TAs No Longer Merely Agreements to Agree, Procurement Lawyer

**39-FALL Procurement Law. 13**

**Procurement Lawyer**

Fall, 2003

[Ian T. Graham](http://www.westlaw.com/Link/Document/FullText?findType=h&pubNum=176284&cite=0329193101&originatingDoc=Ifa228ee149a211dba16d88fb847e95e5&refType=RQ&originationContext=document&vr=3.0&rs=cblt1.0&transitionType=DocumentItem&contextData=(sc.Search)), [Allison D. Diefendorf](http://www.westlaw.com/Link/Document/FullText?findType=h&pubNum=176284&cite=0329191501&originatingDoc=Ifa228ee149a211dba16d88fb847e95e5&refType=RQ&originationContext=document&vr=3.0&rs=cblt1.0&transitionType=DocumentItem&contextData=(sc.Search))[a1](#co_footnote_Fa1296648087_1)

Copyright © 2003 by American Bar Association; Ian T. Graham, Allison D. Diefendorf

**TEAMING** **AGREEMENTS****: NO LONGER MERELY “****AGREEMENTS** **TO AGREE”**

With the growing size and complexity of today’s federal procurement activities, it is increasingly common for two or more companies to join forces as teammates in order to obtain the government’s business. Typically, the parties form a prime/sub relationship to bid for and (if they win) perform the resulting government contract. The financial, legal, and operational allocation of rights and responsibilities between teammates is usually defined in a **teaming** **agreement**. But potential pitfalls abound, including being stuck with the wrong teammate or a bad deal formed too early in the procurement process, or getting dumped from the **team** altogether once the bid has been won.

To successfully draft a **teaming** **agreement**, counsel must balance the client’s business interests, which can be fluid and evolving during the procurement process, with the law’s black-letter demand for comprehension and clarity. For example, where a client wants to leave no room for later negotiation (or perhaps renegotiation, depending on one’s perspective), it is desirable for the **teaming** **agreement** to be maximally explicit and fulsome in order to later survive a potential challenge to its enforceability. Conversely, clients sometimes seek to protect only limited business objectives (such as confidentiality and exclusivity) during the early phase of a procurement, while leaving other terms (such as price and work-share) sufficiently undefined to permit further negotiation later, once the final terms of the prime contract become known. The challenge in drafting a **teaming** **agreement** is balancing these competing interests, particularly when the business client is indecisive.

This article aims to assist counsel with the drafting of **teaming** **agreements**. It reviews several recent court decisions that provide updated guidance regarding the possible interpretation and enforcement of such **agreements**. These cases and regulations provide insight into both the emerging bright-line rules and the remaining gray areas, so that **teaming** **agreement** drafters can better identify and avoid potential pitfalls.

**Teaming** **Agreements** **Are Enforceable in Court**

Two cases decided in late 2002 shattered the conventional wisdom regarding the enforceability of **teaming** **agreements** and the available remedies for their breach. Previously, **teaming** **agreements**, whether written or oral, were difficult to enforce in court. They were generally considered to be merely “**agreements** to agree” in the future.[1](#co_footnote_F1296648087_1) In the rare instance where they were enforced, the remedy available to the injured teammate typically was compensatory monetary damages, which can be difficult to prove.[2](#co_footnote_F2296648087_1) In the two recent decisions, however, the courts upheld the **teaming** **agreements**, and even applied punitive damage and specific performance remedies.

The first significant decision is _Cable & Computer Technology, Inc. v. Lockheed Sanders, Inc._ (Sanders).[3](#co_footnote_F3296648087_1) In this case, the Ninth Circuit upheld the enforcement of an oral **teaming** **agreement** to submit a subcontractor bid to Boeing for a computer upgrade project under the auspices of the U.S. Air Force’s B-1B bomber program. The appeals court also affirmed the lower court’s award of punitive damages following a jury trial.[4](#co_footnote_F4296648087_1) The jury determined that Sanders had entered into an enforceable oral contract with CCT, which Sanders then breached when it withdrew from the **team** two weeks before the submission date to Boeing. Sanders, instead, partnered with another Lockheed subsidiary. Consequently, CCT was left without a teammate, and was not able to bid on its own for the project.

