Teaming Agreements Called Into Question Under Virginia Law

by Sheppard Mullin Richter & Hampton LLP
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In 1997, the Virginia Supreme Court sent a chill down the spines of many companies operating under teaming agreements with a Virginia choice of law provision. In W.J. Schafer Associates, Inc. v. Cordant, Inc., 493 S.E. 2d 514 (Va. 1997), that court held a teaming agreement to be unenforceable on the ground that “agreements to agree in the future” are “too vague and too indefinite to be enforced.” After an initial outpouring of articles and commentaries on the future of teaming agreements under Virginia law, the dust appeared to have settled and, in 2002, the Virginia courts actually issued an affirmative injunction compelling specific performance of a teaming agreement in EG&G, Inc. v. Cube Corp., 63 Va. Cir. 634, 2002 WL 31950215 (Va. Cir. Ct. Dec. 23, 2002).

It’s now 2013 and as Bob Dylan penned so long ago, “The times they are a changing.” On April 3, 2013 the United States District Court for the Eastern District of Virginia (Cacheris, J.) issued a summary a judgment ruling that is sure to call into question many teaming agreements that opted for a Virginia choice of law provision.

Cyberlock Consulting, Inc. v. Information Experts, Inc., click here, involved the second of two teaming agreements entered into between the same two parties. It called for Cyberlock to perform 49% of the work awarded to Information Experts under a prime contract they were pursuing with the Office of Personnel Management. Although the agreement stated (1) that the defendant/prime contractor had agreed “to execute a subcontracting agreement to provide [Cyberlock] 49% of the prime contract for the work anticipated to be performed by [Cyberlock]” and that, upon award of a prime contract, the defendant/prime contractor “will perform 51% of the scope of work with [Cyberlock] performing 49%,” the court found the teaming agreement to be unenforceable. The court held that

. . . the agreement read as a whole indicates that this particular language was not meant to provide a binding obligation but rather to set forth a contractual objective and agreed framework for the “negotiate[ion] [of] a subcontract in the future along certain established terms.

What were the other terms of the teaming agreement that, “as a whole,” confirmed the absence of a binding obligation? They are far from uncommon:

(1) The award was subject to the negotiation and future execution of a subcontract – Commentators have long recognized this type of provision as a potential risk to enforceability and it is one that, in Virginia, was clearly vulnerable under W.J. Schafer Associates. Interestingly, the parties had avoided this trap in their prior teaming agreement, which physically appended the subcontract agreement to the teaming agreement.

(2) The teaming agreement was subject to termination upon the failure of subcontract negotiations – This type of provision is a customary (but not necessary) complement to the requirement for a successful negotiation of the subcontract and, under W.J. Schafer Associates, should have raised at least some red flags for the subcontractor. Again, there was no such termination provision in the parties’ prior agreement.

(3) The subcontract was subject to Government approval – This condition was accompanied by an obligation on the part of the prime contractor/defendant to “exert reasonable efforts” to secure customer approval. This is a common provision in teaming agreements, rising almost to the level of “boilerplate.” The court does not explain why this particular condition should render the agreement unenforceable – there are many conditions precedent to the effectivity of contracts that do not render them unenforceable. But the court’s focus on this issue should serve as a warning to reconsider the uncritical acceptance or insertion of such provisions in teaming agreements. Not all subcontracts require Government approval. At a minimum, such provisions should be reserved for subcontracts where that requirement actually exists.

(4) The allocation of work in a future subcontract was subject to change “as it merely was based on the work anticipated to be performed by Cyberlock as then-presently understood by the parties” – At first blush this seems to suggest a lack of appreciation by the court for the way in which Government programs evolve. But the court here was focused on the deal ab initio, i.e., the ability, based on the teaming agreement, to identify with any predictability the substance of the work to be performed by the subcontractor upon award of the prime contract. Finding that lacking, the court cited it as a fourth reason for holding the agreement to be unenforceable. This is a vulnerability that parties should be able to avoid with more care, precision, and foresight in drafting the teaming agreement.

Perhaps lost in the holding is another key determination by the court, one that was, in this case – and could well be in many others -- outcome determinative, i.e., the exclusion of extrinsic evidence under the parol evidence rule. In fact, the court went out of its way to criticize the 2002 opinion in EG&G on precisely this ground:

To the extent that EG&G suggests that teaming agreements are a special arrangement to which Virginia’s standard rules of contract interpretation, including the parol evidence rule do not apply, the Court concludes that that case is incorrect and should not be followed.

So, if you choose Virginia law, you may want to deep six that boilerplate integration clause. Or – you may just want to jettison the Virginia choice of law clause and roll your dice in some other jurisdiction that is more hospitable to teaming agreements.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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