(CN) – The Texas Supreme Court on Friday upheld a lower court ruling that tossed out a more than $500 million verdict in a years-long legal battle between two of the nation’s largest oil and gas pipeline companies.
In its ruling, the court upheld a state appeals court finding that early discussions between the two Texas firms about a plan to move oil from a transport hub in Cushing, Oklahoma to refineries in Houston did not constitute a formal partnership under Texas law, as one of the companies had argued.
The dispute dates back to 2011, when pipeline giant Energy Transfer Partners began talks with competitor Enterprise Products Partners about the prospect of joining forces to move oil to the Houston refineries.
In three written agreements, the companies agreed to explore the idea, with the caveat that neither would fully commit until each company’s board of directors approved a final contract.
The so-called Double E pipeline was initially promoted as a 50/50 joint venture, but soon fell apart as the project failed to attract enough oil shippers.
When Enterprise bailed on the plan, choosing instead to pursue the ultimately successful project with a Canadian firm, Energy Transfer sued, arguing at trial that Enterprise had breached its contractual obligations under the plan. Energy Transfer argued it was owed half of the profits of Enterprise’s new project.
A Dallas jury in 2014 ruled in favor of Energy Transfer, awarding the company more than half a billion dollars, but the Texas Fifth District Court of Appeals later reversed the judgment in favor of Enterprise.
The appeals court found that the Texas Business Organizations Code allows parties to set conditions for a planned partnership and to back out of the plan if those conditions aren’t ultimately met. In this case, the two companies never executed “definitive agreements” on the plan and never obtained the approval of their respective boards.
On Friday, the Texas Supreme Court said it agreed with the lower court’s reasoning.
“We hold that parties can contract for conditions precedent to preclude the unintentional formation of a partnership under [Texas law] and that, as a matter of law, they did so here,” Chief Justice Nathan Hecht wrote for the court.
The ruling states that Energy Transfer “has not pointed to any evidence that Enterprise specifically disavowed the letter agreement’s requirement of definitive, board-of-directors-approved agreements or that Enterprise intentionally acted inconsistently with that requirement.”
The case has been closely watched by the oil and gas industry and the broader business community.
In an amicus brief to the Texas Supreme Court, the U.S. Chamber of Commerce joined Texas business interests in urging the court to find that “unfulfilled conditions precedent in a clear and unambiguous contract preclude a partnership from being formed as a matter of law.”
In a statement, an attorney for Enterprise hailed Friday’s ruling, saying it “correctly reaffirmed the importance of written contracts.”
“This case needed decisive action because it had the potential to stand as one of the worst for business in Texas since the Texaco v. Pennzoil decision from the 1980s,” David Keltner said.
In that high-profile dispute over a corporate takeover gone awry, a jury awarded Pennzoil $10.5 billion in damages, a verdict that forced Texaco into bankruptcy. The case was similarly centered on whether early business talks constituted a binding agreement.
A spokesperson for Energy Transfer did not immediately respond to a request for comment on Friday’s ruling.
David Sokolow, a University of Texas law professor who briefed the Texas high court in favor of Enterprise, praised the ruling as a win for the principal of “freedom to contract” in Texas.
“To build a pipeline, or to engage in some other kind of oil and gas venture, these things are extremely capital intensive,” he said. “Parties want the freedom to be able to say okay, let’s consider doing this, but I want the freedom to go out and explore whether it’s really going to work.”
Sokolow said the more than $500 million initial verdict against Enterprise in the case likely scared business interests into following the case.
“It’s the sheer magnitude of the award that causes people like the U.S. Chamber of Commerce to get involved,” he said.
“I think the case is significant because it reinforces the basic principles under contract law, especially here, where the parties are at arms-length and have equal bargaining power and are very sophisticated,” said Katie Seegers Roth, an energy attorney with Liskow & Lewis in New Orleans who has written about the case before.
“They have to live by the deals they strike when they form these agreements,” she said.
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