The _Sanders_ jury found that there were no essential terms missing from the oral **teaming** **agreement**.[5](#co_footnote_F5296648087_1) Although the parties had not reached closure on certain financial terms, they had discussed some information regarding pricing. In reviewing the jury verdict, the trial court primarily focused on the parties’ conduct to conclude that they had reached **agreement** on all essential terms. CCT and Sanders “acted like teammates,” and made statements to each other and to others “that they were teammates.”[6](#co_footnote_F6296648087_1) The parties also announced that “we’ve got a deal to go acquire and win B1-B business.”[7](#co_footnote_F7296648087_1) Moreover, both the trial and appeals courts were greatly disturbed by Sanders’ alleged bad faith in entering into the **teaming** **agreement** with CCT. According to the decision, evidence presented at trial suggested that Sanders ***14** had never intended to bid with CCT in the first place. Rather, Sanders had wanted to bid with the other Lockheed subsidiary all along, and was looking for a way to render CCT unable to compete.

The trial court awarded substantial compensatory and punitive damages to CCT for Sanders’ breach of contract. On appeal, Sanders argued that CCT was merely a disappointed bidder, such that the compensatory damage award should be limited. The appellate court concluded, however, that CCT was an injured party to a binding contract, and was entitled to full compensation for its breach. The Ninth Circuit also rejected Sanders’ challenge to the punitive damages award.[8](#co_footnote_F8296648087_1) Based on the lessons of the _Sanders_ case, contractors should be cognizant that the failure to abide by a **teaming** arrangement, even an oral one, can result in significant financial penalties.

The second important decision is _EG&G v. Cube_.[9](#co_footnote_F9296648087_1) In this case, the Virginia Circuit Court ordered specific performance of a written **teaming** **agreement** to bid on and perform a government contract for operations and maintenance support services at a NASA flight facility on Wallop’s Island, Virginia. The parties submitted a bid as a **team**, with Cube as the small business prime contractor and EG&G as a major subcontractor, and Cube was awarded the resulting government contract.

For several months after the award, the two companies performed the contracted work according to the terms of the **teaming** **agreement**. During this time, they also sought to complete a definitized subcontract, which would supersede the **teaming** **agreement**. In the course of such negotiations, however, the parties reached an impasse on two terms: a cap on EG&G’s allowable G&A rate, and a termination for convenience clause. Cube cited this disagreement as an excuse to break off negotiations and terminate the **teaming** **agreement**. EG&G then brought suit in Virginia state court seeking a temporary injunction and specific performance of the **teaming** **agreement**.

At court, Cube argued that the **teaming** **agreement** was merely an “**agreement** to agree.” Since the parties had not agreed on all of the essential contract terms (i.e., the G&A rate cap and the termination provision), there was no enforceable contract. EG&G countered that the parties had agreed to all essential terms in the **teaming** **agreement**, including the G&A rate cap. The alleged impasse regarding the subcontract was nothing more than Cube trying to renegotiate a better deal for itself.

In enforcing the **teaming** **agreement**, the court found that all essential terms had been addressed. There was a mutual commitment of the parties to be bound, an established price scheme, and an exclusive relationship formed to prepare a response to NASA’s RFP. The **agreement** further stated that EG&G “would be” a subcontractor to Cube, without further qualification. Another consideration was EG&G’s commitment of time and resources to help Cube prepare the proposal to NASA, which touted EG&G’s expertise and experience. Additionally, the parties had been performing the NASA contract for many months without a definitized subcontract, all in accordance with the **teaming** **agreement**.

An important factor in the court’s decision was the specter of Cube’s bad faith. The court recognized that the parties had agreed to enter into a final definitized subcontract. But “at no time did EG&G agree to renegotiate essential terms already agreed upon and adhered to over a year of performance on the contract.”[10](#co_footnote_F10296648087_1) The court concluded that

Cube’s attempt to alter the terms, under which the parties have been successfully working, was made in bad faith in order to be able to terminate EG&G in order to reduce Cube’s costs, while at the same time increase the amount of fee that Cube could collect under the WICC.[11](#co_footnote_F11296648087_1)

Significantly, the court distinguished _EG&G_ from the seminal 1997 **teaming** **agreement** case, _W.J. Shafer Associates, Inc. v. Cordant Inc._[12](#co_footnote_F12296648087_1) In _Shafer_, the Virginia Supreme Court had refused to require the specific performance of a **teaming** **agreement** because there was no mutual commitment by the parties, no obligation to buy or sell the product, no agreed price, and no assurance that the teammate requesting enforcement could produce the product when it was needed. Thus, the contract in _Shafer_ included almost none of the “essential” clauses and was merely an “**agreement**” to agree.

Having found the **teaming** **agreement** enforceable, the _EG&G_ court turned to the issue of remedy. Based on EG&G’s request, the court ordered specific performance of the **teaming** **agreement**. It concluded that money damages could not be practically determined, since the NASA prime contract had an uncertain duration (one four-year term, with six one-year options). Moreover, the court considered the irreparable harm to EG&G’s goodwill and business reputation if it lost this subcontracting opportunity. The court also determined that performing a government contract has benefits beyond direct financial gain, as increased experience and expertise in the field can result in other jobs, the profit from which would be too speculative to calculate.

