Teaming Agreements Revisited
 
August 18, 2004
 
John Rowley - Northern Virginia
Jennifer A. Short- Northern Virginia

An article appearing in a previous issue of this newsletter discussed a significant decision by a trial court in Fairfax County, Virginia, which ordered a prime contractor with the Navy and NASA, to honor its teaming agreement and continue working with its teaming partner and primary subcontractor. EG&G Technical Services, Inc. v. The Cube Corporation, Chancery No. 178996 (Fairfax Cir. Ct. Dec. 23, 2002). In his opinion, Judge Terrence Ney distinguished the case from a 1997 decision by the Virginia Supreme Court that had declared a teaming agreement an unenforceable “agreement to agree.” This article revisits the issue of teaming agreements and discusses some recent developments.

Teaming agreements often have been considered to be unenforceable “agreements to agree” because they can be uncertain and contingent upon other events (e.g., award of the prime contract). In Virginia, the leading case on teaming agreements prior to the EG&G decision was W.J. Shafer Assoc., Inc. v. Cordant Inc. (Va. 1997). In Shafer, the Virginia Supreme Court found the teaming agreement in that case to be merely “an agreement to agree” and therefore unenforceable.

However, if two requirements are met, the courts will enforce a teaming agreement. Recent decisions in Virginia and in the federal courts have now made it clear that teaming agreements will be enforced if it is determined from the documents and surrounding circumstances that: (1) the parties manifested an intention to be boundby the agreement; and (2) if the terms of the agreement are sufficiently definite.

Courts have enforced a “teaming agreement,” even where there was no written agreement:

• A federal court ordered payment of monetary damages based on an oral agreement. Cable & Computer Technologies, Inc. v. Lockheed Sanders, Inc., (9th Cir. 2002).
   
• Another federal court ordered payment of monetary damages based on the parties’ exchange of letters and draft subcontracts. ATACS Corp. v. TransWorld Communications, (3d Cir. 1998).

As noted above, in 2002, a Virginia trial court ordered specific performance – i.e., the parties were required to work together – as anticipated by their teaming agreement. EG&G Technical Services, Inc. v. Cube Corp.

To be enforceable, a contract must address the following elements:

• duration (how long will the agreement last?)
• scope (what activities are assigned under the contract?)
• compensation (how will the contractor be paid?)

The terms must be sufficiently clear and definite to permit a court to enforce the parties’ agreement. A court will not draft, insert, or infer terms. In addition, a contract for goods must identify the quantity of goods to be sold or delivered. It is important to specifically establish the elements of a contract before the RFP is released:

• Outline the areas of work that are anticipated – e.g., “Company B will become a subcontractor to Company A to perform maintenance services under the anticipated XYZ Contract.”
   
• Specify when the parties will reach agreement on the terms – e.g., “The parties will determine the scope of work to be performed by each at the time of proposal submission.”
   
• Address pricing structure – e.g., “If Company A is awarded a prime contract, Company B will receive a cost-reimbursement contract based upon the cost proposal submitted in response to the RFP.”

If you are a proposed subcontractor the following are important considerations:

• Evaluate your bargaining position. Are you the only or best source for the goods or services that you are being proposed to provide? If so, consider negotiating for the most specific, enforceable teaming agreement that you can.

In order to clearly articulate your position, include clauses such as the following:

– “If Company A is awarded the XYZ Contract, Company B will be the subcontractor to Company A for the provision of [specified] services.”

– “Company B shall perform, as subcontractor to Company A, X% of the work under the anticipated XYZ Contract.”

If you are a prime contractor, you should consider the following:

• Are there alternatives to the proposed subcontractor? If so, then consider including provisions that do not guarantee a subcontract, allowing you to leave your options open if the relationship sours.

Include clauses such as the following to protect your position:

– “Upon award to Company A of XYZ Contract, Company A and Company B agree to negotiate in good faith for a subcontract to Company B.”

– “This teaming agreement shall terminate in the event that Company A and Company B are unable to negotiate a definitized subcontract within 90 days of award to Company A of XYZ Contract.”

The Termination for Convenience clause is an extremely important element in a prime contractor-subcontractor relationship. The Termination for Convenience clause is a mandatory clause for prime contracts, but it is not a mandatory flow down clause. The Termination for Convenience clause should be modified in any subcontract to provide that the subcontractor may be terminated for convenience in the event that the prime contractor is terminated at the government’s convenience. The modified Termination for Convenience clause should also require the subcontractor to provide information on costs to the prime contractor with sufficient time for the prime to make its submission to the government.

In the absence of the critical elements of a contract, a teaming agreement remains unenforceable. In a recent case before the Circuit Court of the City of Alexandria, Virginia, a subcontractor seeking enforcement of a teaming agreement withdrew its action since the teaming agreement lacked the critical elements set forth in EG&G Technical Services, see RVJ International, Inc. v. STG, Inc., (City of Alexandria Cir. Ct., Law. No. 030129, filed March 2003). In RVJ International, unlike EG&G Technical Services, the teaming agreement contained no certain terms as to a subcontract between the parties, including a price for the work, or a clear definition of the subcontractor’s scope of work.

Contractors desiring to enter into an enforceable teaming agreement should ensure that such agreement contains the essential elements of a contract, or their efforts will amount to nothing more than an unenforceable “agreement to agree.”

For more information, e-mail John P. Rowley or Jennifer A. Short at john.rowley@hklaw.com or jennifer.short@hklaw.com, respectively, or call toll free, 1-888-688-8500.