As we discussed in prior alerts Sons of Cyberlock: Recent Decisions Underscore Challenges in Drafting Enforceable Federal Contracting Teaming Agreements and Is Your Teaming Agreement Enforceable?, contractors pursuing a federal government opportunity as a prime/subcontractor team must carefully draft their teaming agreement to ensure its enforceability.

A recent New York federal opinion[1] is a reminder that teaming agreements are governed by state law, and not federal law, despite support for “contractor team arrangements” under FAR Subpart 9.6, and that state law generally will not enforce a teaming agreement unless a plaintiff can demonstrate sufficient agreement on material terms.

A Claim for Breach of a Teaming Agreement Survives an Early Dismissal Motion Under New York Law 

In the lawsuit, BAE sued L3, alleging breach of a teaming agreement where L3 agreed to bid as the prime contractor and BAE as the subcontractor in their common pursuit of a contract with the Department of the Navy. The teaming agreement was titled a “Memorandum of Agreement” (“MOA”) and was not tied to a particular solicitation. Instead, the MOA said that each team pursuit would be documented in a separate “Annex.”

The L3/BAE Annex specific to the Navy opportunity included exclusivity requirements and detailed information about the roles that BAE would play as L3’s subcontractor. The teaming agreement said that “[u]pon prime contract award, a subcontract will be awarded” to BAE “in accordance with the scope proposed in the SOW/Role defined herein.” L3 described the Annex as an agreement for the “pursuit, capture, and execution” of the Navy contract.

L3 submitted its bid to the Navy. That bid included a proposed pricing structure and price for BAE’s work. BAE helped L3 to prepare this proposal, and BAE alleged that L3 could not have prepared a responsive bid without access to BAE’s expertise and trade secrets.

L3 was awarded the prime contract for approximately $205 million but did not immediately execute a subcontract with BAE. Instead, L3 and BAE signed limited agreements that allowed BAE to procure materials to begin performing work on the Navy contract “prior to completion of the final subcontract” between BAE and L3. L3 ultimately offered subcontract terms to BAE that allegedly were far less favorable than was stated in the Annex, including a proposed 33% price reduction for a large percentage of BAE’s scope of work. As a result, no subcontract was executed between L3 and BAE.

BAE sued L3 for breach of the teaming agreement and for breach of the duty of good faith and fair dealing, both under New York state law, among other state and federal claims.

On February 9, 2024, the Southern District of New York denied L3’s motion to dismiss BAE’s breach of contract and good faith and fair dealing claims. The court explained that New York state law recognizes two types of “preliminary agreements”—a “Type I” agreement and a “Type II” agreement. A Type I agreement is a fully binding, preliminary agreement created when parties agree on all material terms and say they will execute a more formal contract later. Type I agreements are fully enforceable, even if no formal contract is subsequently signed. A Type II agreement exists when parties agree to certain major terms but leave other terms open for future negotiation. A Type II agreement obligates the parties to negotiate the open terms in good faith but is not otherwise enforceable and does not require the parties to come to an agreement.

BAE alleged that the MOU and Annex, taken together, was a Type I Agreement that L3 breached when it failed to award BAE a subcontract. The court agreed that BAE had sufficiently alleged facts supporting the existence of a Type I Agreement under New York law. In reaching this decision, the court cited to the following facts:

• the MOU and Annex had language suggesting the parties intended it to be binding;

• these documents did not say that they were not binding;

• the Annex said it was contingent solely on L3 being awarded a prime contract and not on successful further negotiations;

• after L3 was awarded the prime contract, L3 issued a press release indicating its intent to award a subcontract to BAE;

• BAE began partial performance under the limited agreements, and L3 authorized funding up to $1,761,498 for BAE to perform its work; and

• L3’s bid included in it a proposal to the Navy the final price and pricing structure submitted by BAE for its work.

The court also held that, even if the MOU and Annex did not include agreement on sufficient terms to create a Type I agreement, they still would create a Type II agreement under New York law that required L3 to negotiate with BAE in good faith. The court found that BAE had alleged facts that L3 breached this good faith obligation by demanding terms inconsistent with the MOU and Annex. 

Contract Law in Virginia and North Carolina is Different, and New York’s Ruling Was Preliminary 

Spurned teammates in a prime/subcontractor teaming arrangement may hope for a similar result. However, before a contractor relies on the New York decision, several words of caution are in order.

