TAs Are They Binding

TEAMING AGREEMENTS: Are They Binding?

Acquisition Planning

## Nash & Cibinic Report** | August 2013

27 Nash & Cibinic Rep. NL ¶ 36**

Ralph C. Nash & Richard N. Kuyath

¶ 36. TEAMING AGREEMENTS: Are They Binding?

We generally think of acquisition planning as an activity conducted by Government agencies but contractors also have to plan to compete for work. One aspect of such planning is putting a team together that can demonstrate to the Government that it has the strongest capability to perform the work. In assembling a team of companies, the lead company has to make the decision as to whether it should enter into a binding teaming agreement with one or more members of the team. This would normally be done when that member of the team had a vital role to play in performing the work and the lead company wanted to make sure that it will not participate with any other company. Thus, such a teaming agreement would state clearly that, in the event the team won the job, the lead company would award a designated part of the work to the team member and, in exchange, that the team member would not participate with any other company in competing for the work. Drafting such an agreement so that it is mutually binding is one of the trickiest jobs in the Government contracting arena.

Richard Kuyath of 3M Company drew our attention to two recent decisions that illustrate how difficult this job can be. In Cyberlock Consulting, Inc. v. Information Experts, Inc., No. 1:12cv396 (JCC/TCB), 2013 WL 1395742 (E.D. Va. Apr. 3, 2013), the district court held that a teaming agreement was an agreement to agree that was unenforceable under Virginia law. In X Technologies, Inc. v. Marvin Test Systems, Inc., No. 12–50230, 2013 WL 2493735 (5th Cir. June 11, 2013), the court affirmed a jury verdict finding that there had been a breach of an enforceable teaming agreement. The two decisions do not provide a definitive answer as to how to write a binding teaming agreement because this is a matter of state law that may vary considerably from state to state. However, they do contain some very useful tips on achieving this result.

The Cyberlock Dispute

In Cyberlock, the parties, won the competition but could not agree on the terms of their prospective subcontract with the result that Information Experts (IE) never gave Cyberlock the 49% share of the work that it had promised in the teaming agreement. In response to Cyberlock’s suit for breach of the teaming agreement, the court granted summary judgment for IE, reasoning that the teaming agreement was an agreement to agree that was unenforceable under Virginia law. The court described the agreement as follows:

The Second Teaming Agreement stated that the agreement’s purpose was “to set forth the arrangement between [IE] and [Cyberlock] to obtain an [IE] prime contract” for [Office of Personnel Management Federal Investigative Services division (OPM FIS)] “and to set forth the basis for a subcontract between [IE] and [Cyberlock],” and that “[u]pon Contract Award, [IE] will perform 51% of the scope of work with [Cyberlock] performing 49%.” Under the section titled “Responsibilities and Performance,” the Second Teaming Agreement stated that each party would “exert reasonable efforts to obtain an [IE] prime contract for the Program and to negotiate a subcontract for the Program in accordance with Exhibit A.” That section listed a number of pre-award responsibilities of the parties. It also stated that “[i]n 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, as set forth in Exhibit A.” The section indicated that the “contemplated subcontract will contain provisions passing down those terms and conditions of the prime contract which must be passed on to [Cyberlock] in order to comply with such prime contract, as well as those that are reasonably necessary for [IE] to perform the requirements of the prime contract.” Exhibit A to the Second Teaming Agreement stated that this exhibit “sets out the anticipated Scope of Work and other pertinent information relative to [Cyberlock’s] role in the Program, as presently understood by the parties. In that regard, Subcontractor will perform 49% of the functions and scope of work as relayed by the Government in the prime contract awarded to [IE].” Exhibit A, however, did not set out any further details about the work anticipated to be performed by Cyberlock. In addition, unlike the First Teaming Agreement, the Second Teaming Agreement did not include as an exhibit the subcontract the parties intended to execute if IE was awarded the prime contract contemplated in the Second Teaming Agreement. The Second Teaming Agreement reserved that the contemplated future subcontract “may be subject to the approval of the Client [OPM FIS] regardless of the provisions of this [Second Teaming] Agreement.” Relatedly, it indicated that IE had the responsibility to “exert reasonable efforts to obtain Client approval for the proposed Subcontractor for the Program.”

Finally, in a section titled “Termination of Agreement,” the parties specified that one of the occurrences under which the Second Teaming Agreement would be terminated was if there was a “failure of the parties to reach agreement on a subcontract after a reasonable period of good faith negotiations.”

