Government contractors enter into teaming agreements to secure contracts with partners that will help them win and perform the work. It surprises many, however, that certain terms in a teaming agreement may not be enforceable, particularly the clauses providing for the award of a subcontract. This has led contractors to ask, “What is the point of a teaming agreement?” There are many advantages to teaming agreements, or they would not be so prevalent in the government contracting industry. Although those advantages cannot be understated, contractors need to know the limits of teaming agreements. Depending on whether the contractor is the anticipated prime or subcontractor, those limitations need to be carefully considered.
Prime contractors enter into teaming agreements to enhance their competitive posture by teaming with companies that can provide services or technology they might not be able to offer. Or, even if they have the capabilities to do the work, a lack of past performance experience makes teaming necessary. In contrast, a proposed subcontractor may enter into a teaming agreement to establish a relationship with a new customer—the prime—or because it is ineligible to bid on the work. These considerations, among others, are what normally drive companies into teaming arrangements.
Unfortunately, many contractors do not understand that, unless there are very definitive terms regarding the proposed subcontract, it will be very difficult to enforce the subcontracting commitment. It is a well-established tenet in most jurisdictions that contractual provisions that merely set out agreements to negotiate future subcontracts are not enforceable. Generally referred to as “agreements to agree in the future,” most courts do not enforce them because they are too vague and indefinite. This does not mean other terms in the teaming agreement are not enforceable; they are, but the most significant reason a proposed subcontractor enters into a teaming agreement—to perform the work—is not guaranteed.
In order for proposed subcontractors to increase the likelihood that a court will find a teaming agreement enforceable, they should make sure the teaming agreement contains the following terms:
- A clear statement of work, including the percentage of work with defined tasks. By laying out details of the contemplated work share, disputes over the breadth and scope of a subcontract can be avoided.
- The proposed subcontracting price. This can be the most challenging aspect of an enforceable teaming agreement, as the parties may not know the pricing to be proposed to the prime (and then the government) until significant proposal work has been done, which is usually undertaken after a teaming agreement has been executed. However, without a price for the work to be done, the enforceability of the agreement is at risk.
- A reasonable term regarding the duration of the teaming agreement and how it may be terminated. If the teaming agreement expires after a short, defined period of time, the prime contractor can move on to perform the work on its own or with others.
As noted above, there are clauses in teaming agreements that can be enforced. For example, most teaming agreements provide for the parties to be exclusive to each other. In addition, the nondisclosure/proprietary protection clauses are critical to maintain the confidentiality of shared information. These legal obligations can be enforced, as they are concrete commitments to be carried out in the present, not some time in the future.
For prime contractors, the flexibility teaming agreements offer makes them take a very different negotiation stand than proposed subcontractors. Both parties may want to work together and make certain commitments up front, but the award of a subcontract should not be taken for granted by a proposed subcontractor. Rather, in most teaming agreements, following an award to a prime contractor, the prime has to do no more than make a “good faith” effort to negotiate a subcontract. For subcontractors expecting more of a teaming agreement, the terms of such a contract should be carefully drafted to make it all worth the teaming effort.
About the Author: Tony Franco is a senior partner at PilieroMazza PLLC with over 30 years of legal experience representing clients on business, corporate, and government contracting matters. He may be reached at afranco@pilieromazza.com.