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.

Government Contractors Entitled to Attorneys’ Fees for Work Changes

Contractors doing changed work under a government contract are entitled to attorneys’ fees according to a recent appeals court decision re-affirming the availability of attorneys’ fees as part of an equitable adjustment for changed work.

When the government ordered Tip Top Construction to change the kind of air conditioner the government had originally wanted to be installed in a Postal Service facility in the Virgin Islands, the company hired a lawyer to help negotiate the price for the changed work. At the end of the negotiations that dragged on for almost a year, the government paid Tip Top for the higher price of the air conditioner but refused to pay for its attorneys’ fees. The Postal Services Board of Contract Appeals agreed, concluding that the attorneys’ fees "had nothing to do with performance of the changed work and were solely directed at trying to convince the contracting officer to accept the contractor's figure for the change and maximizing Tip Top monetary recovery."

The appeals court told the government to pay the attorneys’ fees because they are a typical cost of administering a contract. Whether the negotiations were successful is irrelevant. So is the fact that the attorney’s negotiations had nothing to do with the actual installation of the different air conditioner. Negotiating helps in the long run “regardless of whether a settlement was finally reached or whether litigation eventually occurs because the availability of the process increases the likelihood of settlement without litigation. Additionally, contractors would have a greater incentive to negotiate rather than litigate if these costs of contract administration were recoverable."

Not only are attorneys’ fees paid as part of an equitable adjustments for changed work.  They are also routinely paid as part of a termination for convenience settlement proposal. The rates that an attorney charges must be reasonable but they are not capped by law at any specific hourly rate.

Author Terrence O’Connor is the Director of Government Contracts for the Washington, DC regional business law firm of Berenzweig Leonard, LLP.  He can be reached at toconnor@BerenzweigLaw.com.

False Bidding Estimates = Fraud

Extreme competition among government contractors for ever-increasing federal dollars has sparked a wave of “how low can you go” bidding wars among contractors.  Although a bidder may want to submit low bid prices to win a cost-reimbursement contract, the bids must be the actual prices and must have the facts to support  them.  

A recent federal court case involving a large government contractor confirms that purposefully bidding prices lower than the actual charge can constitute fraudulent bidding under the False Claims Act.  In the case, the contractor’s initial bid prices came in too high so they lowered the bids without considering the actual cost.  The contractor won the contract but a whistleblower successfully claimed that the contractor’s bidding process violated the FCA.  Although bids are only estimates and opinions, they must have some facts justifying them.  This decision shows that courts will continue to broadly interpret the False Claims Act.

The decision highlights a solid government contracts principle:  always make sure that your bid prices are backed up with solid pricing and market research data to avoid costly bid protests, FCA treble damages, and findings of non-responsibility based on ethical and legal violations.

Katie Lipp is an Associate Attorney with Berenzweig Leonard, LLP, a business law firm in the DC region.  She can be reached at klipp@BerenzweigLaw.com.  Terry O’Connor is the Director of Government Contracts for Berenzweig Leonard, LLP and can be reached at toconnor@BerenzweigLaw.com.

Pay Attention to Payment Clauses in Contracts

Under a Labor Hour contract, a government contractor can legally be paid for 50 hours of work performed by a salaried employee in one week, even though that employee does not receive more than what his salary pays based on 40 hours per week. Although the government claimed that this would let a contractor “pocket undue windfall profits at taxpayer expense," the Armed Services Board of Contract Appeals (ASBCA) concluded that the contract required payment.

The contract’s payment clause (FAR 52.232-7 Payment Under Time-and-Materials Labor-hour Contracts [FEB 2007]) required the government to pay the contract’s “hourly rates …for all labor performed on the contract that meets the labor qualifications specified in the contract.” According to the board, as long as the salaried employees received their salary, the government was obligated to pay the contractor for the 50 hours worked by these employees, as long as the contractor paid those employees their salary based on a 40-hour work week.

As this decision makes clear, it is critical to carefully read the specific payment clause in the contract as there can be significant differences among the more than half-dozen payment clauses available to the government.

Author Terrence O’Connor is the Director of Government Contracts for the Washington, DC business law firm, Berenzweig Leonard, LLP.  Email Terrence O'Connor