Government contractors routinely enter into teaming agreements with prospective prime contractors to collaborate on proposal preparation and strategy, share intelligence and resources, attend agency presentations, and other cooperative efforts aimed at securing valuable government contracts. Unfortunately, many contractors treat a teaming agreement as an afterthought, relying on quickly-drafted and poorly-drafted templates to formalize the teaming relationship without sufficient consideration of what the team members are actually promising to do and the consequences of a breach.
A recent Virginia Supreme Court decision is good reminder that the failure of contractors to exercise caution and vigilance when drafting teaming agreements can be very costly. In Navar, Inc. v. Federal Business Council, Inc., et al., 291 Va. 338 (2016), negotiations between a putative subcontractor and prime contractor on a large contract with the Defense Threat Reduction Agency broke down after award of the prime contract, leaving the subcontractor without a contract. The Court found that the plaintiff and putative subcontractor had no recourse because the teaming agreement was merely an unenforceable agreement to agree.
Using language that is probably too familiar for government contractors, the teaming agreement in Navar contained general terms such as promising that, "upon arriving at prices, terms and conditions acceptable to the parties," the parties would enter into a subcontract, and that the teaming agreement would expire if the parties were unable, "negotiating in good faith to reach an agreement on the terms of a subcontract." Additionally, the teaming agreement stated that the prime contractor would "receive, at a minimum, 51% of the labor hours and labor dollars," without specifying the actual percentage, labor, or dollars. The Court found that such language did not actually require the prime contractor to hire the plaintiff as a subcontractor, and that the teaming agreement lacked a reasonably certain method for determining a value.
The Navar decision follows a similar decision from the U.S. District Court for the Eastern District of Virginia in Cyberlock Consulting, Inc. v. Info. Experts, Inc., 939 F.Supp.2d 572 (E.D.Va. 2013), aff'd, 549 Fed. Appx. 211 (4th Cir. 2014), which likewise found a government contractor's teaming agreement unenforceable as a mere agreement to agree, and affirms that Virginia state and federal courts are aligned on this issue.
While Navar illustrates common pitfalls made by government contractors when entering into teaming agreements, there is no reason to abandon teaming agreements altogether. In EG & G Inc. v. The Cube Corp., 63 Va. Cir. 634 (2002), for example, the court rejected the notion that a teaming agreement was merely an agreement to agree, finding instead that it was a binding and enforceable contract because it contained the "essential terms" of a contract and the parties began performance prior to the breakdown of negotiations over the subcontract. Although EG & G predates both Navar and Cyberlock, the circumstances in EG & G are distinguishable. As with any teaming arrangement, enforceability will ultimately be dependent upon the specific terms in the teaming agreement and the surrounding actions of the parties.
Tips for Contractors
We discussed the significance of the Cyberlock decision, as well as practice tips, in a previous alert. Navar is a reminder that careful drafting and consideration of the terms of teaming agreements upfront continues to be a critical best practice to avoid being left at the altar after the government awards a prime contract without recourse.
Although the enforceability of a teaming agreement is frequently perceived as the concern of the putative subcontractor due to the fact that it has reduced leverage once the government awards the contract, prime contractors also have an interest in making sure that the subcontractor meets its end of the bargain, as well. Many prime contractors are highly dependent upon the skills and expertise of its proposed subcontractors, and should not discount the importance of negotiating binding teaming agreements. Enforceability of teaming agreements goes both ways.
Prime contractors and subcontractors should continue to think "specific" when entering into teaming agreements:
- State the actual work and dollar value that the subcontractor will perform, and other "essential terms" of a contract for services.
- Negotiate actual subcontract terms upfront.
- Use definitive and certain terms (i.e., "shall" not "may" or "best effort").
- Identify the specific consideration and benefit of the bargain.
- Describe the damages that the subcontractor will suffer in the absence of a contract.
In addition to these and other strategies, contractors should consider potential alternatives to teaming arrangements that may be appropriate to the circumstances, such as entering into a joint venture, use of a GSA Contractor Teaming Arrangement, or the negotiation of the subcontract itself in lieu of a teaming agreement.
Teaming agreements remain an established and invaluable device to permit collaboration in pursuit of government procurement opportunities. Contractors can fully realize the benefits of a teaming agreement by taking time up front to conform the definitiveness of the agreement's terms in light of recent judicial guidance.