Do Common Law Marriages Exist for Businesses?
February 22, 2017The Fifth Court of Appeals considers the application of the Texas Partnership Statute to establish a $319 million partnership—even in the face of written agreements disclaiming a partnership.
Does a common law business marriage exist in the face of written documents? The Fifth Court of Appeals is primed to answer this question soon. The answer could have significant implications for businesses operating in Texas.
Under Texas law, parties to a partnership owe a fiduciary duty of loyalty and care to the partnership and their other partners. Texas courts hold partners to high standards in their business dealings. For example, courts routinely require that partners disclose complete and accurate information concerning the partnership to the other partners. Attorneys frequently joke that this standard might not be met in the closest of domestic relationships.
Transactional lawyers are cautious to avoid the formation of partnerships and frequently insert provisions expressly disclaiming a partnership and/or creating conditions precedent that must be satisfied to formally create any venture between them.
However, Section 152.052 of the Texas Business and Commerce Code—the Texas Partnership Statute—proscribes a statutory avenue for partnership formation. Under Texas law, there seemingly are two routes to partnership – contract and statute. Can a partnership exist even in the face of a written agreement disclaiming a partnership?
The Fifth Court of Appeals is presently considering that question in Enterprise Products Partners L.P. and Enterprise Products Operating LLC v. Energy Transfer Partners, L.P. and Energy Transfer Fuel, L.P.
Enterprise Products Partners L.P., Energy Transfer Partners, L.P., and their respective affiliates entered into a series of agreements to explore the viability of a natural gas pipeline from Cushing, Oklahoma, to the Gulf of Mexico. According to Enterprise Products, these agreements expressly prevented the formation of a partnership and limited the parties’ obligations to one another:
| Confidentiality Agreement | The parties agreed that until a definitive agreement was executed, “no Party … will be under any legal obligation of any kind whatsoever with respect to any transaction by virtue of … any written or oral expression with respect to such a transaction….” |
| Reimbursement Agreement | Disavowed creating a “joint venture, a partnership, a corporation, or any entity….” |
| Term Sheet | The parties agreed “no binding or enforceable obligations shall exist between the parties with respect to the Transaction unless and until the parties (1) have received their respective board approvals and (2) definitive agreements memorializing the terms and conditions of the Transaction have been negotiated, executed and delivered by both of the Parties.” (emphasis added) |
The parties began investigating whether the proposed pipeline would be commercially viable, incurred various shared expenses relating to the design and development of the proposed pipeline, and discussed the joint development of the proposed pipeline with potential customers. When Enterprise Products moved forward to develop a similar pipeline without Energy Transfer, Energy Transfer sued for a breach of fiduciary duty predicated on the formation of a partnership.
The Texas Partnership Statute states that “an association of two or more persons to carry on a business for profit as owners creates a partnership, regardless of whether (1) the persons intend to create a partnership; or (2) the association is called a ‘partnership,’ ‘joint venture,’ or other name.” The statute then lists five factors “indicating that persons have created a partnership:”
1. receipt or right to receive a share of profits of the business;
2. expression of an intent to be partners in the business;
3. participation or right to participate in control of the business;
4. agreement to share or sharing:
a. losses of the business; or
b. liability for claims by third parties against the business; and
5. agreement to contribute or contributing money or property to the business.
The first question posed to the jury in the charge was whether a partnership existed between Enterprise Products and Energy Transfer. Interestingly, the jury appeared to have trouble with the very question now before the Fifth Court of Appeals. During deliberations, the jury sent a note to the judge asking how to reconcile the Texas Partnership Statue’s five-factor test with the conditions precedent established in the contracts. The Trial Court instructed the jury to refer to the jury charge. The charge contained the Texas Partnership Statute’s five-factor test.
In a 10-2 decision, the jury found that the parties formed a partnership, and that Enterprise Products had breached its fiduciary duty to Energy Transfer, and that Enterprise Products owed Energy Transfer $319 million in damages. Enterprise Products appealed.
Enterprise Products has made several arguments in effort to overturn the jury’s verdict including that Texas law favors freedom to contract and that the Texas Partnership Statute does not abolish the enforceability of contracts relating to partnership formation. Ultimately, Enterprise Products argues that if the jury’s decision is upheld, parties will not—and cannot ever—know whether they are in a partnership until a jury tells them. This may be true.
The Texas Partnership Statute is silent as to whether it is a gap-filler in the event a written contract is absent, or whether its provisions are meant to be the underlying principals governing the behavior between partners in Texas partnerships, even when a written contract exists. While the Texas Partnership Statue notes that “the principles of law and equity and the other partnership provisions supplement this chapter unless otherwise provided by this chapter or the other partnership provisions,” it is not expressly clear that the Texas Partnership Statute is meant to override the parties’ contractual arrangements.
For the time being, businesses should keep the Texas Partnership Statute in mind in setting the boundaries of their business engagements.