Dec. 9, 2013

In the construction industry, contractors, designers and subcontractors sometimes enter into teaming agreements that prescribe a framework for jointly cooperating to acquire a construction contract.

In the construction industry, contractors, designers and subcontractors sometimes enter into teaming agreements that prescribe a framework for jointly cooperating to acquire a construction contract.

These agreements typically set forth the parties’ specific obligations and address what happens if the bid or proposal is accepted. One issue that often arises is whether a teaming agreement obligates the successful prime contractor to subcontract with all team members on the project. As a recent case in Virginia illustrates, a teaming agreement must be more than a mere agreement to agree in the future in order to be enforceable in this regard.

Cyberlock Consulting, Inc. v. Information Experts, Inc., 2013 WL 1395742 (E.D. Va. April 3, 2013) involved two entities that joined efforts to procure an information technology contract from the federal government. The agreement stated as its purpose, “to set forth the arrangement between [the prime] and [the subcontractor] to obtain a prime contract . . . and to set forth the basis for a subcontract between [the prime] and the [subcontractor].” It further indicated that “[u]pon Contract Award, [the prime] will perform 51% of the scope of work with [subcontractor] performing 49%.” Under a section titled “Responsibilities and Performance” the agreement stated that each party would “exert reasonable efforts to obtain [the prime contract] for the Program and negotiate a subcontract for the Program in accordance with Exhibit A.”  

Exhibit A contained a list of the parties’ pre-award responsibilities and also stated that “in the event the [prime] is awarded a prime contractor for the Program, [the prime] agrees to execute a subcontracting agreement to provide [subcontractor] 49% of the prime contract for the work anticipated to be performed by Subcontractor.” Exhibit A also noted that the “contemplated subcontract will contain provisions passing down those terms and conditions of the prime contract which must be passed on to [subcontractor] in order to comply with such prime contract, as well as those that are reasonably necessary for [prime contractor] to perform the requirements of the prime contract.” It also provided that the subcontract “may be subject to the approval of the Client regardless of the provisions of this Agreement” and the prime must “exert reasonable efforts to obtain Client approval for the proposed Subcontractor for the Program.” Finally, the agreement listed certain circumstances under which the agreement may terminate, including “failure of the parties to reach agreement on a subcontract after a reasonable period of good faith negotiations.”

After the government awarded the contract to the prime, the prime and subcontractor began negotiations of a subcontract and they exchanged several proposed drafts. Approximately one month later, the prime concluded that the parties would be unable to reach an agreement, and it ceased all further negotiations. The subcontractor sued the prime for, among other things, breach of the teaming agreement.

In a motion for summary judgment filed with the U.S. District Court for the Eastern District of Virginia, the prime contractor argued that the matter should be dismissed because, under the teaming agreement, it had no enforceable obligation to contract with the subcontractor. The subcontractor, on the other hand, contended that the teaming agreement was a binding contract under which the prime agreed to give it 49% of the prime contract work if it received an award from the government.  

In its analysis, the court noted that mere agreements to agree in the future are “too vague and too indefinite to be enforced” and “agreements to negotiate at some point in the future” are similarly unenforceable. On one hand, the court observed that some language in the agreement strongly suggested the prime was obligated to provide 49% of the prime contract to the subcontractor upon award of the prime contract. On the other, it recognized the language in the teaming agreement that anticipated the possibility the parties might not reach an agreement on specific subcontract language and provided a remedy—termination. That language was more persuasive, and therefore, reading the teaming agreement as a whole, the court held that the teaming agreement constituted nothing more than a mere agreement to negotiate in the future. Accordingly, the prime had no duty to award any work to the subcontractor.  

Parties to teaming agreements usually dedicate significant resources to acquiring a project, and this case illustrates the need for teams to ensure that their agreement clearly articulates their intentions. R&B

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