Because both _EG&G_ and _Sanders_ involved flavors of bad faith conduct, only time will tell whether they are unique egregious-fact cases or meaningful signposts in **teaming** **agreement** jurisprudence. In _Sanders_, the finding of fraud clearly permeated the entire decision, leading judge and jury to sustain punitive damages for the breach ***15** of an _oral_ contract—an unprecedented determination. Likewise, the judge in _EG&G_ was obviously influenced by a perception that Cube was trying to reopen the deal without sufficient justification—an occurrence that is not uncommon in the business world. Given the circumstances of _Sanders_ and _EG&G_ without the elements of bad faith, it is quite possible that the courts might have decided differently.

**Practice Tips**

There are two primary types of **teaming** **agreements**: **agreements** to bid, and **agreements** to bid and perform. The critical difference is the inclusion of interim subcontract terms and conditions that would apply until the parties have negotiated a definitized subcontract following the government’s award of the prime contract. Where the goal is clarity and enforceability, the following minimum terms should be included:

1) Duties of each party, including the responsibilities of each party in preparing the prime contract proposal. _A court likely will not enforce an_ **_agreement_** _where the parties have not unambiguously agreed about the work to be performed by each company_.

2) Choice of law and forum for disputes. _This protects the parties from having to litigate in an unexpected forum and clarifies which state’s law will govern_.

3) Confidentiality provisions. _The_ **_teaming_** **_agreement_** _should provide that proprietary information will not be shared beyond the_ **_team_** _or used outside of the current effort_.

4) Exclusivity clauses. _This protects the teammates by providing that the work product of the_ **_team_** _does not benefit third parties. But be careful about possible antitrust considerations where one teammate has unique capabilities, technologies, or intellectual property rights that are essential to the successful performance of the prime government contract_.

5) Severability. _Even where a reviewing court generally construes a_ **_teaming_** **_agreement_** _to be an unenforceable “_**_agreement_** _to agree,” it nonetheless is usually in the interest of both parties to ensure that certain provisions will be enforced (such as confidentiality). The general test for determining whether a contract clause can be severed is the parties’ intentions. Ideally, if portions of the_ **_agreement_** _are still indefinite and subject to further negotiation, the contract should make clear what is and is not binding. It also should include a severability clause to demonstrate the parties’ express intention to remain bound overall, even though one or more clauses may be later ruled as unenforceable_.

6) Process for subcontract definitization after prime contract award. _Where the_ **_teaming_** **_agreement_** _is intended to cover only the bidding phase, it should include procedural provisions for determining work share and related prices after the prime contract has been awarded. It also should contain a termination provision that describes the timing and process for expiration in the event that, despite good faith efforts, the parties cannot reach_ **_agreement_** _on a definitized subcontract_.

7) Relationship between the parties, including who will be the prime contractor and who will be the subcontractor. _The government requires that proposals clearly state which party will be the prime contractor_.

To draft an enforceable **agreement** to bid and perform, the following additional minimum terms should be included:

1) Work share and other performance obligations of the parties. _Absent sufficient detail in these areas, the_ **_teaming_** **_agreement_** _likely will be viewed as an unenforceable “_**_agreement_** _to agree,” at least with respect to post-award performance. To be enforceable, the_ **_teaming_** **_agreement_** _should contain sufficient specific terms and conditions that would permit the parties to generally work together under the prime contract in the absence of any follow-on subcontract_.

2) Price or price scheme for performance. _Many jurisdictions consider price to be an essential term, and will enforce a_ **_teaming_** **_agreement_** _only if the price term is fully addressed. If the price cannot be determined in advance of the prime contract award, the parties at least should agree on a price range in advance, or an objective mechanism by which to calculate the price after award_.

**Conclusion**

Conventional wisdom before _Sanders_ and _EG&G_ was that **teaming** **agreements** were generally unenforceable. But these two important decisions indicate that there is no longer a per se rule against such enforcement. Rather, each case must be evaluated on its unique facts, including whether price mechanisms and other essential terms have been included, whether the parties have made a mutual commitment and act like teammates, and whether they have invested significant time and resources in jointly seeking the government’s business. Further litigation regarding **teaming** **agreements** likely will be encouraged by these two cases, and the legal landscape of enforceability will continue to evolve. For now, counsel and their business clients should take **teaming** **agreements** seriously.

