Member Article

Introduction

Government contractors often use teaming agreements to combine the services of two or more contractors to offer the most persuasive bid for a government contract. The prime contractor typically agrees with the other team members that if the prime wins the bid, it will allocate some of the contractual work to the other member(s). Teaming agreements are also useful in part because they allow the bidder to present an efficient and cost effective project solution without overcomplicating the bid with exhaustive legal details. However, government contractors must be careful to ensure that the teaming agreement is ultimately enforceable under applicable state contract law as well as state and federal antitrust law.

In Cyberlock Consulting, Inc. v. Info. Experts, Inc., 2013 WL 1395742 (E.D. Va. Apr. 3, 2013), a federal district court held that a teaming agreement between two contractors was legally unenforceable under Virginia law because the teaming agreement was merely an agreement to agree in the future. In short, the agreement simply set out “a contractual objective and [an] agreed framework” for future negotiation - it did not manifest any firm intent for the parties to be bound. Id. at 8. The court reasoned that “agreements to agree in the future” are “too vague and too indefinite to be enforced” like regular contracts. Id. (quoting W.J. Schafer Assocs., Inc. v. Cordant, Inc., 254 Va. 514, 519, 493 S.E.2d 512, 515 (1997)).

Enforceability Issues Under State Contract Law

In Cyberlock, the two parties executed a teaming agreement that contained an integration clause that stated the agreement “constitute[d] the entire agreement of the parties hereto and supersedes all prior and contemporaneous representations, proposals, discussions, and communications, whether oral or in writing.” The stated purpose of the agreement was “to set forth the arrangement between [the parties] to obtain a prime contract … and to set forth the basis for a subcontract between [the parties].” The agreement also generally set out the division of responsibilities by stating that “[u]pon Contract Award, [the prime contractor] will perform 51% of the scope of the work with [the subcontractor] performing 49%.” Without setting out specific details about the work to be performed by each party, the agreement simply stated that each party would “exert reasonable efforts to obtain a prime contract for the Program and to negotiate a subcontract for the Program.” It further qualified the parties’ obligations by adding that the future subcontract “may be subject to the approval of the Client.” Although the teaming agreement required the prime contractor to “exert reasonable efforts to obtain Client approval for the proposed [subcontract],” it also went on to specify that the teaming agreement would be terminated if there was “a failure of the parties to reach agreement on a subcontract after a reasonable period of good faith negotiations.”

The court held that if a teaming agreement uses unambiguous language, then a reviewing court will exclude all extrinsic evidence (including parol evidence) and will focus only on the plain language of the agreement to determine whether there is an intent to be bound. Here, the court did not find clear language in the teaming agreement that unequivocally bound the parties, and it affirmed that it is “well settled under Virginia law that agreements to negotiate at some point in the future are unenforceable” irrespective of any extrinsic evidence to the contrary so long as the agreement’s language was unambiguous. Beazer Homes Corp. v. VMIF/Anden Southbridge Venture, 235 F. Supp. 2d 485, 490 (E.D. Va. 2002) (emphasis added); see also Cyberlock, at 7 (concluding that any suggestion that teaming agreements are afforded special rules rather than traditional Virginia contract rules is incorrect and should not be followed).

Practical Tips

Not all teaming agreements are unenforceable. Contract enforceability is a matter of state law in the applicable state governing the contract. There are a number of factors that can increase the chances that a reviewing court will view a teaming agreement as an enforceable contract. First, subcontractors should ensure that the teaming agreement defines key terms, the structure, the compensation agreement, and the scope of the proposed subcontract. These elements should be contained in a draft subcontract attached as an exhibit to the prime contractor’s bid. Second, subcontractors would be wise to include an exclusivity provision that precludes the prime from working with anyone other than the team members. Third, the teaming agreement should include specific remedies available to each party if the subcontract fails to materialize once the bid has been awarded. Finally, the teaming agreement should explicitly clarify that the relationship constitutes more than just “an agreement to agree.”

Likewise, there are a number of factors that bidders should avoid to safeguard the enforceability of their teaming agreements. The teaming agreement should not contain any language suggesting that negotiations will continue in the future because courts have found this to be strong evidence that the agreement is vague and indefinite. Moreover, subcontractors should avoid use of subjective termination provisions that allow the prime to walk away from the subcontract if negotiations fail after the bid has been awarded. The teaming agreement should also ensure that no important details about the performance duties under the anticipated subcontract are left open for future determination and the subcontractor’s work should never be vaguely defined as “subject to change” or based on general understandings of the parties. Finally, the teaming agreement should avoid unnecessary provisions regarding government approval that qualifies the obligation to complete an executed subcontract.

Practical Note

To further avoid enforceability issues, government contractors can utilize other arrangements in lieu of teaming agreements to achieve the same objective. These options include joint ventures, General Services Administration Contractor Teaming Arrangements (CTAs), or pre-finalized subcontracts. Moreover, contractors have the option to form their agreements under a different state law, although the analysis in Cyberlock will likely apply in some other states. Compare Glynn Interactive, Inc. v. iTelehealth, Inc., 2004 WL 439236 (D. Md. Mar. 9, 2004), and BAE Sys. Info. & Elec. Sys. Integration v. Lockheed Martin Corp., 2009 WL 264088 (Del.Ch. Feb. 3, 2009), with Burbach Broad. Co. of Delaware v. Elkins Radio Corp., 278 F.3d 401 (4th Cir. 2002) (finding that West Virginia law, unlike most states, is silent on the subject of the enforceability of preliminary agreements but likely holds such agreements as enforceable).

Conclusion

Teaming agreements can provide a number of benefits to government contractors, but any agreement should use precise, detailed language regarding the roles of the parties to ensure that it will be interpreted as an enforceable contract by a reviewing court.

If you would like to learn more about the enforceability of teaming agreements, please feel free to contact your regular Haynes and Boone attorney or any member of our Litigation/Trial Practice.