Government Contracts Monitor

Teaming Agreements: Enforceable Contracts or Unenforceable Agreements to Agree?

June 11, 2013

Teaming Agreements are an everyday occurrence in federal government contracting. Contractors typically enter into teaming agreements to formalize their relationship while pursuing a federal contract. If a federal contract is awarded to the lead contractor, the normal expectation is that the parties will then perform the work according to mutually acceptable terms. The big question is whether the terms of a teaming agreement can form the basis for an enforceable subcontract between the parties. The recent decision in Cyberlock Consulting, Inc. v. Information Experts, Inc., No. 1:12-cv-396 (E.D. Va. April 3, 2013) highlights this issue.

In that case, Information Experts, Inc. (“IE”) and Cyberlock Consulting, Inc. (“Cyberlock”) agreed to team together to secure two separate prime contracts for IE from the U.S. Office of Personnel Management. In the first instance, IE and Cyberlock entered into a teaming agreement and attached to the teaming agreement a copy of a full statement of work and a copy of the subcontract the parties intended to sign within days of when the prime contract was awarded. IE was awarded that federal contract, so the parties simply signed the subcontract and applied the statement of work to which the parties already agreed.

The problems arose, and the lawsuit was based, on the second teaming agreement between IE and Cyberlock relating to a second federal contract. The second teaming agreement did not include any formal subcontract and the “Scope of Work” was limited to an agreement that Cyberlock “will perform 49% of the functions and scope of work as relayed by the Government in the prime contract awarded to” IE. The second teaming agreement also had the following provisions:

In “the event [IE] is awarded a prime contract for the Program, [IE] agrees to execute a subcontracting agreement to provide [Cyberlock] 49% of the prime contract for the work anticipated to be performed by Subcontractor.”
The “contemplated subcontract will contain provisions passing down those terms and conditions of the prime contract which must be passed on to [Cyberlock]”
The teaming agreement’s purpose was “to set forth the arrangement between [IE] and [Cyberlock] to obtain” a prime contract for IE “and to set forth the basis for a subcontract between [IE] and [Cyberlock].
Any future subcontract “may be subject to the approval of the Client.”
The teaming agreement may be terminated for a “failure of the parties to reach agreement on a subcontract after a reasonable period of good faith negotiations.”

IE won the second government contract, and the parties unsuccessfully attempted to negotiate a subcontract between them. Cyberlock then filed suit claiming IE breached the teaming agreement.

The United States District Court for the Eastern District of Virginia, applying Virginia law, made quick work of this case, holding:

In Virginia, any “writing in which the terms of a future transaction or later, more formal agreement are set out is presumed to be an agreement to agree rather than a binding contract.” Indeed, calling an agreement something other than a contract or subcontract, such as a teaming agreement or letter of intent, implies “that the parties intended it to be a nonbinding expression in contemplation of a future contract.” Moreover, even if the parties are “fully agreed on the terms of their contract,” “the circumstance that the parties do intend a formal contract to be drawn up is strong evidence to show that they did not intend the previous negotiations to amount to an agreement” which is binding.

Because no subcontract was attached and the plain language of the teaming agreement cited above demonstrated that the parties merely intended to negotiate a future subcontract, “the Court finds that the post-award obligations in the Second Teaming Agreement unambiguously set out an agreement to negotiate in good faith to enter into a future subcontract. . . . such an agreement ‘is precisely the type of agreement to agree that has consistently and uniformly been held unenforceable in Virginia.’”

The practical implications of this case are straightforward. First, even though this case explicitly applied Virginia law, the same contract principles apply in many other jurisdictions. Second, it is much safer to fully negotiate, draft, and attach any subcontract as an exhibit to a teaming agreement, like the parties did in the first instance above. Third, in the absence of an actual subcontract agreement, the teaming agreement must be much more specific than merely stating that any future subcontract will have a 51/49 split of the work. Finally, this case highlights that either a prime contractor or subcontractor could potentially escape its commitments and avoid entering into a subcontract by arguing that their teaming agreement was nothing more than an unenforceable agreement to agree.

Cost and time pressures to enter into a teaming agreement and quickly submit a proposal frequently cause contractors to pay less attention to the details of any future subcontract arrangement early in the process. As this case demonstrates, however, the money spent up front drafting a subcontract agreement and attaching it as an exhibit to the teaming agreement pale by comparison to the lost profits/opportunities and litigation costs of trying to enforce an otherwise unenforceable agreement to agree.

Michael J. Schrier is the attorney responsible for the content of this article.