Is a Code of Business Ethics and Conduct Required?

Must a federal government contractor have a Code of Business Ethics and Conduct?   Yes!   All federal government contractors must have a Code of Business Ethics and Conduct.  In addition, unless the contractor is a small business or the contract is for the acquisition of commercial items (as defined by FAR 2.101), the contractor must also have a “business ethics awareness and compliance program” and an “internal control system” aimed at preventing fraud in government contracting.

Although small businesses are exempt from these latter two requirements, small businesses are well-advised to implement an ethics awareness program and internal controls. Debarment from government contracting is a huge risk for small businesses, and an ethics training program and internal controls will help prevent the type of misconduct that could result in debarment.

A company’s ethics and compliance program should focus especially on the company’s operations that pose the greatest risk of potential fraud.  This will not be the same for all contractors.  Assessment of the risk of fraud is essential to an effective compliance program.  A company must study its own operations and look for vulnerability to fraud.  How might an errant employee commit fraud?  How might a careless employee negligently do something that triggers a government audit or I.G. investigation, resulting in a costly debarment proceeding?  The type and scope of ethics awareness training and internal controls will vary from company-to-company, depending on the type of products, services and business operations.  One size does not fit all, which is why contractors must study their own operations and develop effective ethics and compliance programs that work best for them.  Finally, an ethics and compliance program will not be effective unless it is fully supported by top management and embedded in the contractor’s business culture.

John Polk is Special Counsel to Berenzweig Leonard, LLP, a DC region business law firm. John can be reached at jpolk@berenzweiglaw.com.

Teaming Agreement’s Promise of Future Subcontract Was Not Enforceable

Enforcing vague provisions in a Virginia teaming agreement is difficult. Courts continue to consider some teaming agreement provisions to be an unenforceable “agreement to agree” as seen in a recent decision of the Federal District Court in Alexandria. Although finding the teaming agreement’s promise of a subcontract was unenforceable, the court did honor the teaming agreement’s choice of law provision. Thus, not all teaming agreement provisions are automatically unenforceable. To the extent that the parties can make teaming agreements precise, they may be enforceable.

The recent case involved Information Experts (IE) trying to get a contract with the Office of Personnel Management with the help of team member Cyberlock Consulting. Their teaming agreement contained standard provisions committing the parties, if successful in winning the contract, to a specific work-share (51 percent of the work to IE, 49 percent to Cyberlock), tasks each would perform, promises of good faith negotiations to enter into a subcontract if the proposal effort was successful, and a clause identifying Virginia law to be applicable to the teaming agreement.

After the IE-Cyberlock team won the OPM contract, their efforts to negotiate a subcontract acceptable to both parties failed. Cyberlock then sued IE for breaching the teaming agreement by alleging that IE failed to negotiate a subcontract in good faith. The court concluded that the promise of a subcontract was too vague to be enforceable.

Because an enforceable contract needed “terms reasonably certain under the circumstances … mere agreements to agree in the future are too vague and too indefinite to be enforced.” And in Virginia, “agreements to negotiate at some point in the future are unenforceable … Accordingly, an agreement to negotiate open issues in good faith to reach a contractual objective within [an] agreed framework will be construed as an agreement to agree rather than a valid contract.”

Looking at the title of the document itself—a teaming agreement—the court said: “calling an agreement something other than a contract or subcontract, such as a teaming agreement or letter of intent, implies that the parties intended it to be a nonbinding expression in contemplation of a future contract. Moreover, even if the parties are fully agreed on the terms of their contract, the circumstance that the parties do intend a formal contract to be drawn up is strong evidence to show that they did not intend the previous negotiations to amount to an agreement which is binding.”

Although admittedly the teaming agreement contained some very specific language such as the 51/49 work share, the court considered the teaming agreement as a whole, which “indicates that this particular language was not meant to provide a binding obligation but rather to set forth a contractual objective and agreed framework” for negotiating a subcontract “in the future along certain established terms.” For example, any seemingly mandatory teaming agreement language to award Cyberlock a portion of the prime contract “was modified by provisions indicating that: (1) the award of such work would require the negotiation and execution of a future subcontract; (2) the award of such work was dependent on the success of such future negotiations; (3) any future executed subcontract was subject to the approval or disapproval of OPM; and (4) that the framework set out for the work allocation in a future subcontract potentially could change as it merely was based on the work anticipated to be performed by Cyberlock as then-presently understood by the parties.”

To the court, the teaming agreement “was an agreement to negotiate in good faith to enter into a future subcontract” and “such an agreement is precisely the type of agreement to agree that has consistently and uniformly been held unenforceable in Virginia.”

The court’s decision does not mean that all teaming agreement provisions are unenforceable, only those that are too vague to enforce. Because the teaming agreement provision identifying Virginia law as applicable to the teaming agreement was specific and not vague, that provision was enforced.

If you want to put teeth into a teaming agreement, let Berenzweig Leonard help you tailor teaming agreement language that will be enforced.

Terry O’Connor is the Director of  Government Contracts with Berenzweig Leonard, LLP, a DC region business law firm. Terry can be reached at toconnor@BerenzweigLaw.com.