Myth-busting teaming agreements

Since many commentators are using the “myth-truth” shtick, I thought I’d try it with regard to an age-old debate on teaming agreements in government contracting.

Full disclosure: I wrote an article about teaming agreements many years ago (about the same time I penned a piece about the impending and lunacy-laden Y2K disaster – for those over 45). This was after a Virginia Supreme Court decision suggested that teaming agreements as they were then routinely written (and still today) were generally unenforceable. I said then that such agreements may or may not be enforceable depending on the language used in the agreement, and that certain language should be both used and avoided to assure maximum enforceability. Even before and since then articles on this subject have graced many a publication. But I’d thought I would try a different approach.

So, with that, here it goes.

Myth 1: Teaming agreements are, like most contracts, binding and enforceable agreements.

Truth: No. Here’s the problem: a number of courts (especially in Virginia) have ruled that teaming agreements used by many government contractors which don’t specifically provide for a promise to execute a subcontract are considered as mere unspecified “agreements to agree” and thus unenforceable. But that applies to those agreements whose language contains those unspecified terms, which means that not all teaming agreements are unenforceable. Again, and this hasn’t changed, it depends on the language. Many of the traditionally-drafted teaming agreements used by both prime and subcontractors do promise nothing more than the obligation to negotiate a subcontract in good faith upon an award to the prime, rather than to actually execute the subcontract. Otherwise, it’s an unenforceable agreement beyond the obligation to negotiate. Virginia courts have taken a particular approach in its decisions regarding teaming agreements, with strong judicial opinions supporting the notion that the “agreement to agree”-type teaming agreements will likely be unenforceable.

Myth 2:  Courts have overwhelmingly ruled that teaming agreements are not valid, enforceable promises to subcontract work.

Truth: If I kept count, I’d likely agree that there have been more decisions against than in favor of the enforceability of teaming agreements, especially in Virginia. However, that misses the point. In many of these cases, and as stated above, the teaming agreement language was held to be too uncertain to constitute an enforceable agreement. To drive home the point, if you want an agreement to be enforceable, its terms must be clear enough to reflect the specific intent of the parties to enter into a definite promise – a clear offer and acceptance of something of value. In this case it’s the specific intent to require the execution of a subcontract upon the prime award, and not just to negotiate one where those negotiations may succeed or fail.

I typically avoid citing case law outside of court briefings for fear of causing acute boredom among normal folks. I make an exception here because some of them are quite instructional for showing the difference between the enforceable and unenforceable in these agreements.

For example, the Virginia Supreme Court in the 1997 W.J. Schafer Associates Inc. vs. Cordant Inc. case discussed in my article decided that the teaming agreement there was unenforceable because it stated only that, in the event of a prime contract award, the parties would “negotiate in good faith” a subcontract, which falls short of a definite promise to actually execute that subcontract. It also didn’t help that the subcontractor’s product wasn’t fully developed, much less commercially available, when the teaming agreement was executed. Not surprisingly, the court concluded that the agreement’s language was too vague and indefinite to constitute an enforceable agreement. 

In another case, Cyberlock Consulting, Inc. v. Info. Experts, Inc., a Virginia federal court decided in 2013 that a teaming agreement was invalid because it was similarly dependent on “good faith negotiations” of a subcontract, especially where the prime was able to terminate the teaming agreement upon the “failure of the parties to reach agreement on a subcontract after a reasonable period of good faith negotiations.” This was despite an agreement to actually execute a subcontract upon a prime award and further despite providing the subcontractor a specified workshare percentage. At most, said the court, the parties agreed to negotiate in good faith a future subcontract, again the very type of agreements other Virginia courts have ruled unenforceable.

Now compare these two cases with a case from the Fairfax, Virginia Circuit Court in 2002. In one of the better opinions I’ve ever read on the subject, the late Judge Terrence Ney in EG&G, Inc. v. Cube Corporation concluded that the teaming agreement there contained language that definitively reflected a clear commitment to award a subcontract upon a prime contract award. That language included words that the parties “would” enter into a subcontracting agreement and that the subcontractor “would” perform a certain percentage of the work (49% of the contract dollar value), among other words basically stating that upon award the prime committed to subcontracting the work. (Note: I would have preferred using “will” or “shall” in that agreement, but I wouldn’t complain here since the subcontractor won the case). It also helped that the subcontractor had already started the work under a later executed “letter subcontract.” In any event, the difference between saying we will negotiate a subcontract in good faith upon a prime award and if we cannot then we can walk away, and we will issue a subcontract upon award, are strikingly different. And that distinct language will likely make the difference between an enforceable and unenforceable teaming agreement, at least where the Virginia courts are concerned. Notably, courts in other states have not been as consistent on this subject, but then again many if not most of the teaming agreements in this business and in this area provide that Virginia law applies.

