Teaming Agreements Offer Government Contractors A Way To Avoid Court Battles

Like most small businesses, government contractors are focused on keeping control over their expenses. And who doesn’t hate that one dreaded line item: legal? Well, who other than lawyers that is.

Admittedly, this may be a counterintuitive point for a litigator to be raising. But the fact is, savvy companies wanting to secure government contracts realize they need to find creative ways to avoid the courthouse while increasing the chances of being a successful bidder. One such strategy allows competitors and collaborators to band together to pursue a contract by creating a “teaming agreement.” This allows multiple firms to pool their resources to bid on a large project together. In the government contracting world, a little bit of a large project is much better than a lot of nothing at all.

Other than reducing litigation, the most obvious benefit is that businesses can complement each other’s unique capabilities and strengths. Cooperation leads to the development of a proposal that the partners may not have been able to compete for individually. As a team, the companies can offer the government the best combination of performance, delivery and cost for the product, system or service a department or agency wants to acquire. By joining forces, two or more businesses can be seen as a much larger entity, better able to deliver on a contract.

For any business looking for a teaming agreement partner, there are a few key dos and don’ts to avoid the bumpy road to a lawsuit.

Upside: Potential

In general – and there are a few special exceptions – one of the great benefits of a teaming agreement is that it usually applies to just one government project, not locking the companies doing a deal into a long-term marriage. Drafted properly it limits the obligation that each company has to one another. Additional benefits of a teaming agreement include several business advantages:

• The parties won’t be considered “affiliates” when the government calculates whether a bidder is a “small business”
• Stronger proposals are submitted based on the depth of experience of each member of the agreement
• While one member of the agreement serves as the primary contractor, the subcontractor is also contractually obligated to fulfill their specified tasks
• Businesses can combine forces and enter new markets that they may not have entered without their teaming partner.

Downside: Risk

That said, there are things to beware of – not the least of which is exercising the due diligence needed in any contract negotiation. Because teaming agreements generally apply to just one proposal or program at a time, there are a few drawbacks to teaming agreements:

• A new agreement must be negotiated for each new proposal solicitation, which can run up the cost
• There is a risk that after the prime contractor receives the prime contract, the company and the subcontractor in the deal will be unable to reach agreement on the terms
• As far as the government is concerned, the prime contractor is the only party bearing the entire risk of completing the project to the government’s satisfaction

Still, many companies find the benefits outweigh the risks.

Cautionary Tales

What’s important for companies to remember is that teaming agreements need to be specific, with details spelled out. This may be the surest way to avoid litigation. While the messages from courts around the country are mixed, generally they do not have much tolerance for agreements that are vague or say “we’ll work together now but finalize the details later.”

For example, in one case, the Supreme Court of Virginia found that a teaming agreement between two contractors did not provide a required level of certainty to be considered a binding deal. The problem was a simple one: the contract between the teaming partners was found to be an agreement to agree, and thus unenforceable. Other courts have reached a variety of sometimes-confusing conclusions: In California, teaming agreements are enforceable if they use “best efforts” to reach a common goal in an actionable way. What this means is that the parties need to demonstrate in the agreement that they are truly attempting to work together. Agreeing to agree later wasn’t enough for a Maryland court, which tossed out such a contract. But in Florida, while a court was leery of what it called “fuzzy lines,” it allowed a case to proceed because, it found, the parties were using their best efforts to cut a deal. On the other hand, in New York state a preliminary agreement is enforceable if, at the least, it requires good faith negotiations.

What does this all mean? Beyond the specific terms of a deal, businesses need to ensure that their agreement is consistent with court decisions in their jurisdiction. Likewise, executives of the contracting companies are well-advised to be as specific as possible when negotiating and drafting a teaming agreement. While this may not be possible in every instance, it should be a goal in every discussion.

Finally, both companies and their attorneys need to be involved in finalizing the agreement. When finalizing a teaming agreement, both parties must fully understand their roles as either the primary contractor or the subcontractor, and must understand how binding the terms are. Parties need to know whether the teaming agreement can be cancelled or modified, or whether there may be what courts call “unjust enrichment” liability for any of the companies involved where one party was unjustly enriched at the other party’s expense.

And most importantly, as you begin considering creating a teaming agreement, talk to a lawyer experienced in drafting teaming agreements so you don’t end up needing a litigator to sort things out later.

Binnall Law Group’s lawyers have helped numerous clients negotiate and litigate contract issues.