Teaming Agreements in Virginia: Are They Enforceable? - January 2016
Teaming agreements are widely used in Virginia and elsewhere by prime contractors and subcontractors who regularly deal with federal, state and local governments for the provision of services, construction and other things to meet the needs of these public bodies. Therefore, it is essential that prime contractors and subcontractors are aware of Virginia legal statutes regarding the enforceability of teaming agreements and understand many of the Virginia courts refuse to enforce teaming agreements as unenforceable “agreements to agree.”
The use of teaming agreements is rather well-established with respect to submitting proposals or bidding upon federal government contracts for the acquisition of supplies, services, construction, research and development and information technology. In fact, the Federal Procurement Regulations encourage the use of teaming agreements. Teaming agreements can also open opportunities for disadvantaged and small businesses to participate in federal or other public construction or procurement contracts.
In most cases, state law will determine whether a teaming agreement is an enforceable contract. Therefore, it is important for any contractor or subcontractor considering the use of a teaming agreement to bid on or submit a proposal for a contract with any federal or other public agency in Virginia to understand that both Virginia state and federal courts have refused to enforce what the parties believed to be a binding and enforceable contract. A review of a number of those decisions illustrates that the terms of the teaming agreement itself play a critical role in whether it will be enforced by a court in Virginia. As can been seen from the court decisions discussed in this paper, the law in Virginia also remains somewhat uncertain as to what must be contained in a teaming agreement to make it an enforceable contract. Nevertheless, there are ways to make it much more likely that a teaming agreement will be enforceable by the inclusion or exclusion of certain terms and conditions in a carefully drafted teaming agreement.
The only decision of the Virginia Supreme Court concerning the enforceability of teaming agreements is W.J. Schafer Associates, Inc. v. Cordant, Inc. In that case, Cordant entered into a teaming agreement with a party named Ogden for the purpose of submitting a proposal to the Air Force, which was seeking bids for a contract for converting its personnel records stored on microfiche to a system of electronic data accessible by computer. After Cordant was awarded a prime contract, it attempted to negotiate a contract with Ogden for the purchase of image scanning equipment known as “digitizers” made by its corporate affiliate, Schafer, a technology company that had been developing the “digitizers”. When Ogden and Schafer refused to enter into a subcontract after negotiations failed, Cordant secured from another company a product to replace the Schafer digitizers and thereafter sued Cordant and Schafer for breach of contract. The Supreme Court reversed the decision of the lower court and ruled that the teaming agreement in that case did not contain the requisites of an enforceable contract for the sale of the digitizers. The court stated “There was no mutual commitment by the parties, no obligation on the part of Ogden to sell the digitizers or on the part of Cordant to purchase them, no agreed purchase price for the product, and, indeed, no assurance that the product would be available when needed.” There are two distinctions in the Schafer case, which could prove to be significant. First, the prime contractor sued its subcontractors for refusing to enter into a contract with the prime and second, the issue before the court was whether or not there was an enforceable contract for the sale of goods under the Uniform Commercial Code.
The W.J. Schafer case is the only Virginia Supreme Court case and all the other cases mentioned are decisions of lower courts. While the Schafer case provides some guidance as to what is required to make a teaming agreement enforceable, it appears that the issue of whether or not there is a cause of action in Virginia for breach of a covenant to negotiate a contract in good faith is undecided. However, there are cases holding that there is an implied obligation of good faith and fair dealings in every contract. But this doctrine presupposes that there is an enforceable contract between the parties in the first instance. Moreover, the terms and conditions of the teaming agreements before the courts in these cases were all different and the outcome of each case was dependent upon how the court viewed the language of the particular teaming agreement before it.
The next decision in Virginia after Schafer dealing with a teaming agreement is the decision of the Circuit Court of Fairfax County in EG&G, Inc. v. The Cube Corp. In this case EG&G and The Cube Corporation entered into a teaming agreement for the purpose of submitting a proposal to NASA. Under the teaming agreement, Cube was to be the prime contractor and EG&G was to serve as the subcontractor for the project. In a lengthy opinion written by Judge Terrence Ney, the court granted specific performance of the teaming agreement. Unlike the court’s decision in the Schafer case, the court in Cube allowed extensive testimony and other evidence concerning the dealings between the parties to determine whether or not the parties intended to enter into a binding and enforceable contract. One of the critical facts discussed by the court was that, although the parties were unable to agree on the definitive terms of a subcontract agreement, they did operate for a brief time under a letter agreement. The court also said, “Unlike the circumstance set forth in either Schafer or Dual, the Teaming Agreement and subsequent proposals required Cube to do more than just ‘negotiate in good faith’ to arrive at a final subcontract. Cube itself admits that the Teaming Agreement required EG&G to work with Cube in an ‘exclusive’ relationship to prepare a response to the RFP for the WICC.” The court continued, “In exchange for EG&G’s efforts on the proposal, the Teaming Agreement expressly stated that if Cube were awarded the WICC as prime, EG&G would be a subcontractor on the WICC and perform a substantial amount of the work - up to 49% - under the government contract.” [Emphasis in original]
Although the decision of the Circuit Court of the City of Norfolk in Marketplace Holdings, Inc. v. Camellia Food Stores, Inc. , did not involve a teaming agreement, the opinion of Chief Judge Everett A. Martin, Jr. discusses the The Cube Corp. case, which the plaintiff used to support its position that the teaming agreement in that case was an enforceable contract. Judge Martin said, “Judge Ney did not find that Virginia would recognize a cause of action for breach of an agreement to negotiate in good faith. Rather, he concluded after hearing three days of evidence that the several documents the parties executed and their intent and performance provided reasonable certainty about the essential contractual terms.”
