A common misperception is that forming a partnership in Texas requires formal paperwork. However, there actually is no requirement for a written agreement. In fact, parties may even create a partnership when they do not intend to do so. When does Texas law allow a partnership to be formed? Does it need to be in writing? Can parties expressly contract to not create a partnership?
A legal partnership in Texas may be created by oral or written agreement. It may even be created by actions and behaviors that imply an agreement between individuals or entities. Note the definition of a partnership in Texas outlined in the statute below:
Effective: January 1, 2006
V.T.C.A., Business Organizations Code § 152.051
§ 152.051. Partnership Defined
(a) In this section, “association” does not have the meaning of the term “association” under Section 1.002.
(b) Except as provided by Subsection (c) and Section 152.053(a), 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.
(c) An association or organization is not a partnership if it was created under a statute other than:
(1) this title and the provisions of Title 1 applicable to partnerships and limited partnerships;
(2) a predecessor to a statute referred to in Subdivision (1); or
(3) a comparable statute of another jurisdiction.
(d) The provisions of this chapter govern limited partnerships only to the extent provided by Sections 153.003 and 153.152 and Subchapter H, Chapter 153.
This statute was tested in the case of Energy Transfer Partners, L.P. v. Enter. Prods. Partners, L.P., 593 S.W.3d 732 (Tex. Jan. 31, 2020) [17-0862]. Enterprise Products Partners, L.P. and Energy Transfer Partners (ETP) agreed to research the possibility of converting a natural gas pipeline to an oil pipeline, not only signing a Confidentiality Agreement, a Letter Agreement, and a Reimbursement Agreement, but also claiming to have started a Joint Venture LLC. However, shortly after that claim, Enterprise terminated its agreement with ETP and formed a new pipeline partnership with Enbridge.
ETP filed a lawsuit against Enterprise, and the trial court agreed with ETP, awarding the company sizeable damages. However, when Enterprise sought to overturn that verdict, the court of appeals disagreed with the trial court’s verdict based on Chapter 152 of the Texas Business Organizations Code. The Texas Supreme Court then agreed to review the verdict and affirmed the appellate court.
According to the Texas Supreme Court, two conditions in the Letter Agreement were not met, and ETP did not obtain a jury finding as instructed by the court of appeals to determine whether those two conditions had been waived. The Texas Supreme Court also agreed with the court of appeals that parties can definitively disprove the formation of a partnership under Chapter 152 by creating contractual conditions precedent.
Parties should consider the importance of expressly contracting not to enter into a partnership prior to any business dealings. Parties should also consider the danger of accidentally entering into a partnership without intending to do so. Hiring a lawyer knowledgeable in business law can help a litigant avoid such costly, time-consuming mistakes when dealing with other businesses.
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