Government contracting is a team sport. Even the largest contractors rely significantly upon carefully chosen subcontracting partners to present the strongest proposal for a government opportunity. These subcontracts, however, are not executed until the award is won and the ink has dried on the prime contract with the government. Prior to the execution of a formal subcontract, the relationship between the intended subcontracting partners is governed by a “teaming agreement.” Teaming agreements vary widely in their terms, and are a staple of government contracting that are specifically encouraged by the Federal Acquisition Regulation.1
However, the flexibility and preliminary nature of teaming agreements represents a risk to contractors who fail to draft these agreements with the appropriate terms. Teaming agreements are contracts, and as such are subject to the rules regarding the enforceability of contracts in the various states governing their formation. In Cyberlock Consulting, Inc. v. Info. Experts, Inc., 2013 WL 1395742, -- F.Supp.2d -- (E.D.Va. Apr. 3, 2013), the U.S. District Court for the Eastern District of Virginia found a teaming agreement, entered into between two government contractors, unenforceable under Virginia law, confirming what other state and Federal courts have decided regarding such agreements. And recently, the Fifth Circuit in X Technologies, Inc. v. Marvin Test Sys., Inc., No. 12-50230, 2013 WL 2493735 (5th Cir. June 11, 2013), confirmed that exclusivity agreements in teaming agreements are enforceable to recover damages.
The Cyberlock and X Technologies decisions have continued to shape case law governing the enforceability of teaming agreements. Government contractors should carefully consider how they structure their teaming agreements. To increase the likelihood that courts will find a teaming agreement to be an enforceable contract — rather than an unenforceable “agreement to agree” — we recommend that government contractors include the following elements in their agreements:
- A clear statement of work;
- A clear statement of subcontract pricing;
- The duration of the teaming agreement;
- A clear statement that, pursuant to the teaming agreement, the prime contractor “shall” subcontract with the teammate; and
- A modified termination for convenience clause that permits the prime contractor to terminate the subcontract only if and to the extent the government terminates the prime contract.
We discuss below the enforceability of teaming agreements and summarize the recent Cyberlock and X Technologies decisions and other applicable cases.
Enforceability of Teaming Agreements Generally
The enforceability of teaming agreements is of central importance to the government contracting marketplace, as many companies base their long-term business plans on such agreements. As such agreements are in wide use, the issue has been litigated across the country. These cases usually involve a common set of questions regarding enforceability: Are these deals merely unenforceable “agreements to agree,” or do they represent a binding and enforceable contract? How can a teaming agreement, sometimes executed months or even years ahead of the issuance of a solicitation and the submittal of proposals, include the type of precision in terms courts require?
Generally, a teaming agreement between potential subcontracting partners will set forth certain terms, including, but not limited to, the purpose of the agreement, the relationship between the parties, the rights of the parties, and other general provisions. A teaming agreement provides that the parties will execute a more detailed subcontract upon the successful outcome of the proposal. Although such agreements are recognized under FAR provisions,2 state law, rather than federal law, governs disputes related to the enforceability of teaming agreements because they are commercial, non-government contracts.3 Teaming agreements often contain a choice-of-law provision, setting forth the state law that will govern any dispute arising under the teaming agreement. Accordingly, they are not enforceable in government contracts forums, but rather in the courts of the states in which they are formed or in which the parties agree to resolve disputes.
The enforceability of teaming agreements varies somewhat among states and among agreements. However, as seen in the cases discussing this issue, certain recurring principles underlie enforcement and can contribute to it. Generally, the more definite and detailed the teaming agreement, the more likely that a court will enforce the teaming agreement.
Cyberlock: Enforceability of a Teaming Agreement that Anticipates Future Negotiations
Cyberlock presents a fairly typical dispute over a teaming agreement. Cyberlock, the subcontractor, and Information Expert, Inc. (IE), the prime contractor, teamed together to bid on a contract issued by the Office of Personnel Management (OPM). The parties executed a teaming agreement that contained a merger or integration clause which stated that 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 written.”4 The agreement included a generalized statement of work indicating that, in the event of an award of a prime contract, IE would perform 51% of the work, and Cyberlock 49%. Unlike earlier versions executed by the parties, the agreement did not include as an attachment the subcontract the parties intended to execute upon contract award, and specified that the terms were subject to termination upon the failure of the parties to reach agreement on a subcontract after a reasonable period of good faith negotiations.5 OPM ultimately awarded the prime contract to IE. However, IE and Cyberlock reached an impasse after a month of negotiations, and IE eventually terminated negotiations between the parties on the proposed subcontract. Cyberlock subsequently sued to enforce the second teaming agreement, claiming it was entitled to 49% of the work awarded to IE.