The next decision in Virginia concerning a teaming agreement after The Cube Corp. case is the decision of the United States District Court for the Eastern District of Virginia in Cyberlock Consulting, Inc. v. Information Experts, Inc. In that case, a subcontractor sued a federal government contractor alleging a breach of a teaming agreement entered into for the purpose of obtaining a contract award from the government. In its opinion, the court discussed two teaming agreements. In discussing the first teaming agreement, the court mentioned that there was attached as an exhibit to the agreement a form of subcontract containing all of the terms and conditions of the subcontract which would be entered into by the parties if the prime contractor was awarded a contract. No such form of subcontract was attached to the second teaming agreement, which involved a new project for work similar to that covered by the first teaming agreement. Both teaming agreements contained an integration provision stating that they represented the entire agreements of the parties and superseded all prior and contemporaneous representations, proposals, discussions and communications between the parties. The first teaming agreement and the second teaming agreement set out the percentages of the work to be performed by Cyberlock and by Information Experts (“IE”). IE was awarded a prime contract by the government. IE did not execute a contract with Cyberlock, but the parties actively began to negotiate a subcontract. After the parties were unable to agree upon the terms of a subcontract, Cyberlock sued IE for breach of contract and for fraud and unjust enrichment. In granting IE’s motion for summary judgment dismissing Cyberlock’s breach of contract suit, the court found that the agreement was clear and unambiguous. The court concluded, without the introduction of any evidence as to what the parties intended, that the most reasonable reading of the second teaming agreement, when construed as a whole, was 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 of the approval or disapproval of [the government]; 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.” In its opinion the court described the essentials for the enforcement of a contact in Virginia in this way:
For a contract to be enforceable, "there must be mutual assent of the contracting parties to terms reasonably certain under the circumstances." Allen v. Aetna Cas. & Sur. Co., 222 Va. 361, 364, 281 S.E.2d 818 (Va. 1981). Mere "agreements to agree in the future" are "too vague and too indefinite to be enforced." W.J. Schafer Assocs., Inc. v. Cordant, Inc., 254 Va. 514, 519, 493 S.E.2d 512 (Va. 1997); see also Beazer Homes Corp. v. VMIF/Anden Southbridge Venture, 235 F. Supp. 2d 485, 490 (E.D. Va. 2002) ("It is well settled under Virginia law that agreements to negotiate at some point in the future are unenforceable."). In considering whether an agreement is an enforceable contract or merely an agreement to agree, courts consider whether the document at issue includes the requisite essential terms and also whether the conduct of the parties and the surrounding circumstances evince the parties' intent to enter a contract. See High Knob v. Allen, 205 Va. 503, 507-08, 138 S.E.2d 49 (Va. 1964).
The court’s opinion in Cyberlock also discussed the decision in The Cube Corp. but expressed the opinion that it was wrongly decided.
In Liobmedia, LLC v. Dataflow/Alaska, Inc., the United States Court of Appeals for the Fourth Circuit, denied the plaintiff’s claim for lost profits for breach of a teaming agreement while suggesting that any damages incurred by the plaintiff would be limited to any direct damages resulting from a breach of the obligation under the teaming agreement to enter into good faith negotiations of the terms of a future subcontract. Both parties in this case disagreed as to what law should be applied. The plaintiff argued that the federal law of government contracts applied because the choice of law provision in the teaming agreement so specified. However, the defendant argued that, because there was no federal law governing the enforceability of teaming agreements, Alaska law should apply. In reaching its decision, the court looked to the federal common law of government contracts to support its conclusion that the plaintiff’s claim for lost profits constituted a claim for consequential damages which was precluded by the terms of the teaming agreement. On the other hand, the court cited case law from Alaska to the effect that even if the plaintiff should proceed with a claim for breach of the obligation to negotiate the terms of a subcontract in good faith, its claim would be limited to any costs associated with the negotiations themselves and not lost profits. While the court may have inferred that there might be a cause of action under the law of Alaska for breach of an obligation in a teaming agreement to engage in good faith negotiations with regard to the terms of a subcontract, this case offers no precedential value of whether a cause of action for such a breach exists in Virginia. And the terms of a teaming agreement itself will often contain a waiver of any claim for lost profit and limit any damages to the costs and other expenses incurred in negotiating the teaming agreement.
