Christopher G. Hill | Construction Law Musings | January 7, 2019
These days in construction, and other pursuits, teaming agreements have become a great method for large and small contractors to work together to take advantage of various contract and job requirements from minority participation to veteran ownership. With the proliferation of these agreements, parties must be careful in how they draft the terms of these agreements. Without proper drafting, the parties risk unenforceability of the teaming agreement in the event of a dispute.
One potential pitfall in drafting is an “agreement to agree” or an agreement to negotiate a separate contract in the future. This type of pitfall was illustrated in the case of InDyne Inc. v. Beacon Occupational Health & Safety Services Inc. out of the Eastern District of Virginia. In this case, InDyne and Beacon entered into a teaming agreement that provided that InDyne as Prime would seek to use Beacon, the Sub, in the event that InDyne was awarded a contract using Beacon’s numbers. The teaming agreement further provided:
The agreement shall remain in effect until the first of the following shall occur: … (g) inability of the Prime and the Sub, after negotiating in good faith, to reach agreement on the terms of a subcontract offered by the Prime, in accordance with this agreement.
InDyne was subsequently awarded a contract with the Air Force and shortly thereafter sent a subcontract to Beacon and requested Beacon’s “best and final” pricing. Beacon protested by letter stating that it was only required to act consistently with its original bid pricing. Beacon then returned the subcontract with the original bid pricing and accepting all but a termination for convenience provision. Shortly thereafter, InDyne informed Beacon that InDyne had awarded the subcontract to one of Beacon’s competitors. Beacon of course sued and argued that the teaming agreement required that InDyne award the subcontract to Beacon.
The Court disagreed. After several paragraphs of analysis of the arguments of the parties, and with reference to the above quoted language, the Court found this language to create an agreement to negotiate in the future that is unenforceable. In doing so the Court stated:
Although Beacon makes a strong case that the teaming agreement is more definite than those found by courts to be unenforceable under Virginia law, “[w]ell-established precedent compels us not to impose a subcontract on parties to a teaming agreement when they have expressly agreed to negotiate the material terms of a subcontract in the future.” The parties chose to have Virginia law apply to the terms of the teaming agreement. Under the clear precedent in Virginia, this teaming agreement is unenforceable.
In short, where a teaming agreement expressly states that the parties still have some negotiating work to do on material terms of any subcontract moving forward the teaming agreement will not likely be enforceable by its own terms in the event that the parties fail to agree to the terms of any future subcontract.
As always, I recommend that you read the whole opinion yourself in consultation with an experienced Virginia construction attorney to both double check my analysis and to assure that any teaming agreement will be enforceable.