The ruling indicates that selecting New York law may increase the likelihood that the terms of a well-written teaming agreement will be enforced.

TAKEAWAYS

• Government contractors will find the New York Court’s recent denial of a motion to dismiss instructive when negotiating the governing law for their teaming agreements.
• The Court affirmed that that there are two types of teaming agreements that are enforceable under New York law.
• The ruling confirms that New York law may be an attractive option for government contractors seeking to ensure enforceability of their teaming agreements.

The U.S. District Court for the Southern District of New York (Crotty, J.) partially denied a motion to dismiss several claims brought by BAE Systems asserting a breach of contract by L3 Harris challenging, among other things, the enforceability of the parties’ teaming agreement. The contract relates to a Department of the Navy prime contract won by L3 Harris. BAE Systems Information and Electronics System Integration Inc. v. L3 Harris Cincinnati Electronics Corporation, S.D.N.Y. 23-cv-01860 (Feb. 9, 2024).

In many states, teaming agreements entered into in pursuit of prime contracts are often found to be unenforceable “agreements to agree,” leaving teaming partners with little recourse if the parties fail to negotiate a subsequent subcontract. In denying L3 Harris’s motion to dismiss, however, Judge Crotty held that New York law recognizes the enforceability of two types of “preliminary” agreements:

• A first type (Type I) is where the parties agree on all the points that require negotiation but agree to memorialize their agreement later in a more formal document.
• A second type (Type II) is where parties agree on certain major terms, but leave other terms open for further negotiation. In these agreements, the parties are not bound by the terms of the preliminary agreement, but instead are obligated to negotiate the open terms in good faith in an attempt to reach the objective within the agreed-upon framework.

BAE Systems argued for the existence of a Type I agreement. Following New York precedent, the Court stated that it is guided by four factors that are relevant in discerning the ultimate question of whether the parties intended to be bound: (1) whether there is an expressed reservation of the right not to be bound in the absence of a writing; (2) whether there has been partial performance of the contract; (3) whether all the terms of the alleged contract have been agreed upon; and (4) whether the agreement at issue is the type of contract that is usually committed to writing.

The Court ruled that BAE Systems had sufficiently alleged a Type I agreement. In analyzing the four-factor test, the Court found: for factor (1), the agreement was not contingent on the result of further negotiations; for factor (2), BAE Systems had already begun performance under a UCA; for factor (3), the absence of specified contract type, price, payment terms and time of performance could be rendered certain through extrinsic evidence in discovery; and, for factor (4), the Federal Acquisition Regulation encourages the use of teaming agreements.

The Court also refused to dismiss BAE Systems’ claim that L3 Harris had failed to negotiate the subcontract in good faith, citing L3 Harris’s alleged demand that BAE Systems cut labor costs by 60% and accept a 33% price reduction. Additionally, the Court refused to dismiss the allegation by BAE Systems that L3 Harris misappropriated its trade secrets in violation of the federal Defend Trade Secrets Act.

The Court’s opinion and order denying L3 Harris’s motion to dismiss the claims is instructive for government contractors that seek to increase the likelihood that their teaming agreements will be found enforceable.

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