Alerts

Teaming Agreements Under Fire: Decision Chips Away at the Enforceability of Teaming Agreements

Alerts / August 13, 2018

In recent years, federal and state courts in Virginia have slowly chipped away at the ability of teaming partners to enforce what they presumed were contractual rights against one another; however, these courts have left open the possibility that a party to a teaming agreement may retain some enforceable rights against its partner. Troublingly for prospective subcontractors, a recent decision from the Virginia Supreme Court further weakens the enforceability of teaming agreements.

By way of background, the United States District Court for the Eastern District of Virginia held in 2012 that a teaming agreement’s inclusion of percentage figures for the distribution of work provided a sufficiently definite basis for treating the teaming agreement as an enforceable contract. See Cyberlock Consulting, Inc. v. Info. Experts, Inc., 876 F. Supp. 2d 672, 679 (E.D. Va. 2012). The court reversed course less than a year later, however, determining that the percentage figures merely “set forth a contractual objective and agreed framework for the negotiation of a subcontract in the future along certain established terms.” Cyberlock Consulting, Inc. v. Info. Experts, Inc., 939 F. Supp. 2d 572, 581 (E.D. Va. 2013), aff'd, 549 F. App'x 211 (4th Cir. 2014) (internal quotations and alterations omitted). This position was cited approvingly by the Virginia Supreme Court when it held that a similar teaming agreement, which laid out certain minimum percentages of work, did not constitute an enforceable contract. See Navar, Inc. v. Fed. Bus. Council, 291 Va. 338 (2016).

Since the Cyberlock and Navar decisions, contractors and subcontractors have continued to negotiate teaming agreements under Virginia law, often under the presumption that at least certain terms, particularly the obligation of the parties to negotiate in “good faith” to form a definite, enforceable subcontract after award, will remain enforceable. A recent decision by the Virginia Supreme Court, however, suggests that while this may be true in theory, any successful lawsuit premised on that theory may result in only a hollow victory under certain circumstances. See CGI Fed. Inc. v. FCi Fed., Inc., 814 S.E.2d 183 (Va. 2018).

CGI Federal involved facts familiar to experienced contractors. In order to pursue an award set aside for small businesses, FCi, an eligible small business, sought out a large teaming partner to improve its technical ability, while CGI, an ineligible business, sought out a small-business partner to pursue part of the award. After CGI determined it required at least 40 percent of the work in order to make the effort worthwhile, the parties negotiated a teaming agreement that contemplated a future subcontract that would allocate 45 percent of the work to CGI (this figure was later revised to 41 percent after FCi was required to direct work to additional subcontractors). In a twist that would appear to breach the duty to negotiate in good faith, however, FCi’s initial proposal to the government assigned considerably less work to CGI than contemplated by the teaming agreement, a tactic repeated in FCi’s subsequent revised proposals. FCi won the award on this basis and entered into subcontract negotiations with CGI, offering the latter between 16 percent and 22 percent of the total share of work; after the parties failed to negotiate a subcontract, FCi terminated CGI for cause.

CGI brought suit, alleging three theories of recovery: (i) breach of the teaming agreement, (ii) fraudulent inducement and (iii) unjust enrichment, and the suit eventually reached the Virginia Supreme Court. Consistent with Cyberlock and Navar, the court summarily disposed of CGI’s breach claim, holding the teaming agreement did not create an enforceable agreement binding FCi to award a subcontract with any specific allocation of work. More surprisingly, however, the court also rejected CGI’s claims for fraudulent inducement and unjust enrichment, seemingly cutting off alternative paths of recovery contractors may have previously assumed were available.

With respect to fraudulent inducement, the court determined that for the same reasons the teaming agreement was not sufficiently definite to constitute an enforceable contract, it also barred recovery of damages by CGI because the agreement provided no basis for calculating such damages. With respect to unjust enrichment, the court determined that the agreement’s provisions stating each party would bear its own costs were sufficiently definite to be enforceable, precluding CGI’s recovery on this basis. Although the court suggested CGI could have sought to void the agreement on the basis of fraud to pursue damages strictly on the basis of its tort claims, the court’s holding with respect to CGI’s fraudulent inducement claim suggested damages under such a theory would have been limited simply to its bid preparation costs.

In light of CGI Federal, contractors should assess whether they can reasonably rely on the terms and conditions of their teaming agreements to provide meaningful assurances regarding the negotiation of a prospective subcontract without binding themselves to more definite terms prior to any prime award, at least under Virginia law. Accordingly, unless contractors wish to consider the law of other forums when negotiating their teaming agreements, they must pay close attention to the specific terms and conditions of their contracts when evaluating what is and is not enforceable and govern their pre-award conduct accordingly.

For questions about this alert, contact Barron Avery at wavery@bakerlaw.com or 202.861.1705 or Liam O’Reilly at woreilly@bakerlaw.com or 202.861.1745.

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