Footnotes

[a1](#co_fnRef_Fa1296648087_ID0EMBAC_1)

_Ian T. Graham is a partner and Allison D. Diefendorf is an associate with Jenner & Block, LLC, in Washington, D.C. The authors wish to thank David A. Churchill for his insightful comments on this article_.

[1](#co_fnRef_F1296648087_ID0EVGAC_1)

_See, e.g._, [W.J. Shafer Associates, Inc. v. Cordant Inc., 254 Va. 514, 493 S.E.2d 512 (1997)](http://www.westlaw.com/Link/Document/FullText?findType=Y&serNum=1997221923&pubNum=711&originatingDoc=Ifa228ee149a211dba16d88fb847e95e5&refType=RP&originationContext=document&vr=3.0&rs=cblt1.0&transitionType=DocumentItem&contextData=(sc.Search)) (refusing to enforce **teaming** **agreement**).

[2](#co_fnRef_F2296648087_ID0E1GAC_1)

_See, e.g._, Aydin Corp. v. Grumman Aerospace Corp., 1986 U.S. Dist. LEXIS 17708 (E.D. Pa. 1986) (rejecting specific performance remedy because money damages would be sufficient).

[3](#co_fnRef_F3296648087_ID0E1HAC_1)

[CCT v. Lockheed Sanders, 52 Fed. Appx. 20 (9th Cir. 2002)](http://www.westlaw.com/Link/Document/FullText?findType=Y&serNum=2002755507&pubNum=6538&originatingDoc=Ifa228ee149a211dba16d88fb847e95e5&refType=RP&originationContext=document&vr=3.0&rs=cblt1.0&transitionType=DocumentItem&contextData=(sc.Search)).

[4](#co_fnRef_F4296648087_ID0EIIAC_1)

The trial court reduced both the compensatory and punitive damage awards granted by the jury. Both reductions were affirmed by the appeals court.

[5](#co_fnRef_F5296648087_ID0EQJAC_1)

When an essential term is missing, the law sometimes will imply a “reasonable” term. _See_ [Restatement (Second) Contracts § 204](http://www.westlaw.com/Link/Document/FullText?findType=Y&serNum=0289907172&pubNum=0101603&originatingDoc=Ifa228ee149a211dba16d88fb847e95e5&refType=TS&originationContext=document&vr=3.0&rs=cblt1.0&transitionType=DocumentItem&contextData=(sc.Search)).

[6](#co_fnRef_F6296648087_ID0E5JAC_1)

[Cable & Computer Technology Inc. v. Lockheed Sanders, Inc., 214 F.3d 1030, 1034 (9th Cir. 2000)](http://www.westlaw.com/Link/Document/FullText?findType=Y&serNum=2000364140&pubNum=506&originatingDoc=Ifa228ee149a211dba16d88fb847e95e5&refType=RP&fi=co_pp_sp_506_1034&originationContext=document&vr=3.0&rs=cblt1.0&transitionType=DocumentItem&contextData=(sc.Search)#co_pp_sp_506_1034).

[7](#co_fnRef_F7296648087_ID0EMKAC_1)

_Id._

[8](#co_fnRef_F8296648087_ID0EULAC_1)

[52 Fed. Appx. at 23](http://www.westlaw.com/Link/Document/FullText?findType=Y&serNum=2002755507&pubNum=6538&originatingDoc=Ifa228ee149a211dba16d88fb847e95e5&refType=RP&fi=co_pp_sp_6538_23&originationContext=document&vr=3.0&rs=cblt1.0&transitionType=DocumentItem&contextData=(sc.Search)#co_pp_sp_6538_23).

[9](#co_fnRef_F9296648087_ID0ESMAC_1)

[2002 WL 31950215 (Va. Cir. Ct. 2002)](http://www.westlaw.com/Link/Document/FullText?findType=Y&serNum=2003089148&pubNum=999&originatingDoc=Ifa228ee149a211dba16d88fb847e95e5&refType=RP&originationContext=document&vr=3.0&rs=cblt1.0&transitionType=DocumentItem&contextData=(sc.Search)).

[10](#co_fnRef_F10296648087_ID0EXBAE_1)

_Id._ at *11.

[11](#co_fnRef_F11296648087_ID0EDCAE_1)

_Id._

[12](#co_fnRef_F12296648087_ID0ECDAE_1)

[254 Va. 514, 493 S.E.2d 512 (1997)](http://www.westlaw.com/Link/Document/FullText?findType=Y&serNum=1997221923&pubNum=711&originatingDoc=Ifa228ee149a211dba16d88fb847e95e5&refType=RP&originationContext=document&vr=3.0&rs=cblt1.0&transitionType=DocumentItem&contextData=(sc.Search)).

39-FALL PROCLAW 13

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