In a case that could impact the enforceability of teaming agreements in both state and federal courts, the U.S. District Court for the Eastern District of Virginia recently held that a teaming agreement that, in the court’s view, amounted to an “agreement to agree” was not an enforceable contract under Virginia law.

The case, Cyberlock Consulting, Inc. v. Info. Experts, Inc., 2013 WL 1395742 (E.D. Va. April 3, 2013), is significant for government contractors that rely on teaming agreements to form binding contractual commitments to secure and ultimately perform contracts with the U.S. Government. While the future of the Cyberlock holding is uncertain—Cyberlock has appealed the district court’s decision and the case will soon go before the Fourth Circuit—the case highlights critical issues for government contractors to consider when entering into teaming agreements. Contractors should no longer assume teaming agreements that are tentative “agreements to agree” will be enforceable in the state and federal courts that ultimately follow Cyberlock. Without concrete and unqualified subcontract terms, those courts applying Virginia law may be reluctant to enforce teaming agreements under this decision. An understanding of the case and its ramifications is thus essential for government contractors that anticipate using teaming agreements to form teams to pursue future prime contracts.

Background

In the fall of 2008, Cyberlock, a company that provides cybersecurity services to the U.S. Government, entered into a teaming agreement with Information Experts, Inc. (IE) to secure a prime contract from the U.S. Office of Personnel Management (OPM). Upon receiving the contract, IE subcontracted with Cyberlock pursuant to the terms of their agreement, and Cyberlock completed its work on the project in September 2011.

The Cyberlock litigation arose out of a dispute over a second contract that OPM awarded to IE later that year. Cyberlock and IE again entered into a teaming agreement to secure the contract, this time specifying that upon IE receiving the prime contract, the two companies would negotiate a subcontract, with IE performing 51 percent of the work and Cyberlock performing the remaining 49 percent. Although the teaming agreement specified the allocation of work between IE and Cyberlock, other aspects of the agreement were left uncertain. For example, it characterized the subcontract as “contemplated,” the division of labor as “anticipated,” and Cyberlock’s role in the arrangement “as presently understood by the parties.” The agreement only required IE to “exert reasonable efforts” to conduct “good-faith negotiations” with Cyberlock. The agreement specified that if those negotiations were unsuccessful, the teaming agreement would terminate. The teaming agreement also did not include as an exhibit an example of the subcontract the parties would execute if IE were awarded the prime contract, an omission that would prove important in the subsequent litigation.  

After IE was awarded the second OPM contract, it entered into negotiations with Cyberlock regarding the terms of the subcontract. The negotiations became contentious one month later due to a dispute over the allocation of work. IE and Cyberlock failed to agree on the proposed subcontract terms, and Cyberlock later accused IE of negotiating in bad faith. Cyberlock then filed a breach-of-contract suit against IE in the U.S. District Court for the Eastern District of Virginia. After roughly one year of pre-trial litigation, both parties moved for summary judgment.

District court decision  

The district court held the teaming agreement between IE and Cyberlock to be an “unambiguous [ and ] unenforceable agreement to agree.” In interpreting the teaming agreement, the court looked to the agreement’s plain language, and, finding it clear, declined to consider extrinsic evidence of IE and Cyberlock’s pre- and post-award conduct. After analyzing the agreement as a whole, the court described its terms as “set[ ting ] forth a contractual objective” rather than “provid[ ing ] a binding obligation.” In distinguishing an enforceable contract from an unenforceable “agreement to agree,” the court relied on four factors:

  1. The award of the prime contract would still require the negotiation of a formal subcontract.
  2. The award of work under the subcontract was dependent on OPM’s approval of the prime contract.
  3. Mandatory language—including the allocation of work between IE and Cyberlock—was qualified by tentative terms, including “contemplated,” “anticipated,” and “as presently understood.”
  4. The teaming agreement anticipated that the subcontract may never be successfully negotiated and provided for a no-fault termination on that basis.

The court thus granted IE’s motion for summary judgment on Cyberlock’s breach-of-contract claim.

Best practices for negotiating enforceable teaming agreements

If the district court’s decision is affirmed on appeal, the decision could impact federal court disputes over teaming agreements throughout the Fourth Circuit. It is important to note, however, that the federal district court’s interpretation of Virginia law is not binding on Virginia state courts or even on other federal district courts within the Fourth Circuit. Such courts, in fact, may decide not to apply Cyberlock’s interpretation of Virginia contract law in future cases. That said, the Cyberlock decision is a good reminder that government contractors can take steps to increase the likelihood that their teaming agreements will be enforceable:

  1. Consider choice of law and choice of forum. Courts have arrived at different conclusions when evaluating the enforceability of teaming agreements. The U.S. District Court for the Eastern District of Virginia is not alone among federal courts in finding unenforceable teaming agreements that are susceptible to interpretation as merely “agreements to agree.” The U.S. District Court for the District of Maryland, for example, has held a tentative teaming agreement unenforceable under Maryland state law. Glynn Interactive, Inc. v. iTelehealth Inc., 2004 WL 439236 (D. Md. Mar. 9, 2004). Some state courts, on the other hand, have been more sympathetic to enforcing teaming agreements despite their often vague terms. E.g., Air Tech. Corp. v. Gen. Elec. Co., 347 Mass. 613 (Mass. 1964). These divergent approaches highlight the importance of choice-of-law and choice-of-forum provisions for government contractors entering into teaming agreements. Those designating Virginia law should be aware that the Cyberlock decision potentially raises the bar on the enforceability of teaming agreements. This may be unattractive for companies intending to enter into an enforceable teaming agreement without allocating the resources necessary to negotiate specific subcontract terms at the very outset of the relationship.
  2. Negotiate specific terms. Cyberlock also demonstrates the importance of negotiating more specific teaming agreements. In outlining the terms of the teaming agreement, the parties should make an effort to be as specific as possible, for example, by avoiding indefinite and tentative terms such as “contemplated” or “anticipated” and by specifying the type and the amount of work each party is to perform.
  3. Avoid provisions that require only “best efforts” to negotiate and contemplate the termination of the teaming agreement if subcontract negotiations should fail. By eliminating provisions in the teaming agreement that will terminate the agreement if the parties cannot successfully negotiate a subcontract, government contractors are more likely to ensure the enforceability of such agreements under Cyberlock. Companies should consider whether they want their teaming agreements to have such a binding effect. Prime offerors, in particular, may prefer to have the flexibility to engage another company as a subcontractor where negotiations with the intended teammate break down through no fault of the prime.
  4. Consider negotiating the subcontract up front. Government contractors that want to “lock in” the terms of a subcontract may reduce legal risk by negotiating the subcontract up front, instead of relying solely on a teaming agreement that may not be enforceable in court. Recognizing that it is not always feasible or even possible to negotiate a subcontract at such an early stage, parties can take the other steps discussed above to ensure that they are sufficiently bound to one another when the time comes to negotiate the subcontract.
  5. Consider including the subcontract as an exhibit to the teaming agreement. Including the negotiated subcontract (or at least a form subcontract) as an exhibit to the teaming agreement should demonstrate that the prime offeror and the intended subcontractor have entered into more than an “agreement to agree.” If challenged in court, such a teaming agreement will demonstrate that the award of the prime contract does not still require the negotiation of the terms of a formal subcontract, increasing the likelihood of enforceability. The greater the level of detail in the attached subcontract, the more valuable it will be in demonstrating the certainty of the parties’ agreement.

Nicholas Scott Brod