A teaming agreement is a common instrument used by government contractors in the preparation of bids. It provides the government customer with an integrated solution to deliver products and/or services by combining the complementary services/products of multiple companies. Whether your company is the prime or a subcontractor, a well-written teaming agreement can be essential in protecting your interests.
The enforceability of teaming agreements in Virginia was recently called into question by a decision of a U.S. District Court of Virginia that involved a situation very familiar to most government contractors. Two companies entered into a teaming agreement defining their relationship as prime and subcontractor for a specified contract opportunity with the U.S. government. The parties agreed, among other things, to negotiate and enter into a subcontract if the prime contractor received an award from the government. If the parties were unable to agree on the terms of the subcontract within a reasonable amount of time, the teaming agreement would be terminated with no further obligations by either party. Although the teaming agreement established the work share ratio between the parties, it did not define the role of the subcontractor in performance of the contract. The parties were ultimately unable to reach an agreement on a subcontract.
The subcontractor filed a lawsuit for breach of contract against the prime contractor, seeking to enforce the terms of the teaming agreement between the parties. The Court found that the teaming agreement was an unenforceable “agreement to agree,” and ruled in favor of the prime contractor. The court’s rationale was that the teaming agreement was entered into with the expectancy that a subcontract would be negotiated and executed in the future. Because that event may not happen, in the Court’s view this meant that the parties never intended the teaming agreement to function as an actual binding agreement.
There were numerous issues with the teaming agreement in this case that if resolved upfront could have lead to a teaming agreement that is enforceable and more reflective of the intent of the parties:
- The expected subcontract was discussed as merely a possibility. Stronger language should have been added to the teaming agreement to clearly state that if a contract was awarded to the prime contractor, the parties would negotiate in good faith to execute a subcontract. Any language that speaks to a contingency for entering into a subcontract should be eliminated to the greatest extent possible.
- The sub-contractor’s role in the performance of the prime contract was not defined. The teaming agreement should always define the role that the subcontractor will have in the work awarded to the prime, in as much detail as possible. Keep in mind that this statement of work (SOW) typically becomes part of the subcontract and the stronger bargaining position for the subcontractor is at the beginning of the business relationship when the teams are being formed.
- The teaming agreement stated that any subcontract “may be subject to the approval of the Client.” This is very problematic. While it is common to state that subcontractor’s role on the team may be subject to approval by the government client, it is quite different to state that the resultant subcontract is dependent on government approval.
It is important to note that the Court in Virginia did not state that all teaming agreements are, by their nature, unenforceable agreements. The Court merely held that this particular teaming agreement was not enforceable. Its ruling was instructive in identifying the issues with terms commonly found in teaming agreements and thereby opening a path for teaming agreements to be drafted in a way that they are enforceable. Therefore, it is prudent to revisit the terms and conditions of your existing teaming agreements. If the old teaming agreement contains language such as the agreement at issue in this case, contractors may be receive a negative outcome if they seek to enforce the teaming agreement, especially in Virginia.
It is highly recommended that any party seeking to enter into a teaming agreement, whether as a prime or subcontractor, consult with legal counsel knowledgeable in government contracts. It is critical that your teaming agreement is drafted in such a way to maximize its enforceability and protect your business interests.
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