Cyberlock lost the case because the court followed the plain meaning rule in reaching its conclusion (rejecting evidence of the conduct of the parties). See The Plain Meaning Rule: Too Much of a Good Thing, 20 N&CR ¶ 57, and Postscripts at 21 N&CR ¶ 64, 21 N&CR ¶ 27, 21 N&CR ¶ 52, 22 N&CR ¶ 63, 23 N&CR ¶ 49, 25 N&CR ¶ 16, 26 N&CR ¶ 48, and 26 N&CR ¶ 68. Concentrating only on the words of the teaming agreement, it concluded that they indicated that there was no binding promise to award 49% of the work to Cyberlock, stating:

[T]he Court concludes that the most reasonable reading of Second Teaming Agreement, construed as a whole, is that any seemingly mandatory language to award Cyberlock with a portion of the prime contract was modified by the provisions indicating that: (1) the award of such work would require the negotiation and execution of a future subcontract; (2) the award of such work was dependent on the success of such future negotiations; (3) any future executed subcontract was subject to the approval or disapproval of OPM FIS; and (4) suggesting that the framework set out for the work allocation in a future subcontract potentially could change as it merely was based on the work anticipated to be performed by Cyberlock as then-presently understood by the parties. See [Boisseau v. Fuller], 30 S.E. [457] at 457 [(Va. 1898)] (concluding that “the use of such words [which otherwise would create a binding contract] , however strong, will not constitute the instrument” a binding contract “if it can be clearly inferred from the rest of the paper that the parties had it in contemplation to enter into a future [contract] ”); see also Trianco, LLC v. Int’l Bus. Machines Corp., 466 F. Supp. 2d 600, 606 (E.D. Pa. 2006) aff’d in part, vacated in part, 271 F. App’x 198 (3d Cir. 2008) (concluding, although the teaming agreement “does include much seemingly mandatory language about the subcontract—for example, that ‘IBM will award a subcontract’ to Trianco,” that “taking the Teaming Agreement as a whole, it is clear that this mandatory language is modified by the provisions that [the] award of a subcontract was contingent on further negotiations” ).

This decision imposed a high standard on a party entering into a teaming agreement—perhaps requiring that the terms of the prospective subcontract be agreed to at the time the parties sign the teaming agreement. It is possible that the court was influenced in reaching this conclusion by the fact that the parties had done that in the first teaming agreement that they signed.

The X Technologies Dispute

In X Technologies, both parties (X Tech and Geotest) competed outside of their teaming agreement. X Tech submitted a proposal containing Geotest’s “workshare” and a separate proposal doing the work by itself. Geotest submitted a proposal on its own using Raytheon as a subcontractor. When Geotest won the competition, X Tech sued for breach of contract and Geotest defended claiming that X Tech was the first breacher by submitting a competing proposal. The teaming agreement stated:

This is an exclusive agreement between X-Tech and Geotest. X-Tech will submit Geotest’s workshare as part of X-Tech’s proposal as a response to this [ Request for Proposals] . Geotest will not team up with any other company for solicitation FA8224-09-R-0104 except that Geotest may provide prices for the TS-217 tester only (without any software licenses, support or training) to other potential bidders.

The court determined that the jury had correctly found that Geotest had breached the teaming agreement because it had promised that it would not team with any other party but had then teamed with Raytheon. Geotest argued that its contract with Raytheon was merely a license of software but the court accepted the jury’s determination that the arrangement between Geotest and Raytheon was a teaming arrangement. The issue of whether Geotest would have been bound if it had merely submitted Raytheon as a potential subcontractor was not discussed.

The court then determined that X Tech had not breached by submitting another proposal because the agreement did not contain its promise of exclusivity. The court reasoned:

The agreement, by its terms, limits only Geotest’s ability to team. The fact that it explicitly restricts one party’s ability to team but is silent as to the converse ability of the other party suggests that the restriction is unilateral. And, as Geotest itself notes, had Geotest not negotiated the agreement, including its teaming limitation, it would have been “sidelined by the small business set-aside” from bidding for the contract. It thus had an incentive to exchange unilateral exclusivity for the opportunity to be part of the bid.

The agreement does require X Tech to submit Geotest’s workshare. But it does not specify that X Tech must submit this workshare to “any” or “every” or even “its” response to USAF’s solicitation. X Tech is bound to submit Geotest’s workshare only in “a” response to the solicitation. X Tech fulfilled its obligation.

This appears to be a close reading of the language of the teaming agreement that does not deal directly with the first sentence stating: “This is an exclusive agreement.” However, it flags the possibility that a teaming agreement can be read as a one-way street.

Lessons Learned

While these cases are quite dissimilar, they provide several lessons. The most important is that parties entering into teaming agreements have to be very careful in drafting the agreement to state their express agreement in clear and uncertain language. In both cases, the judges carefully analyzed the words of the agreement and arrived at their interpretation—arguably without regard to the intent of the parties when they entered into the agreement. Neither court appeared to recognize how difficult it is to spell out the precise arrangement before they have won the contract. Cyberlock contains a clear warning that words dealing with the possibility that there will be disagreement on the final terms of the ensuing subcontract may be held to indicate that there is no contractual requirement to enter into a subcontract at all.