Myth 3:  If I need a teaming agreement, I can get one off the web. Besides, they all pretty much contain the same standard language.

Truth: That you do at your own peril. Throughout time there has been developed in this business teaming agreement templates or the garden variety “boilerplate” agreements. In fact, a quick Google search will gin up dozens of articles and templates. First, beware of such cut and paste approaches to any agreement, particularly teaming agreements, especially ones you find on the internet. This is because such ready-made agreements -- beyond those that are so simple that just about any boilerplate version will do (e.g., your one pager car bill of sale) -- don’t always fit the particular circumstances, arrangements or relationship between the prime and subcontractor.

Second, what a prime is looking to accomplish and promise or not promise (see above discussion) in a teaming agreement is often very different from what a subcontractor is looking to accomplish and be promised in that same agreement.

For example, a prime contractor in many cases may not mind the more indefinite and ultimately unenforceable language, like the agreements in the Schafer and Cyberlock cases, as it gives it flexibility to change the terms of the relationship with the subcontractor, to include the subcontractor’s work share and pricing. Or, the prime may want to exit the relationship by not subcontracting to the very party that may have been instrumental in preparing the proposal and receiving the award, for whatever reason, or just because, after all, the teaming agreement is not going to be enforceable anyway. 

The subcontractor’s abject anger and a burning desire to lawyer up would be understandable as it will likely feel slighted for being dumped unceremoniously after pouring their heart, soul, personnel and dollars into the relationship and the proposal on the notion that it signed an agreement that in actuality was a toothless tiger from the standpoint of enforceability. This wouldn’t be the case, however, if the teaming agreement was properly drafted, clear, definite and unambiguous. Let me put it another way, just because one signs a written agreement doesn’t make it enforceable. Enforceability, and the strength of the obligations contained in the agreement, are dependent on the very words in that agreement.

So, if a subcontractor wants its teaming agreement to be binding and enforceable (of course no guarantees from any lawyers including this one since any judge may rule on a case with an eye-popping, mindless decision), it should make sure that the agreement contains language that screams “that shalt subcontract if there is a prime award.” Or at least words to that same biblical (and legally enforceable) effect.

Third, and perhaps most importantly, there is no boilerplate language for the workshare allocated under a teaming agreement. In many cases, these workshare allocations are defined in an exhibit to the teaming agreement, and in just as many cases they are similarly improperly defined. Is the subcontract work to be based upon a percentage of prime contract overall value, or a percentage of prime contract funded value? There is a huge difference. Or will the parties agree to allocate work based upon prime contract tasks or line items? Will it be based upon a percentage of the direct labor, or upon certain a number of employees, and if so what labor categories? And which categories provide for the most revenue and margin versus those that may be not much more than classic loss leaders with nothing behind to make up for it? Or is the workshare what the prime may wish it to be – meaning that it’s not defined at all? Much of this will depend on the contract type and work to be performed. And, once again, precision in the language is the key here.

Myth 4: Litigation over teaming agreements is common in the government services industry.

Truth: I don’t keep count but likely not. The vast majority of teaming agreements that I provide advice on don’t end up as formal disputes. Nonetheless, the decision to roll the dice and litigate over a teaming agreement should be business related. At the end of the day, a decision has to be made between litigating over a contract where the legal fees alone may exceed the contract work’s profits, without a certainty of success, and just moving on to the next opportunity. Having said that, litigation resulting from any poorly drafted agreement is usually avoidable.

Very simply, preparing teaming agreements properly and knowing the extent of their enforceability at the outset, and including the correct language that “fits the deal,” will go a long way in avoiding litigation.

Put another way, a teaming agreement’s language needs to be certain, definite and properly tailored to the work to be performed to be enforceable – like any agreement. Otherwise, it’s not an agreement. And your attempts to enforce it will only enrich the lawyers.

Stay safe.