The court, in assessing the enforceability of the teaming agreement, first cited Virginia precedent in holding that “an agreement to negotiate open issues in good faith to reach a contractual objective within [an] agreed framework will contract.”6 Next, the court declined to consider parol (i.e., outside) evidence in assessing enforceability of the agreement — specifically, the conduct of the parties and pre- and postprime contract award negotiations — because the teaming agreement was unambiguous and contained provisions that prevented resort to evidence outside the four corners of the agreement. Accordingly, the court considered only the teaming agreement as a whole, and noted that, even if the parties had fully agreed on the terms of the contract, the intent to execute a formal contract at a later date is “strong evidence to show that they did not intend the previous negotiations to amount to an agreement which is binding.”7 Next, the court noted that, while the agreement did contain language indicating the parties intended to enter into a subcontract in the event IE was awarded the contract, the parties never negotiated or agreed to a specific subcontract. The court highlighted a number of provisions demonstrating that the teaming agreement “unambiguously set out an agreement to negotiate in good faith to enter into a future subcontract,” and was therefore unenforceable under Virginia law.8
The courts of Virginia have dealt with teaming agreements several times, and each time has sought to identify the to be performed by the subcontractor if the prime received the contract. Relying on the terms of the agreement, the circumstances regarding the parties’ proposal for the contract, and the parties subsequent performance of those terms, the court determined that the teaming agreement constituted a binding, enforceable contract.10 Cyberlock has appealed its case to the U.S. Court of Appeals for the Fourth Circuit. One important distinction between the Cyberlock and EG&G cases, which may affect the appeal, is that the parties in EG&G actually performed the work for almost a year under the prime contract, resulting in specific work conducted by the subcontractor and specific invoices submitted and paid. And while the Cyberlock court did not expressly overrule EG&G, it criticized EG&G for its use of extrinsic evidence in assessing the enforceability of the agreement. Legal observers will be watching to see whether the Fourth Circuit will enforce the Cyberlock/IE teaming agreement, or if it will agree with the Cyberlock court’s analysis (and its criticism of EG&G) and other courts in the circuit that have found teaming agreements to be unenforceable agreements to agree.11
X Technologies: Enforceability of Exclusivity Agreements
The Fifth Circuit recently affirmed a jury verdict arising from the breach of an exclusive teaming agreement. In X Technologies, plaintiff X Technologies, Inc. (X Tech) entered into an exclusive teaming agreement with defendant Marvin Test Systems (Geotest) to bid on a U.S. Air Force contract for testing equipment. Despite that the exclusive teaming agreement provided that Geotest would not team up with any other company for the solicitation, Geotest submitted a second bid in its own name with the assistance of software licenses it secured from a third company. The Air Force awarded Geotest the contract, and X Tech brought a breach of contract claim asserting that Geotest violated the exclusive teaming agreement when it submitted a separate specific elements of an agreement that render it enforceable. In the Schafer case, the Virginia Supreme Court held that the teaming agreement at issue was unenforceable on the ground that “agreements to agree in the future” are “too vague and too indefinite to be enforced.”9 In 2002, however, the EG&G court issued an affirmative injunction compelling specific performance of a teaming agreement. The court explained that the Virginia courts will uphold a bargain that creates an enforceable right under Virginia law whether labeled a teaming agreement or otherwise. Distinguishing the facts in Schafer, the court stressed that the teaming agreement contained an unequivocal obligation to subcontract, binding the prime contractor with the words “shall subcontract” if the prime were awarded the contract. The court also found that the teaming agreement evinced a mutual commitment between the parties regarding the work be construed as an agreement to agree rather than a valid bid with a third party. The district court jury found that Geotest breached the exclusivity provisions of the teaming agreement.12 On appeal, the Fifth Circuit affirmed the district court’s judgment in favor of X Tech, holding that the plain meaning of the exclusivity provisions was controlling.13
The X Technologies case provides an example of the enforceability of a teaming agreement while the opportunity is in an inchoate stage — i.e., the breach of the agreement occurred prior to any award, and prior to any contemplated subsequent negotiations. The holding provides a number of lessons for contractors. First, teaming agreements are, or can be, contractual undertakings that bind the parties’ actions even before submission of any bid or proposal in response to a government solicitation. Second, exclusivity provisions must be undertaken seriously. Contractors may regret trying to straddle the line between using non-illusory language in their teaming agreements that will nevertheless permit some teaming flexibility, only to find that a court later views the exclusivity provisions of the agreement binding.
Ninth Circuit: Enforceability of Oral Promises to Team
The negotiations leading to teaming agreements have also been the subject of enforceability litigation. In 2000, the Ninth Circuit considered the enforceability of an oral agreement to enter a teaming agreement.14 Plaintiff Cable & Computer Tech (CCT) engaged in extended negotiations with Lockheed Martin (LM) over the terms of a projected teaming agreement for pursuit of a subcontract opportunity but never executed a teaming agreement, despite exchanges of written drafts and oral assurances. LM eventually obtained the subcontract through another subsidiary without CCT. CCT sued to enforce the terms of the draft teaming agreement. Applying California law, the district court determined that, because Boeing required the agreement to be executed in writing and submitted with the bid, the parties obviously intended for all negotiations to be reduced to a written agreement. The district court found for LM, holding the teaming agreement void.
