A Tale of Two Teaming Agreements: One Enforceable, the Other Not

Teaming Agreements Explained

Teaming agreements are widely used in the construction industry.  Generally, a teaming agreement is employed when contracting and engineering firms join forces to pursue design/build contracts or when small contractors vie to compete on bundled federal procurements.  Teaming agreements are expressly encouraged by the federal government.  See FAR Part 9.602 (stating that “Contractor team arrangements may be desirable from both a Government and industry standpoint in order to … compliment [contractor]’s capabilities; and [o]ffer the Government the best combination of performance, cost and delivery…”).  Such agreements are also important to small and disadvantaged business concerned with winning set-aside contracts.

Before significant resources are devoted to preparing a bid, team members put an agreement in place.   The teaming agreement sets forth their respective rights, risks, and responsibilities during the pre-proposal.  Oftentimes, a government agency will consider the collective strength of a team’s credentials in awarding such contracts, particularly if the procurement is of a larger variety.

Enforceability of Teaming Agreements

The issue presented here is what happens when the government agency awards the contract based on a teaming proposal, but the team members then cannot reach accord on a subcontract agreement.  When does a subcontractor have a legally-enforceable right to require its teaming partner (general contractor) to enter into a subcontract with it after the award for a project the two team members bid on?  Recently, a federal court in Virginia ruled on this very issue.

In Cyberlock Consulting, Inc. v. Information Experts, Inc., Cyberlock Consulting, Inc. (“Cyberlock”) and Information Experts, Inc. (“IE”) entered into two separate and distinct teaming agreements, in which IE was the prime contractor and Cyberlock, a prospective subcontractor.  876 F. Supp. 2d 672, (E.D. Va. 2012). 

In the first agreement, Cyberlock and IE set forth their intent to be bound to each other.  The language in the teaming agreement was clear setting forth the parties’ intent to be bound to a detailed breakdown of scopes of work to be completed by each party in the event of award.  A formal subcontract agreement was attached to the teaming agreement and the parties indicated that if IE was awarded the prime contract, IE would enter into a subcontract (the one attached to the teaming agreement) with Cyberlock. 

When a second similar project opportunity arose, Cyberlock and IE entered into a second, but different, teaming agreement.  This second agreement was far less detailed than the first.  The second agreement identified only a generic “percentage of work” to be completed.  The attention to detail and the explicit assignment of specific, discreet tasks, which was evident in the first teaming agreement, were absent in the second.  In the second agreement, IE and Cyberlock did not attach a draft subcontract as they did in the first agreement.  In addition, the second agreement contained language providing for a number of bases that could result in its termination, including the “failure of the parties to reach agreement on a subcontract after a reasonable period of good faith negotiations.”

After IE was awarded the first project contract, it signed a subcontract with Cyberlock.  The first project went off without a hitch.  The second subcontract award, however, did not proceed so smoothly.  Although IE was awarded the second prime contract, IE and Cyberlock were unable to draw up a formal subcontract agreement.  After a month of failed negotiations, Cyberlock sued IE alleging breach of contract, fraud, and unjust enrichment.

Cyberlock’s position was that the second teaming agreement provided that if IE was awarded a prime contract by the government, Cyberlock was guaranteed a 49% share of the work.  IE, on the other hand, contended that the teaming agreement was nothing more than an agreement to negotiate a subcontract at a later time and, therefore, was not binding on IE.

It was then up to a judge to determine whether the second teaming agreement was enforceable.  Citing Virginia law, the judge concluded that the second teaming agreement was simply not definitive enough to qualify as an enforceable agreement.  The parties left too many details up in the air and the agreement was subject to too many conditions.  Interestingly, the court went on to state the following: “Indeed, calling an agreement something other than a contract or a subcontract, such as a teaming agreement or a letter of intent, implies ‘that the parties intended it to be a nonbinding expression in the contemplation of a future contract.'”  This is a pretty amazing statement for the Court to make, particularly since the FARs specifically refer to and encourage teaming agreements.

The court found it compelling that no draft subcontract was attached as an exhibit to the second teaming agreement, whereas a draft had formed part of the first agreement.  The court also relied on the express language providing for a termination of the relationship should the parties “fail to reach agreement on a subcontract after a reasonable period of good faith negotiations.”  The court concluded that this language could have no other meaning than that the subcontract award to Cyberlock was not a certainty.

Comment:  The primary purpose of a teaming agreement is to define the structure of the parties’ business relationship prior to awarding of a contract.  This case provides some guidance as to what to do if the goal is to enter into an agreement that is binding after the award.  The agreement should be detailed and define the tasks that each member is to perform, along with the percentages of the work.  The fewer details contained in the agreement, the more likely it is that a court will regard the document simply as an agreement to negotiate (an agreement to agree in the future), which is unenforceable.  It is good practice for the parties intending their agreement to be binding after the contract award is made to attach a draft subcontract as an exhibit and to state that its execution will occur upon award.

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