First, the New York decision was preliminary. The Court did not find L3 liable to BAE for breach of contract, nor did the court hold that an enforceable contract existed. The court found only that BAE had stated sufficient facts to state a claim. It is not uncommon for contract claims to survive dismissal early in a case only to fail later at summary judgment, which tends to be decided after expensive and time-consuming discovery. For example, in Cyberlock the spurned subcontractor survived a motion to dismiss, only to learn after discovery that its teaming agreement was an unenforceable “agreement to agree” under Virginia law. Time will tell if BAE’s claims will suffer a similar fate or whether BAE has enforceable contract rights under the MOU and Annex.

Second, BAE’s allegations were unusual in that BAE had suggested partial performance after award of the Navy contract to L3. Teaming agreements often expire by their own terms unless teammates agree to a subcontract within a period of time after the award of the federal government contract. Post-award, teammates often spend much of their time negotiating the terms of the subcontract outlined in the pre-award teaming agreement. BAE, however, alleged that L3 had signed and funded interim agreements with BAE, and that BAE started work as an anticipated subcontractor to L3. Other subcontractors in other cases may not be able to make similar allegations against their prime contractor teammates.

Third, contract law in New York is materially different from contract law in North Carolina and Virginia. North Carolina and Virginia courts have not formally adopted New York’s “Type I / Type II” preliminary agreement structure. Instead, North Carolina and Virginia courts more generally refuse to enforce “agreements to agree” or “agreements to negotiate in the future” because these arrangements leave open too many material terms to create binding obligations between the parties. Virginia courts have applied these concepts to federal teaming agreements and have refused to enforce them. See Navar, Inc. v. Fed. Bus. Council, 291 Va. 338, 345, 784 S.E.2d 296 (2016); Cyberlock Consulting, Inc. v. Info. Experts, Inc., 939 F. Supp. 2d 572, 578 (E.D. Va. 2013), aff'd, 549 F. App'x 211 (4th Cir. 2014). North Carolina courts, like Virginia’s, refuse to enforce “agreements to agree,” though North Carolina apparently has not decided whether this principle applies to teaming agreements prepared pursuant to FAR Subpart 9.6. See Charlotte Motor Speedway, LLC v. Cnty. of Cabarrus, 230 N.C. App. 1, 7-8, 748 S.E.2d 171, 176-77 (2013); Silver v. Chase Properties, Inc., 259 N.C. App. 938, 814 S.E.2d 486 (2018).

North Carolina and Virginia also do not clearly define when parties are obligated to negotiate in good faith, as New York recognizes in “Type II” agreements. In Virginia, agreements to negotiate in good faith are unenforceable. Navar, 291 Va. 338, 784 S.E.2d 296. In contrast, some recent North Carolina decisions have acknowledged a willingness to enforce agreements to negotiate potential contracts in good faith. See MLU Servs., Inc. v. Lawrence Mobile Home Serv., Inc., No. 5:17-CV-565-KS, 2021 WL 4952504, at *4 (E.D.N.C. Oct. 25, 2021) (collecting cases). However, the boundaries of this obligation are not well defined.

A teaming agreement that includes all material terms of a subcontract is not an “agreement to agree” but an enforceable contract, though one probably conditioned upon the prime contractor teammate receiving a federal government contract. But negotiating and drafting fully binding contracts can be time-consuming and expensive for parties, and teammates often focus their limited pre-award resources on preparing a winning federal bid, rather than drafting a binding subcontract that may never be used. While this result may be acceptable for the prime contractor, it can leave a subcontractor without any enforceable rights. 

Takeaways 

• A teaming agreement that leaves material terms open to future negotiation might not be enforceable under state law.

• Teammates wanting an enforceable teaming agreement should include a fully negotiated subcontract as part of their teaming agreement and make those subcontract terms effective upon award of the federal opportunity. Preparing such documents may require detailed and extensive negotiations, but preparing a final contract in advance reduces the risk that a subcontractor is frozen out by the prime contractor and left with no court remedy.

• A spurned subcontractor might survive a defendant’s preliminary motion to dismiss its breach of contract claim, only to have its claim finally dismissed after expensive and time-consuming discovery, if a Court or jury finds that no enforceable contract was formed.

• New York law seems more likely to recognize a legal obligation for parties to negotiate in good faith and may be more likely to find a well-drafted teaming agreement to be enforceable, when compared to the laws of Virginia or North Carolina.

[1] BAE Sys. v. L3 Harris, No 1:2023 CV 1860 (S.D.N.Y. Feb 9, 2024).