely explore joint ventures in the energy sector should consider reassessing their practices and re-evaluating potential litigation risk arising from discarded projects.
Author: David McGill is an experienced litigator at Kobre & Kim LLP whose practice focuses on representing individuals and companies in joint-venture and partnership disputes, frequently with offshore and/or cross-border elements. McGill’s experience includes civil and criminal trials in federal court, appeals at the state and federal level, and arbitrations and mediations.