The Ninth Circuit disagreed, stating that the district court’s analysis avoided the question of whether there was an oral contract to execute a teaming agreement. The court ruled that CCT had provided “significant, probative evidence” that CCT and LM had orally agreed to team for the subcontract bid. The court made clear that this oral agreement was not itself a teaming agreement compliant with the terms of the solicitation. Rather, “[u]nlike an agreement to agree, an agreement to use best efforts to achieve a common objective is a closed, discrete, and actionable proposition.”15 This case sits on the other side of the spectrum from Cyberlock in holding that an exchange of promises to work together can create an enforceable obligation to do so. Contractors should be wary of making absolute statements regarding the finality of a promise to team with another company until they are prepared to execute a formal agreement. It will be interesting to see whether future courts will follow Cable & Computer Tech. or consider it an outlier in the growing body of law.
Sixth Circuit: Agreement Enforceable Despite Anticipation of Future Negotiation
In 2010, a federal district court in Ohio took a different view than the Cyberlock court of the requirements of an enforceable teaming agreement.16 In the CelerityQ case, the court found a letter of agreement to pursue a contract opportunity between CSDC, a prospective prime contractor, and CelerityQ, CSDC’s prospective subcontractor, to be an enforceable teaming agreement under the law of Ontario, Canada. Upon award of the contract to CSDC, CSDC hired another subcontractor to perform the work, and CelerityQ sued to enforce the teaming agreement. The court ruled for CelerityQ, noting that the agreement stated that “upon award of the RFP both parties agree to finalize the terms of their responsibility under a formal Subcontract.”17 Further, the parties agreed to neither solicit nor submit proposals to or from any other party for the opportunity. The court noted that the agreement provided for termination in the event “either party [is] unable to fulfill its obligations,” and stated that “should the RFP or the Project be of a different nature than expected, both parties agree to negotiate in good faith a resolution to the above expressed intent.”18 Based on these provisions, the court deduced that CSDC intended to use CelerityQ as a its subcontractor for the project.
In CelerityQ, the parties did not attach a draft subcontract to the teaming agreement (which specifically stated that the subcontract terms would be negotiated after award) and failed to state a subcontract amount beyond the specified minimum percentage of effort. Indeed, the court in Cyberlock relied on similar circumstances to find against a contractual agreement. Moreover, the CelerityQ court placed some weight on parol evidence of the prior course of dealing of the parties — in particular, the fact that the parties engaged in a series of meetings to discuss the project and the agreement. This weight was not determinative, but the CelerityQ court clearly did not share Cyberlock’s view that such evidence was categorically excluded. While this case arises under Canadian law, the agreement at issue was treated using recognizable contract principles, and appears to have terms very similar to many commonly-used agreements. In light of the competing decisions, subcontractors seeking enforceable teaming agreements should view the provisions discussed in CelerityQ as cautionary minimums, not as guarantees of enforceability.
Third Circuit: Agreement Contemplating Future Negotiations Unenforceable
In the Trianco case, the Third Circuit reviewed the enforceability of an executed teaming agreement under New York law where the teaming agreement also explicitly anticipated additional negotiations after award.19 Under the terms of the teaming agreement to join forces to submit a proposal in response to a government solicitation for computerized checkstands at military commissaries, Trianco agreed not to collaborate with any company other than IBM during the bid preparation phase, and provided the technical and pricing information needed to prepare the bid. IBM submitted its bid using the technical and pricing information Trianco had provided and listing Trianco’s name as a subcontractor. When IBM won the contract and then requested Trianco to quote new prices to compete with other subcontractors for the work, Trianco sued to enforce the teaming agreement.
The court, applying New York law, rejected Trianco’s claim and held that the teaming agreement did not include a definite or approximate subcontract price, or even an objective method to ascertain a price. The court, looking only to the four corners of the agreement, found that, despite “seemingly mandatory” language, it was “clear that the parties’ objective intent was to leave negotiation of a subcontract price until after IBM received the prime contract from the government.”20 As such, the agreement was held to be an unenforceable agreement to agree, a departure from earlier Third Circuit decisions that moved outside the four corners of a teaming agreement to conclude that the parties had executed an enforceable contract.21 This case clearly illustrates the competing interests of subcontractors and prime contractors in these negotiations. Subcontractors attempt to compel enforceability of teaming agreements by including specifics of work they will perform and pricing. If such specifics are not available (because teaming agreements are nearly always executed early in the process), prudent subcontractors should incorporate by reference the proposal they will provide to the prime contractors and a provision that it cannot be altered except by mutual consent. Prime contractors, however, are likely to be content with generalities regarding work to be performed and pricing, hoping to trigger “agreement to agree” decisions and render the teaming agreement unenforceable. General advice in this area will always depend upon whether the firm is the buyer (prime) or seller (subcontractor).
Contractors who enter into teaming agreements that are governed by Virginia law would be well advised to heed the facts of Cyberlock, X Technologies, and earlier case law, and consider structuring their teaming agreements accordingly. For example, prospective subcontractors should consider providing as much detail as possible in the teaming agreement, such as a clear statement of an intent to subcontract, a statement of work identifying each party’s work share and duties, a clear statement of subcontract pricing, the duration of the teaming agreement, and reasonable termination provisions. Using the term “shall subcontract,” avoiding “good faith negotiations” language, and including a definite duration corresponding to the prime contract will support the agreement’s enforceability.