There are important reasons why prospective prime contractors and subcontractors who consider the use of a teaming agreement when submitting a bid or proposal to a public owner as a team should carefully consider whether the proposed teaming agreement is an enforceable contract before they enter into such an agreement. A successful bidder or awardee who will be acting as the prime contractor certainly wants assurance that the proposed subcontractor, whose expertise and pricing may be relied upon at the time a bid or proposal is submitted, will agree to enter into a subcontract as proposed by the teaming agreement if the prime receives an award. If the teaming agreement is not binding upon both parties, the proposed subcontractor will be free to change its mind and decide not to enter into a subcontract. Or, if the parties cannot agree on the terms of a subcontract, the proposed subcontractor may have no further obligation to the prime, who may then have to look for another subcontractor with the possibility of a substantial increase in cost. Unlike the law in some other jurisdictions, the prime would have no cause of action against the prospective subcontractor based on the theory of promissory estoppel since, in Virginia, no affirmative cause of action exists based on that doctrine.
The prospective subcontractor, on the other hand wants assurance that, if the prime is awarded the contract, the subcontractor-team member will be awarded the subcontract for the portion of the work contemplated by the teaming agreement. If the teaming agreement is not enforceable, the prospective subcontractor will most likely have no remedy if a subcontract is not awarded to it, even for what could be a substantial amount of money spent in helping the prime put together the bid or proposal, which produced an award of the prime contract.
What then is required to make a teaming agreement enforceable? The Cyberlock and The Cube Corp. cases do provide some guidance even though they are both lower court decisions. In Cyberlock, the first teaming agreement, which the court held was enforceable, had an exhibit attached containing a “Statement of Work” covering the period of performance, place of performance, requirement for key personnel, format of the contract, and project management for the work that Cyberlock would be performing for IE. Another attachment contained the specific subcontract, which the parties intended to enter into upon the award of a prime contract. And the teaming agreement explicitly provided that if a prime contract was awarded to IE, IE would enter into the subcontract with Cyberlock which was attached as an exhibit to the teaming agreement within 5 business days from the date of the award. Finally, the failure of the parties to agree upon the terms of a subcontract was not listed as an event, which would result in the termination of the teaming agreement.
In granting specific performance of a teaming agreement in The Cube Corporation, Judge Ney relied upon parol evidence showing that there had been extensive dealings between the parties evidencing their intent to enter into a binding and enforceable agreement and, even though the parties were unable to agree upon the terms of a definitive subcontract, they did operate under a letter agreement for a brief time period.
The lessons learned: (1) Avoid language in the teaming agreement making an award of a subcontract subject to the negotiation of the terms of a subcontract; (2) Negotiate as many of the essential terms of a subcontract as possible before the teaming agreement is entered into and attach a copy of a proposed subcontract containing those terms and conditions as an exhibit to the teaming agreement; (3) Include in the teaming agreement a statement that a subcontract will be awarded to the subcontractor if the prime receives an award of a prime contract in the form attached to the teaming agreement; (4) Include language in the teaming agreement that it is the intent of the parties to enter into a binding contract in accordance with the terms of the teaming agreement; (5) Avoid the inclusion of any provision making the inability of the parties to reach an agreement on the terms of a subcontract an event, which causes the termination of the teaming agreement; and (6), have an attorney familiar with government contracting, whether for construction or procurement of services or supplies, review any teaming agreement before it is signed.
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[1] See FAR part 9.602:“Contractor team arrangements may be desirable from both a Government and industry standpoint in order to enable the companies involved to— (1) Complement each other’s unique capabilities; and (2) Offer the Government the best combination of performance, cost, and delivery for the system or product being acquired.”
[2] 254 Va. 514, 493 S.E.2d 512 (1997)
[3] 63 Va. Cir.634 (Fairfax Cir. Ct. Dec. 23, 2002)
[4] 64 Va. Cir. 144 (Norfolk Cir. Ct. 2004)
[5] Compare Aerotek, Inc. v. Tyonek Native Corporation, 2007 WL 1052590 (E.D. Va. 2007), in which the U.S. District Court for the Eastern District of Virginia said that the teaming agreement before the court in that case was an enforceable agreement to negotiate.
[6] 939 F. Supp. 572 (E.D. Va. 2013)
[7] 349 Fed. Appx. 843 (4th Cir.2009)
[8] W.J. Schaefer Associates. v. Cordant, Inc., id at note 2.