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Posted on Thursday, July 19, 2018

Teaming Agreement’s “Agreement to Agree” on a Future Subcontract is Unenforceable

On June 7, 2018, the Virginia Supreme Court issued an opinion that highlights a significant concern for subcontractors seeking to enforce a teaming agreement with its prime contractor, CGI Federal Inc. v. FCi Federal, Inc., No. 170617 (Va. June 7, 2018). The Court held that provisions in a teaming agreement about percentage of workshare to be allocated to the subcontractor were not enforceable, as they were not terms of the ultimate contract.

CGI Federal Inc. (CGI) and FCi Federal, Inc. (FCi) entered into a 2011 teaming agreement for a United States Department of State visa processing contract. The State Department had reserved the visa contract for small businesses, so CGI, a large contractor, was ineligible to bid. FCi agreed to cooperate with CGI in submitting a bid, because FCi did not have the capabilities to perform the contract on its own.

The teaming agreement required FCi’s proposal to include CGI as a subcontractor, and in a “Statement of Work,” said that CGI would receive 45% of the workshare, pending final solicitation requirements. After the State Department’s response to the first proposal said that only 41% of the workshare could be allocated to CGI, the parties came to an agreement where CGI accepted 41% of the workshare along with 10 management positions. FCi’s revised proposal, however, allocated only 35% of the workshare to CGI, and reserved all management positions for FCi.

The State Department awarded the contract to FCi. Following this award, Ikun, a competing bidder, filed multiple protests about FCi’s small business eligibility. A settlement agreement between FCi and Ikun required that FCi give Ikun and its associates work under the contract. The resulting second revised proposal to the State Department provided CGI with only a 16% workshare.

When the State Department finalized the contract with FCi, FCi and CGI began negotiating the subcontract terms. The original 16% workshare offer was raised to 22%. On June 20, 2014, the parties entered a temporary agreement to allow CGI to begin work, while FCi and CGI continued to negotiate a final subcontract agreement. But, before a final agreement was decided, FCi terminated CGI for cause because of a staffing dispute on November 10, 2014.

CGI then sued FCi in the Fairfax County Circuit Court in Virginia, asserting, among other claims, breach of contract for FCi’s failure to award CGI a 41% workshare and ten management positions. The jury found for CGI on the breach of contract claim. But, the circuit court granted FCi’s motion to strike and set aside the jury verdict, finding that the language in the teaming agreement that obligated CGI to award a subcontract to FCi was unenforceable. CGI appealed.

The Virginia Supreme Court upheld the circuit court’s ruling that there was no breach of contract. The Court found that the teaming agreement provisions make it clear that the parties never agreed to final provisions for a subcontract, and that it was expressly conditioned on future events and negotiations, including CGI’s “best and final proposal” to FCi. The Court relied on precedent, saying that at best the teaming agreement imposed a framework for good faith negotiations between the parties.

The Court further emphasized that well-established precedent compelled it to not impose a subcontract on teaming agreement parties who have expressly agreed to further negotiations. They said that such an agreement cannot be said to be a contract that the parties have made for themselves.

The Court also upheld the circuit court’s ruling that the terms of the amended teaming agreement could be used to limit recovery of fraud damages. The parties failed to include terms in the teaming agreement by which lost profits could be reasonably measured, so the Court said that CGI could not recover any lost profits based on this claim.

The fact that the teaming agreement was conditioned on further negotiations between the parties resulted in CGI being denied any relief at all when it came to enforcing the terms of the agreement on workshare. The Virginia Supreme Court held that the teaming agreement was just an “agreement to agree,” requiring further negotiations.

This decision does not mean that all provisions of a teaming agreement are unenforceable. This decision concerns only the “agreement to agree” nature of an agreement to negotiate a subcontract at a later date. Many provisions in a teaming agreement are still enforceable, and teaming agreements will continue to be valuable documents for government contractors. This decision highlights that government contractors need to know the limits of a teaming agreement in their jurisdiction and understand how to work within these limits.

CGI Federal Inc. v. FCi Federal, Inc., No. 170617 (Va. June 7, 2018).

Berenzweig Leonard is teaming up with Red Team Consulting for a monthly newsletter featuring upcoming contracts, key protest decisions, events, and more. This post was published in the July 2018 Monthly Insights newsletter. To sign up for Monthly Insights, please click here.

Stephanie Wilson is a Partner at Berenzweig Leonard, LLP. Stephanie and Terry O’Connor lead the firm’s Government Contracts practice.

Law Clerk Ashton Copeland is a 2L at the Antonin Scalia Law School, George Mason University School of Law.