Another lesson is that the parties to a teaming agreement need to carefully state what state law will apply and then carefully analyze that law. We would guess that some states would not have dismissed the Cyberlock agreement out of hand but would have addressed the question of whether Information Experts negotiated in good faith. That is the view of the U.S. Court of Appeals for the Federal Circuit in dealing with agreements to agree as stated in Aviation Contractor Employees, Inc. v. U.S., 945 F.2d 1568 (Fed. Cir. 1991), 34 GC ¶ 33:

[W]hile some courts have invalidated so-called “agreements to agree,” the emerging view is that an agreement which specifies that certain terms will be agreed on by future negotiation is sufficiently definite, because it impliedly places an obligation on the parties to negotiate in good faith. See Corbin at § 97 (1990 Supp.); Lee v. Joseph E. Seagram & Sons, Inc., 552 F.2d 447, 454 (2d Cir. 1977). Such an obligation gives the contract certainty by allowing the courts to determine when a breach has occurred by determining whether the parties have negotiated in good faith.

See also North Star Steel Co. v. U.S., 477 F.3d 1324 (Fed. Cir. 2007), 49 GC ¶ 71; and Gardiner, Kamya & Associates, P.C. v. Jackson, 369 F.3d 1318 (Fed. Cir. 2004), 46 GC ¶ 234.

Some states would also use a less strict application of the plain meaning rule that the court used in Cyberlock. Thus, knowledge of state law is a vital component to drafting a teaming agreement.

Finally, the parties to a teaming agreement need to have a full discussion of their mutual intentions. Presumably, they go into such an agreement with the honest intent to work together to win the competition and then to share the work in a way that takes the greatest advantage of the skills of each party. If that is so, they should discuss in detail how that intent can be carried out in a mutually beneficial way. Each party has to determine whether the other party has some hidden agenda to act differently after the agreement is signed. The history of litigation of teaming agreements indicates that this has been the case in a number of instances—with the result that this becomes an essential part of the negotiation process. As we stated at the outset, this is one of the most difficult negotiations a contractor is likely to encounter. It takes real skill to arrive at a successful teaming agreement where both parties’ expectations are fulfilled. RCN

ADDENDUM • This addendum to Ralph’s article discusses, from the subcontractor’s standpoint, the enforceability of the most common type of teaming agreement, which is the prime contractor/subcontractor relationship.

When drafting and negotiating a teaming agreement, the prime contractor will often have different motivations than its proposed subcontractor. The prime will most likely want to draft the terms and conditions of the teaming agreement so that it does not include a binding commitment to enter into a subcontract. This allows the prime to retain the flexibility to, for example, award the subcontract to another party that is more technically capable to perform the subcontract or that is willing to agree to a lower price to perform the subcontract than the prime’s proposed subcontractor. It also gives the prime more leverage to negotiate favorable prices and terms and conditions with its proposed subcontractor. In addition, this approach permits the prime to later decide to perform the work itself instead of subcontracting it. It also enables the prime to subcontract with another party if the prime’s relationship with the proposed subcontractor later sours. In contrast, the proposed subcontractor will most likely want to enter into a teaming agreement under which the prime has made a binding commitment to award the subcontract to the proposed subcontractor.

In most cases, the prime and subcontractor will negotiate the teaming agreement using the prime’s standard teaming agreement as the starting point. Prime contractors’ standard teaming agreements are almost always drafted to not include a binding commitment to award the subcontract In fact, in over 30 years of negotiating teaming agreements, I don’t recall ever seeing a prime’s standard teaming agreement include a binding commitment to award the subcontract.

The courts have usually interpreted teaming agreements to be unenforceable agreements-to-agree. In some cases, the courts have interpreted the teaming agreement to be an enforceable preliminary agreement to negotiate the subcontract in good faith. However, when a teaming agreement contains sufficiently definite obligations and shows intent for both parties to be bound, the courts have found the teaming agreement to include a binding commitment to award the subcontract. Under general principles of contract law, a teaming agreement is enforceable if it is clear that the parties to the agreement mutually intend to be bound by its terms, those terms are sufficiently definite to be enforced, and the agreement is supported with consideration.

Although the enforceability of teaming agreements varies, depending upon the applicable state law, in general, the following essential terms of the subcontract must be included in the teaming agreement in order for there to be a binding commitment to award the subcontract: (1) an explicit identification of the work to be performed, (2) the compensation to be paid for the work and the payment terms, (3) the quantity of goods or services to be provided, (4) the duration of performance, and (5) the delivery or performance dates.

