In the construction industry, we see a growing trend of contractors, subcontractors and designers collaborating to pursue large construction contracts. Among many benefits, these collaborations enable companies to pursue projects that would otherwise be too large by combining their resources and skill sets with compatible partners. The terms of these collaborations are often outlined in “teaming agreements,” which define the relationships, rights and responsibilities of both parties during both the pursuit of the contract and, if the contract is awarded, performance of the project.
However, what happens when one of the parties breaks the terms of that teaming agreement?
When teaming agreements contain sufficient specificity of terms, they are typically enforced and the breaching party will likely be found liable for damages. However, teaming agreements that are not reasonably complete, definite and clear may be declared unenforceable as mere “agreements to agree.” Under this scenario, a party to a teaming arrangement that fulfills its obligations while pursuing a contract may be left shortchanged if its partners don’t fulfill their promises when the project is ultimately awarded.
Parties to a teaming agreement can increase the likelihood that their agreement will be enforced by adhering to the following “Don’ts” and “Dos”.
Agree to negotiate essential terms at a future date. In its recent ruling in Navar, Inc. v. Fed. Bus. Council, the Supreme Court in Virginia found that an agreement between a contractor and subcontractors for a federal construction contract was unenforceable as it “merely set out agreements to negotiate future subcontracts in good faith.”
Rely on oral agreements. In Abt Assocs., Inc. v. JHPIEGO Corp, a federal court in Maryland held that a teaming agreement was unenforceable since it was not executed and did not indicate mutual agreement on the essential terms.
Include uncertain terms. In W.J. Schafer Assocs., Inc. v. Cordant, Inc, the Supreme Court in Virginia found a teaming agreement between a contractor and subcontractor unenforceable as it, among other things, did not identify a price for the item to be supplied by a subcontractor.
Identify essential terms. Typically, every contract must at least include the identity of the parties, the subject matter and consideration. Within those parameters, each project is different, and therefore the essential terms of an agreement differ project-by-project. For instance, under most scenarios, pricing is an essential term that must be carefully delineated. However, one California court found, in Krantz v. BT Visual Images, L.L.C., that identification of a specific price was not essential to the enforceability of a teaming agreement, as price there was necessarily dependent on subsequent events.
Draft a teaming agreement that clearly outlines the arrangement, and support the existence of the agreement with other written evidence. A federal case in Pennsylvania, ATACS Corp. v. Trans World Commc'ns, Inc., exemplifies this need. Under a teaming arrangement in which two contractors pursued a contract from the Greek army, one party agreed to assume financial responsibility for the contract, while the other party agreed to be a major subcontractor to assist in the proposal preparation. The terms of the parties’ understanding were documented in a letter which described the relationship as a “strategic alliance.” After the Greek government awarded the contract, the prime contractor awarded the proposed subcontractor's work to another company that offered to do the work for less. The federal court upheld the “teaming agreement” as valid and enforceable given the specificity of the duties carefully described in the letter and the existence of several other written communications which supported the terms of the agreement. The judgment was affirmed by the United States Court of Appeals for the Third Circuit.
In sum, in order to avoid potential problems in your teaming arrangement, carefully consider the essential terms of the collaboration and clearly incorporate them into a written agreement.
For more information on preparing a teaming agreement, see 1 Bruner & O'Connor on Construction Law § 2:9.