Guest Author: Kimberly Heifetz*, Counsel, Thompson Coburn LLP, writes:
Teaming agreements (TA) are a standard part of many prime contractor/subcontractor relationships, but a recent decision should serve as a reminder that TAs are also a trap for the unwary. In Cyberlock Consulting, Inc. v. Information Experts, Inc., — F. Supp.2d –, 2013 WL 1395742 (E.D. Va., April 3, 2013), a federal district court held that a TA’s terms regarding the parties’ “agreement to agree” to future “good faith” negotiations of a subcontract, did not constitute an enforceable contract. Teammates’ pre-award agreements to negotiate subcontracts after the prime contract is awarded are very common, but the Cyberlock decision reinforces the dangers of such provisions when the prime and sub subsequently reach an impasse in their subcontract negotiations. This case underscores the importance of memorializing in advance, to the extent possible, the parties’ obligations with respect to their subcontract relationship.
The Cyberlock facts are familiar, and this is not the first court to reach a similar conclusion under Virginia law. The prime, Information Experts, Inc. (IE), executed a TA with proposed subcontractor Cyberlock Consulting, Inc. (Cyberlock), and the team’s proposal efforts were successful with a resulting contract award to IE. After a month of failed subcontract negotiations, IE terminated the negotiation effort with Cyberlock, and Cyberlock sued IE for breach of contract.
The question ultimately resolved by the court was whether the parties’ agreement in the TA to negotiate in good faith the terms of a subcontract after prime contract award constituted an enforceable contract. The court applied Virginia law, and finding no contract ambiguity and noting the inclusion of an integration clause in the agreement, limited its review to the express TA language. Cyberlock urged the court to consider certain extrinsic evidence when interpreting the parties’ intentions, but the court declined to do so.
The TA was replete with language convincing the court that, while the agreement did demonstrate the parties’ intention to negotiate and execute a subcontract “[u]pon Contract award” and with 49% of the work allocated to Cyberlock, the agreement also contemplated the possibility that the parties might not reach agreement on subcontract terms. Terms cited by the court included the parties’ agreement to “exert reasonable efforts . . . to negotiate a subcontract for the Program,” as well as references to a “contemplated subcontract,” “work anticipated to be performed by Subcontractor,” and Cyberlock’s “role in the program, as presently understood by the parties.” The TA also contained a provision subjecting the parties’ subcontract agreement to approval by the Government and explicit language providing for termination of the agreement in the event the parties could not “reach agreement on a subcontract after a reasonable period of good faith negotiations.”
The court found that the language favoring the subcontractor, which contemplated award of a subcontract, was effectively modified by TA provisions making award contingent on further negotiations and future agreement. Holding that an agreement to negotiate in the future simply was not enforceable as a valid contract, the court rejected Cyberlock’s claim for breach of contract against IE.
This case highlights a real dilemma: Pre-award (and even pre-proposal) agreement to subcontract terms and conditions can be tricky and risky since the precise scope and nature of the prime/sub relationship won’t be known unless and until the prime contract is awarded. Under Cyberlock and earlier decisions, however, contingent obligations or commitments in a TA regarding future subcontract terms (such as work share, pricing, schedule, and material and required clauses) are likely to be viewed as unenforceable. Suggestions for avoiding the Cyberlock pitfalls include the following:
- Where the Government solicitation contains a sufficiently-detailed statement of work and other terms, the prime and sub execute a subcontract with the requisite material terms and clauses, including a provision that the subcontract terminates in the event the prime does not receive the Government contract award and a provision that the parties will negotiate written amendments to the subcontract as needed to conform to the prime contract award.
- The subcontract may include pre-award, proposal preparation obligations of the parties, or it may be accompanied by a separate TA that attaches the subcontract as an exhibit.
- If executing a subcontract at the pre-award stage is not feasible, attach an exhibit to the TA that describes the essential elements of a subcontract to which the parties have agreed, such as the discrete tasks and responsibilities of each party, their respective prices or labor rates, schedule or delivery terms, termination and dispute clauses, and other clauses set forth in the solicitation that are typically flowed-down in subcontracts, thereby minimizing the things that need to be negotiated after the prime contract is awarded and demonstrating the parties’ intent to execute the subcontract after award.
- Use affirmative TA language that says “Prime shall award a subcontract to sub in the event prime is the awardee” and avoid use of futuristic and contingent language that a court could interpret as modifying or otherwise negating the affirmative language.
Some of these approaches may well be unavailable in the case of a multiple-award, indefinite-quantity indefinite-delivery type of contract, where the parties cannot know the precise scope of work until the task order competition. In addition, the above suggestions are made for prospective subs, and it is important to understand that primes may take a much different view of things.
*Kimberley Heifetz is one of the instructors for PCI’s Best Practices in Subcontracting, which will be held in Washington, DC on July 31-August 1 and in Irvine, California on November 5-6.