Certain key terms and conditions in the prime’s teaming agreement will likely be issues from the subcontractor’s perspective. The prime contractor’s objective of limiting its obligation to award the subcontract to its proposed subcontractor is often accomplished by including vague and nonspecific provisions in the teaming agreement and off-ramps that permit the prime to unilaterally terminate the agreement under certain circumstances. Examples include:

(1) Making the subcontract “subject to negotiation” or “subject to mutual agreement.”

(2) Including references only to “a subcontract” or a “proposed subcontract,” but with no additional description of the subcontract’s prices, payment terms, statement of work, quantities of goods and services to be provided, delivery or performance schedule, duration of the subcontract, and applicable Government flowdown provisions.

(3) Providing for termination of the teaming agreement if negotiation and execution of a definitive subcontract are not concluded within a specified time period (e.g., 30 days) after award of the prime contract.

(4) Reserving the right for the prime to unilaterally withdraw from or terminate the teaming agreement in the prime’s “sole discretion.”

(5) Including a disclaimer of consequential damages (which would include lost profits due to the failure to award the subcontract) for breach of the teaming agreement. This eliminates any effective remedy for the subcontractor if the prime fails to award the subcontract to the subcontractor. See Liobmedia, LLC v. Dataflow/Alaska, Inc., 349 Fed. Appx. 843, 2009 WL 2171240 (4th Cir. 2009) (since agreement contained no promise to subcontract, plaintiff’s claim of lost profits really is a “consequential damage” that was precluded under the “Disclaimer of Consequential Damages” clause in the agreement).

In contrast, the subcontractor will want the teaming agreement to include an enforceable commitment to award the subcontract. The subcontractor will attempt to do this by including or deleting certain provisions in the teaming agreement, such as:

(1) Including in the teaming agreement an unqualified commitment from the prime to “place” or “award” the subcontract to the subcontractor.

(2) Deleting from the teaming agreement any time limit placed on the negotiation of a definitive subcontract.

(3) Including a provision in the teaming agreement that provides that failure to agree to the price or other terms and conditions of the subcontract is subject to resolution under the “Disputes” clause in the teaming agreement. Including in the “Disputes” clause escalating, nonjudicial steps that must be first followed to resolve the dispute, starting with negotiation between representatives of both parties involved in with the subcontract, then executives of both parties, then mediation, and finally, and only as a last resort, a court of competent jurisdiction.

(4) Including in the teaming agreement enforcement and/or damages provisions for the prime’s failure to award the subcontract, such as specific performance or liquidated damages.

(5) Including in the teaming agreement the subcontract’s negotiated prices, or the parameters or formula under which the prices will be negotiated, and as many other subcontract terms and conditions as possible. (Negotiating subcontract terms and conditions up front takes more time, but better supports enforceability. It also significantly reduces the time required to negotiate the subcontract after award of the prime contract.)

(6) Including in the governing law provision of the teaming agreement the law of a state that is more likely to enforce teaming agreements (e.g., Pennsylvania or Texas).

(7) Including a provision in the teaming agreement whereby the prime agrees it will be entitled to terminate the subcontract for its convenience only if the prime contract is terminated for convenience by the Government. (Otherwise, the prime will have the unilateral right to terminate the subcontract immediately upon its award to the subcontractor.)

(8) Including a detailed subcontract statement of work (the subcontract “work share”) that clearly and precisely sets forth the subcontract statement of work, the quantities of products and services to be provided under the subcontract, the subcontract’s delivery or performance schedule, and the duration of the subcontract.

(9) Deleting or not adding boilerplate “integration” clauses, which provide that the teaming agreement is intended to be the final, complete, and exclusive statement of all terms and conditions of the agreement between the parties with respect to the subject matter of the agreement and it supersedes any previous understandings, commitments, or agreements, oral or written, with respect to the subject matter of the agreement. Such clauses will likely result in the exclusion of extrinsic evidence under the parol evidence rule, which will prevent the court from looking at evidence outside of the four corners of the agreement to determine whether the parties intended there be a binding commitment for the prime to award the subcontract to the subcontractor. Cyberlock held that the teaming agreement’s integration clause prevented the court from looking outside of the agreement to determine if the parties intended the teaming agreement to be a binding commitment to award the subcontract.

(10) Including an express provision in the teaming agreement making it clear the parties intend it to be a binding agreement to award the subcontract and not merely an agreement-to-agree.

(11) Including a provision in the teaming agreement making it bilaterally exclusive for the subcontractor’s work share and that provides that, by entering into the teaming agreement, the parties are forgoing the opportunity to work with other contractors or subcontractors or to pursue the work independently so that the consideration provided by both parties that makes the agreement binding is clearly identified.

Richard N. Kuyath

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