Teaming Agreement Held Unenforceable

September 30, 2013

Teaming agreements in tech are often like letters of intent in commercial real estate, but with one important difference – whether they are assumed to be binding. Commercial real estate letters of intent are rarely intended to be binding, except sometimes to impose an express duty to negotiate in good faith and even less often to require arbitration to resolve differences. By contrast, bidding on tech contracts, especially for governmental procurement awards, often requires, of the prime contractor, fast action on multiple fronts and being subject to unknowable delays and changes in the bidding process, while spending money proceeding on a speculative basis. Furthermore, a commercial real estate sales contract can be relative standard and short compared to a tech subcontract.

A teaming agreement is, often, an agreement between a prime contractor and a particular subcontractor, to bid upon for a particular award. In Cyberlock Consulting, Inc. v. Information Experts, Inc. [1], the U.S. District Court for the Eastern District of Virginia, held, as being unenforceable, a teaming agreement, which contemplated that, if the prime contractor received the award, the prime contractor and the subcontractor would negotiate a subcontract containing various designated economic terms. Specifically, according to the Court, the Cyberlock teaming agreement provided:

“The Second Teaming Agreement [the subject one in this case] stated that the agreement’s purpose was “to set forth the arrangement between [IE] and [Cyberlock] to obtain an [IE] prime contract” for 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%.” (Id. § 1, “Purpose of Teaming Award.”) 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.” (Id. § 4(a).) That section listed a number of pre-award responsibilities of the parties. (Id. § 4(a)-(h).) 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.” (Id. § 4(i).) 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.” (Id. § 4(j).) 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].” (Id., Ex. A.) 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. (Def. MSJ Mem.¶ 30.) 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.” (Second Teaming Agreement § 4(k).) Relatedly, it indicated that IE had the responsibility to “exert reasonable efforts to obtain Client approval for the proposed Subcontractor for the Program.” (Id. § 4(b).)

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.” (Id. § 5(j).) ”

Such provisions are about as specific and flexible as many teaming agreements get. In Cyberlock, the prime contractor received the award; however, the subsequent negotiations, between the prime contractor and the subcontractor, failed. The Court held that the specific terms of the teaming agreement quoted above were not comprehensive enough, to force the prime contractor to enter into the contemplated subcontract in accordance with those terms, and/or that this teaming agreement, by its terms, required a successful post-award negotiation.

The take-aways I see, from the case, are:
  • Although teaming agreements may look like binding contracts, the parties cannot simply assume that they are. That is true, as a matter of state law, even if they get the award presumably based upon full disclosure of their names and relationship. That is particularly true if the award process results in unaddressed changes to, or delays in, the bid, the award or the work. Therefore, the parties should determine whether they want the teaming agreement to be binding, in whole or in part. In addition to the aforementioned problems the prime contractor has in trying to put together a bid, the prime contractor may want the flexibility to substitute subcontractors and/or to be sure that the particular subcontractor is committed. However, it is often difficult for the prime contractor to have it both ways. Furthermore, determining the extent of the binding effect is particularly important insofar as bidding often necessitates exchanges of confidential information and talent. Given that a court probably will not (absent specific language in the teaming agreement to the contrary) split a contract into enforceable parts and non-enforceable parts, a separate exclusivity, confidentiality, non-compete, and/or patent rights agreement may be advisable.
  • The Court did not specifically address the “reasonable efforts” or “good faith negotiations” provisions quoted above, other than to, in effect, rule that they did not create an enforceable contract. Thus, the Court did not address whether those provisions themselves were severable and enforceable and, if so, whether either of the parties in this case breached either of those provisions. See my above comment regarding having a separate agreement.
  • As quoted above, the Court referenced, favorably, a prior teaming agreement entered into by the same parties for a prior or different project and noted that the proposed subcontract itself was attached, as an exhibit, to that prior teaming agreement. However, such an attachment may take time and energy that is simply not otherwise justified given the aforementioned time constraints and difficulties in bidding on contracts. The open question is whether the Court would go so far as to require such an attachment, even though full agreement may not be possible pre-award. What if, instead, the teaming agreement states that it is intended to be final by specifying a binding method for resolving unaddressed issues or changed circumstances? Such methods may include requiring arbitration, incorporating recognized customs and practices or a particular form, or, in this case, if applicable, perhaps incorporating to the prior teaming agreement.
  • A party cannot assume that detrimental reliance or partial performance, except perhaps for a long time in performing the work awarded, will seal the deal or even create a claim for damages. The Court refused to look beyond the “four-corners” of the teaming agreement.
  • You shouldn’t feel that this case applies to just teaming agreements. Many courts have considered, in many different contexts (a) whether an agreement is substantially complete and, if so, whether the court should flesh-out, or force the parties to flesh-out, “reasonable” details vs. whether the parties did not intend to be bound unless and until a complete and final document is “signed, sealed and delivered”; and (b) whether detrimental reliance or partial performance seals the deal or at least justifies damage remedies. Such contexts have included sales contracts and joint venture agreements. Such issues may even have arisen under joint venture types of Contractor Team Arrangements. Who knows to what extent the courts, in such other cases, may find the analysis in this case relevant.
  • Litigation is not only time-consuming and expensive, but also creates risks for the prime contractor in proceeding with the work, under the award, in the meantime. On the other hand, being forced (on the pain of otherwise having to pay the subcontractor its lost profits) to work with a subcontractor, who is or feels unwanted, has its own management difficulties. On the subcontractor’s side, how does it prove the amount of its lost profits given the unclear path of how to perform many tech subcontracts, which is one of the problems that lead to using an open-ended teaming agreement, rather than a subcontract, in the first place? Facing the aforementioned issues expressly, and providing for corresponding remedies, to the extent possible, in the teaming agreement, may be preferable. Some subcontracts are more critical or costly than others with respect to those issues, some bidding procedures allow more time than others, some subcontractors are more fungible than others, some projects require more creativity than others, and, thus, the respective bargaining strengths of the parties may vary. Therefore, one type of teaming agreement may not “fit all”. [2]

[1] Cyberlock Consulting, Inc. v. Information Experts, Inc., Memorandum Opinion dated April 3, 2013, by the U.S. District Court for the Eastern District of Virginia, Case No. 1:12cv396, appeal still pending in the U.S. Court of Appeals for the Fourth Circuit as Case No. 13-1599.

[2] Neither Cyberlock nor this article deals with SBA, FAR, GAO, or other governmental qualification or bidding requirements, anti-trust issues, or patent or copyright issues.