The long-awaited Texas appeals court decision in Enterprise Products Partners LP vs. Energy Transfer Partners LP, is likely being viewed by the Texas business community as welcome clarity on the formation of partnerships.

The July 18 opinion from the 5th Court of Appeals in Dallas reversed the Dallas County District Court’s judgment in 2014 that awarded ETP more than $535 million in damages for alleged breaches of a disputed common law partnership. The 2014 jury verdict caused shock waves in Texas business circles. Now the appellate decision is no doubt being closely studied by companies across Texas.

ETP, Enterprise and Enbridge Inc. are three of the largest oil pipeline companies in North America, and the dispute between ETP and the other two companies led to one of the largest judgments in Texas history.

In early 2011, Enterprise approached ETP about converting one of ETP’s pipelines or building a new pipeline for the purpose of moving oil from the Cushing, Okla., crude oil storage hub to refineries in Houston. ETP and Enterprise executed a letter agreement and term sheet defining the ownership structure and operation of their potential venture, and the companies agreed to contribute to and market their venture. They also agreed that “no binding or enforceable obligations exist” under their transaction until the parties “received their respective board approvals and definitive agreements memorializing the terms and conditions of the transaction.…”

After executing the letter agreement and other agreements, ETP and Enterprise worked together to secure commitments for their pipeline. The parties did not receive enough commitments to meet their minimum threshold, and Enterprise terminated its participation in the project. Upon termination, Enterprise and Enbridge—which already had begun discussions to pursue another Cushing-to-Gulf Coast pipeline—moved forward with their alternative Seaway crude oil pipeline, secured considerable commitments and began operating the southbound pipeline from Cushing.

ETP sued Enterprise in Dallas County District Court for breach of joint enterprise and breach of fiduciary duty. ETP claimed that Enterprise had formed a partnership with ETP, that Enterprise hid its dealings with Enbridge, and that Enterprise usurped a business opportunity by teaming with Enbridge to operate the Seaway pipeline.

Enterprise contested the formation of any partnership. After a four-week trial, the jury found that ETP and Enterprise had created a partnership to pursue a pipeline project from Cushing to the Gulf Coast and awarded ETP damages. In July 2014, the district court signed a judgment for ETP awarding more than $319 million in actual damages, $150 million in disgorgement of wrongfully obtained benefits, and more than $66 million in interest. Enterprise appealed.

The judgment caused serious concern across Texas, with executives and attorneys from numerous industries examining whether their potential projects and letters of intent created common law partnerships and what steps they could take to avoid partnership liability.

On July 18, a three-judge panel of the Dallas Court of Appeals reversed the judgment against Enterprise. The judges reasoned that ETP had failed to prove that key conditions outlined in the letter agreement had been satisfied or waived. The court rejected ETP’s argument that the formation of a common law partnership between ETP and Enterprise was controlled solely by the five-factor test in Texas Business Organizations Code §152.052.

Instead, the court ruled that Section 152.052’s factors are non-exclusive. The conditions in the parties’ letter agreement—requiring board approval and definitive agreements—constituted the necessary conditions that had to be satisfied before a partnership could be formed. The court concluded that these unperformed conditions “prevent the partnership from forming unless the parties waive the performance of the conditions” or other rules of law or equity nullify them.

The Dallas Court of Appeals opinion further held that Enterprise’s express denial that conditions necessary for forming a partnership had been met triggered ETP’s “burden to plead and prove compliance” through approvals by the parties’ boards of directors and execution and delivery of definitive agreements.

Alternatively, ETP “had the burden to prove an excuse for nonperformance.” ETP did not deny that the conditions were not met. Thus, the court held that ETP was obligated to request a jury finding that it had established waiver or excuse of those conditions but ETP failed to do so as required by Texas Rule of Civil Procedure 279 and applicable law.

The court therefore rendered judgment that ETP recover nothing from Enterprise. It is anticipated that ETP will petition the Texas Supreme Court to review the decision.

For midstream companies and other parties involved in, or planning to undertake, joint ventures or other similar arrangements, the wisest approach is to remain precise and cautious in structuring such arrangements.

That includes using clear language in any preliminary agreement, stating that no party is bound to complete the deal until a definitive agreement is signed and agreeing on press releases and marketing materials to ensure that neither party states that a joint venture exists before the definitive agreement is signed.

Jackson Walker LLP advises parties to structure letters of intent in ways that will avoid a dispute about whether the parties created a common law partnership, and it is essential for parties entering one of these arrangements to retain experienced legal advisers to avoid potential problems—whether the Texas Supreme Court decides to take up this matter or not.

Richard Howell and Amy Baird represent oil and gas companies in the Houston office of Jackson Walker LLP. Michael Pearson is co-chair of Jackson Walker’s Energy Practice group, also based in Houston.