What's Next for Teaming Agreements After Cyberlock?

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A recent federal District Court decision holding a teaming agreement between two contractors unenforceable under Virginia law raises questions about the usefulness of these commonly employed agreements—and not just in Virginia.

What Are Teaming Agreements?

Teaming agreements are frequently used by government contractors that have complementary capabilities and intend to propose for work on a prime contractor–subcontractor basis. The agreements reflect the parties' intent that if the government awards a contract to the prime contractor, then the prime contractor will enter into a subcontract with the other team member, and the teaming agreement often allocates the types and amounts of work to be done by each party. One of the reasons that teaming agreements are used is that they avoid the need for the parties to negotiate a detailed subcontract agreement that they may end up not needing if their proposal is not successful. Teaming agreements sometimes include exclusivity provisions that would prevent the parties from teaming with others for the designated project.

The Cyberlock Decision

In Cyberlock Consulting, Inc. v. Information Experts, Inc., ___ F.Supp.2d ____ (2013), 2013 U.S. Dist. LEXIS 49092, 2013 WL 1395742 (1:12cv396 (JCC/TCB) April 3, 2013, the U.S. District Court for the Eastern District of Virginia granted summary judgment to Information Experts, which was resisting the enforcement of a teaming agreement by Cyberlock after the parties were unable to reach agreement on a subcontract relating to a prime contract awarded to Information Experts by the government, as contemplated in the teaming agreement. The court essentially agreed that the teaming agreement was a "mere [agreement] to agree in the future," and therefore unenforceable under Virginia law. The court noted that, unlike an earlier teaming agreement between the same parties, the one at issue did not include a detailed description of the work to be performed by the proposed subcontractor and did not include as an exhibit the subcontract the parties would execute if the prime contract were awarded. In addition, the court noted that the teaming agreement also included a provision calling for termination of the agreement if there was a "failure of the parties to reach agreement on a subcontract after a reasonable period of good faith negotiations."

The court also disavowed an earlier decision in the case, in which it denied a motion to dismiss the breach of contract claim, in part by considering parol evidence without having expressly determined that the contract was ambiguous. In explaining the court's reasoning for disavowing the earlier ruling, the Cyberlock decision also took the unusual step of criticizing and refusing to follow an earlier Virginia Circuit Court decision that it had followed in the earlier ruling. Referring to EG & G, Inc. v. Cube Corp., 63 Va. Cir. 634, 2002 WL 31950215, at *7 (Va. Cir. Ct. Dec. 23, 2002), the court stated:

"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."

In view of Cyberlock being decided by a federal District Court judge interpreting Virginia law and disapproving of a Virginia state court decision, it is unknown at this time if Cyberlock will remain the last work on enforceability of teaming agreements in Virginia.

Should Teaming Agreements Still Be Used?

Although Cyberlock was decided under Virginia law, the logic of the decision could also apply in other states. Because many parties enter into teaming agreements under the assumption that they are enforceable agreements, it may be worthwhile for those parties to consider the implications of the Cyberlock decision before entering into their next teaming agreement.

However, it is important to note that the decision does not necessarily undermine all teaming agreements; the court merely held that a teaming agreement that did not include much detail about the proposed subcontract—and that expressly provided that it would terminate if a subcontract was not agreed upon—was not sufficiently binding for the jilted subcontractor to sustain a claim seeking the award of 49 percent of the contract value. There remain many situations in which parties that have reached agreement on the major terms of a potential subcontract could enter into a teaming agreement and be reasonably confident that it will be enforceable.

Even if the parties are not far enough along in their negotiations to enter into a teaming agreement that would clearly pass muster under Cyberlock, it still might be useful to enter into such an agreement on the understanding that it is more in the nature of a letter of intent or memorandum of understanding, which are often used by parties that hope and intend to enter into definitive agreements in the future. Such situations would require a sufficient level of trust between the parties or other factors in favor of using a teaming agreement of uncertain enforceability.

A willingness to proceed in the face of the risk of unenforceability without taking steps to reduce the risk is actually something many parties undertake when they enter into negotiations for a major and complex transaction, so this is not really new territory—it is just an existing issue that has not been thought to be present in the teaming agreement context.

Increasing the Likelihood That a Teaming Agreement Will Be Enforceable

If parties wish to increase the likelihood that a teaming agreement will be enforced, there are steps that may be worthwhile to consider toward achieving that result. Examples of such steps are:

  • negotiate the key terms and form of a proposed subcontract and include it as an exhibit to the teaming agreement,
  • do not make the teaming agreement subject to termination in the event of a dispute about the terms of the subcontract,
  • include confidentiality and exclusivity provisions that would preclude each party from going forward with the transaction without the other party,
  • identify and include remedies if a subcontract is not entered into and
  • choose a state other than Virginia for the applicable governing law, such as Delaware or another state favorable to enforcement.

With regard to the choice of law issue, as noted above, it appears at least possible that jurisdictions other than Virginia would apply the logic used in Cyberlock to a failed teaming arrangement. On the other hand, Delaware case law would appear to be more sympathetic to enforcement of teaming agreements. See BAE Sys. Info. & Elec. Sys. Integration v. Lockheed Martin Corp., 2009 Del. Ch. LEXIS 17, 21–22 (Del. Ch. Feb. 3, 2009). In BAE, the court refused to dismiss a claim in which the defendant argued that a memorandum of agreement functionally similar to a teaming agreement was an unenforceable agreement to agree. The BAE court did not see the absence of definitive pricing as integral, and considered the conduct of the parties (they continued to perform under the agreement for four years prior to the claim arising) in determining that there was an intent to be bound.

Planning Items for Consideration

Even if a teaming agreement is deemed enforceable, it may be of limited value if the parties reach a genuine and unexpected deadlock in final negotiations of a subcontract. As noted by the BAE court:

If [the parties] had tried, but failed, to come to an understanding about F-35 work, what would be [plaintiff's] claim? How would it be valued? How would it be enforced? Or, is this litigation about the allocation of real work or is simply about the "value of a chance"? [*22] This case amply demonstrates the perils and shortcomings of any arrangement that sounds like an agreement to agree.

This observation appears to emphasize the point that meaningful remedies for the breach of a plainly enforceable teaming agreement may be challenging to obtain. As a result, the parties should consider the possibility that they will fail to reach a final agreement on a subcontract after the award of a prime contract, and they may want to fashion an appropriate remedy and incorporate it into the teaming agreement.

The challenges raised in the failed teaming agreement context are significant enough to serve as a reminder that a considerable level of trust and confidence between the parties is a prerequisite to entering into negotiations for a teaming agreement. Consequently, a teaming agreement between contractors that have never worked together on a project poses a higher level of risk, no matter which jurisdiction's law will determine the agreement's enforceability.

For Further Information

If have any questions about this Alert, please contact Andrew E. Mishkin, Robert A. Prentice, any member of the Construction Group or the attorney in the firm with whom you are already in contact.