Simple Incorporation By Reference Is Insufficient To Make Subcontract’s Scope of Work Track Terms of Teaming Agreement

Government contractors routinely enter into teaming agreements in order to merge their complementary skills and maximize their mutual chance of winning a prime contract. A seminal case brought by Holland & Knight lawyers several years ago made clear that a prime contractors agreement in a teaming agreement to award a subcontract to its teaming partner is enforceable “if it is clear that the parties intended to enter into a binding contractual relationship and the agreement contains sufficient objective criteria to enforce.” See EG&G, Inc. v. The Cube Corp., 63 Va. Cir. 634, 2002 WL 31950215 (Fairfax Cty. Cir. Ct. 2002).

As a recent South Carolina case points out, however, a binding teaming agreement is not enough and the subcontractor must take care to ensure that the terms of the teaming agreement properly find their way into the operative provisions of the resulting subcontract. In Stevens Aviation, Inc. v. DynCorp International, Inc., 394 S.C. 300, 715 S.E.2d 655 (2011), the parties teaming agreement could be read as requiring DynCorp, the prime contractor, to award all “strip and paint” requirements for several specific types of aircraft to its teaming partner and eventual subcontractor, Stevens. DynCorp was awarded the federal prime contract, but the subcontract as negotiated was less comprehensive than the teaming agreement in identifying the scope of work that DynCorp was required to award to Stevens. As is usually the case, the subcontract also contained an “integration clause,” stating that the subcontract “supersedes all prior written or oral agreements between the parties . . . and constitutes the entire agreement between the parties hereto . . . .” The subcontractor brought suit complaining that DynCorp breached the subcontract by awarding some of its strip and paint requirements for the covered aircraft to other companies.

Noting that the parties had incorporated the teaming agreement by reference into their subcontract, the trial court held that the terms of the teaming agreement were therefore binding upon the parties and entered partial summary judgment for the subcontractor.

The court of appeals reversed, holding that the incorporation by reference of the teaming agreement was ineffective and that neither the incorporation nor the operative language of the subcontract was sufficient to require DynCorp to purchase all of its requirements for the services from Stevens.

The major problem, according to the court, was that the parties merely referred to the teaming agreement in the “whereas” or “recitals” section of the subcontract and did not specifically state the purpose of the incorporation in terms sufficient to override the scope of work provisions of the subcontract itself. The court said that while there are no “magic words” to be used to incorporate a teaming agreement into a subcontract, “whereas” clauses “are not considered contractual" and cannot be permitted to control the express provisions of the contract. . ..” A proper incorporation by reference, according to the court, “must clearly communicate that the purpose of the reference is to incorporate the referenced material into the contract (rather than merely to acknowledge that the referenced material is relevant to the contract, e.g., as background law or negotiating history).”

The court sent the case back to the trial court for further proceedings and it is possible that Stevens may still win in the end. (For example, the court might ultimately conclude that the scope of work or other elements of the subcontract are ambiguous, thus justifying resort to extrinsic evidence – including the teaming agreement – in order to determine what the parties meant by the language they used.) Nevertheless, prime contractors and subcontractors alike can learn a few lessons from this case:

• DON’T assume that a simple incorporation by reference, without more, is sufficient to ensure that the terms of a subcontract match what the parties agreed to do in their teaming agreement;
• By all means, DO incorporate the terms of your teaming agreement into the subcontract: it provides background and may be useful later in interpreting ambiguities in the subcontract;
• However, DON’T depend upon your simple incorporation by reference to supply crucial terms of the subcontract. Whenever possible separately detail the scope of the work, prices and other essential terms in the body of the subcontract;
• If you absolutely must rely upon incorporation by reference to supply an essential term, DO be as specific as possible: In the Scope of Work section of the subcontract, for example, you could specifically state that “Subcontractor's Scope of Work shall be as set forth in Paragraph xxx of the Teaming Agreement dated mm/dd/yyyy.” A detailed reference like that is likely to be enforced.