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Virginia Supreme Court Holds Teaming Agreement Unenforceable

September 28, 2016

In January 2016, I posted an Opinions & Observations column, Teaming Agreements in Virginia: Are They Enforceable?, dealing with the subject matter of whether teaming agreements are enforceable in Virginia. In that  column I mentioned that there was only one Virginia Supreme Court case dealing with this issue, W. J. Shafer Assocs. v. Cordant, Inc., 254 Va. 514, 493 S.E. 2d 512 (1997). Nevertheless, the reasoning of the Supreme Court in Shafer was followed by the United States District Court for the Eastern District of Virginia in Cyberlock Consulting, Inc. v. Info Experts, Inc., 939 F. Supp. 2d  572 (E.D.Va.2013), aff’d No. 13-1599, 549 Fed. Appx. 211, 2014 U.S. App. LEXIS 322 (4th Cir. June 8, 2014), where the court held a teaming agreement, which only required the parties negotiate in good faith to enter into a future subcontract, to be an unenforceable agreement to agree. I also discussed the decision of the Circuit Court of Fairfax County in EG&G, Inc. v. The Cube Corp., 63 Va. Cir 634 (Fairfax Co. 2002), where Judge Ney, after allowing extensive testimony and other evidence concerning the dealings between the parties as to whether the parties intended enter into a binding and enforceable contract, found that teaming agreement to be enforceable.

On April 28, 2016 the Virginia Supreme Court, in Navar, Inc. v. Fed. Bus. Council, 784 S.E. 2d 296, 2016 LEXIS 58 (2016), held that the teaming agreement before the Court in that case was unenforceable as “merely an agreement to agree to negotiate at a future date” where the teaming agreement provided that, if the prime contractor received an award of a prime contract, it would negotiate in good faith with the prospective subcontractors and “upon arriving at prices, terms and conditions acceptable to the parties,” it would enter into subcontracts with them. The teaming agreement also provided that it would terminate if the parties were unable to reach an agreement on the terms of a subcontract after good faith negotiations.

Significantly, the Court cited and quoted from the courts’ opinions in both Shafer and Cyberlock in reaching its decision that the teaming agreement before the Court was unenforceable.  Moreover since this case was on an appeal from the decision of the Circuit Court of Fairfax County, it is doubtful that Judge Ney’s decision in The Cube has any precedential value and most likely has been overruled at least by implication.

In reaching its decision, the Court did say the teaming agreement did not contain any reasonable method for determining a sum or any requirement that the parties mutually agreed that Navar would be the actual subcontractor once a prime contract was awarded although Navar argued that that, under the teaming agreement, it was to receive an agreed percentage of the labor hours and costs. 

Since the Virginia Supreme Court has now echoed what it said in Shafer and what the Eastern District of Virginia said in Cyberlock, the “lesson learned” in the last paragraph of my previous column is of greater importance.  There is no longer any uncertainty as to what Virginia law now is on the matter of the enforceability of teaming agreements which require only that the parties negotiate in good faith the terms and conditions of a subcontract. 

As stated in my previous column, if you wish a teaming agreement to be enforceable in Virginia you should:

  • avoid language in the teaming agreement making an award of a subcontract subject to the negotiation of the terms of a subcontract;
  • negotiate as many of the essential terms of a subcontract as possible before the teaming agreement is entered into and attach a copy of a proposed subcontract containing those terms and condition as an exhibit to the teaming agreement;
  • include in the teaming agreement a statement that a subcontract will be awarded to the subcontractor if the prime receives an award of a prime contract in the form attached to the teaming agreement;
  • include language in the teaming agreement that it is the intent of the parties to enter into a binding contract in accordance with the terms of the teaming agreement;
  • avoid the inclusion of any provision which makes the inability of the parties to reach an agreement on the terms of a subcontract an event which causes the termination of the teaming agreement; and
  • have an attorney familiar with government contracting, whether for construction or procurement of services or supplies, review any teaming agreement before it is signed.

[1]  In Cyberlock, the court held another teaming agreement to be enforceable because it not only identified in an attachment the period and place of performance, requirements for key personnel, format of the prime contract, and project management requirements for the work Cyberlock would be performing, but another attachment to the agreement consisted of the specific subcontract the parties intended to enter into upon an award of the prime contract.

Pender & Coward shareholder Jack Rephan focuses his practice on construction law, government contracts, public procurement and alternative dispute resolution.  For more information, please contact him at (757) 490-6278 or jrephan@pendercoward.com.

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