Tuesday, 20 August 2013 15:21
By Robert Crump
Agree to potentially agree
In Virginia, a subcontractor and a government contractor entered into two teaming agreements to secure two prime contracts from the federal government. The first teaming agreement specified that if the government contractor was awarded the prime contract during the agreed upon period of agreement, it would then enter into the subcontract with the subcontractor within five days. Soon after submitting its bid, the government contractor was awarded the prime contract. On that same day, the government contractor and subcontractor entered into their agreed upon subcontract.
Shortly after it was awarded the first prime contract, the federal government entity announced that it would be accepting bids for a new job involving similar work. In anticipation of bidding for this second potential project, the subcontractor and government contractor entered into a second teaming agreement, which stated that its main purpose was to set forth the arrangement between the two contractors. The agreement established that “[u]pon Contract Award, [the government contractor] will perform 51% of the scope of work with [the subcontractor] performing 49%.” The second teaming agreement also had a merger and integration clause stipulating that the second agreement would supersede all “prior and contemporaneous representations, proposals, discussions, and communications, whether oral or in writing.” Finally, the second teaming agreement contained a section titled “Termination of Agreement.” This section stipulated that the agreement would be terminated if there was a “failure of the parties to reach agreement on a subcontract after a reasonable period of good faith negotiations.”
Not long after submitting its proposal, the government contractor was, once again, awarded the prime contract. The government contractor did not execute a subcontract on that same day, as it had done when it was awarded the first prime contract. Instead, the parties entered into negotiations. After approximately one month, the parties’ negotiations over the terms of the subcontract stalled and they failed to reach an agreement. Almost immediately after negotiations failed, the subcontractor sued the government contractor for breach of contract.
Court holds that contemplation of a future contract does not create a binding agreement
The court held that the second teaming agreement, as an entire instrument, was unambiguous and constituted an unenforceable agreement to agree. The court noted that even “calling the agreement something other than a contract or subcontract, such a teaming agreement or letter of intent, implies that ‘the parties intended it to be a nonbinding expression in contemplation of a future contract.’” The court found the circumstances of the parties’ intention to enter into a formal contract at a later date, after the government contract award, was strong evidence that they did not intend the previous negotiations to amount to an agreement.
The court noted the presence of some limited language suggesting that the government contractor was obligated to provide 49% of the second prime contract to the subcontractor. However, the court stressed the importance of reading the agreement as a whole. After analyzing the language of the agreement, the court concluded that the second teaming agreement was not a binding obligation, but rather, it simply set forth a contractual objective and an agreed framework for future negotiations. Thus, the court found that the teaming agreement was an unenforceable agreement to agree.
While this case was decided under Virginia law and could possibly be reversed on appeal, it is important for contractors to understand the implications of the decision for teaming agreements in the future. Contractors can take steps to increase the enforceability of their future teaming agreements, such as including as much detail about the subcontract as possible, including a remedies provision that addresses the result of the failure of the parties to enter into a subcontract, and including a choice of law provision to apply another state’s laws to the teaming agreement.