New frontiers for teaming agreement enforcement: some courts are prepared to enforce teaming agreements using remedies historically reserved for only the most egregious of breach of contract cases.
In the past, teaming agreements, although favored and endorsed by the government (see FAR Sub. Part 9.6), have at various times raised the issues of enforceability. They have been considered merely as "agreements to agree" and not binding contracts, since (1) there was no consideration to support future promises of either party, and (2) many of the terms of the resultant subcontracts were left for negotiation after the prime contract award. (1) Recently, the courts have overcome this problem by reasoning that a teaming agreement will be enforced, provided that there is both evidence of the parties' intention to be bound by the agreement and that the agreement includes sufficient terms. (2)
Another question relating to enforceability is that by their essence, teaming agreements limit competition and therefore may constitute restraints of trade. While the issue of potential antitrust violations remains a potential hazard, such concerns would probably not be a roadblock to their enforceability--except in the most egregious circumstances, such as one bidder tying up a patent holder on a critical patent or a critical sole-source, to preclude competition from other bidders.
Now that these classical impediments to the enforceability of teaming agreements have been slowly laid to rest, there have been two recent cases that have further enhanced the legal viability of teaming agreements. In each of these cases, the court granted the party seeking to enforce the teaming agreement an extraordinary remedy--in one case, punitive damages, and in the other, specific performance. Furthermore, additional remedies necessary for the party seeking to enforce a teaming agreement may be on the horizon.
Punitive damages are rarely awarded in breach of contract actions. The concept behind such an award is that the wrongdoer's actions have risen to such a level that compensatory damages alone will not right the wrong to the plaintiff, and the defendant's heinous acts should be punished by an award to the plaintiff of exemplary damages. This extraordinary award of damages has in the past not been associated with the breach of teaming agreements. However, in Cable & Computer Technology, Inc. (CCT) v. Lockheed Sanders Inc. (Lockheed) and Lockheed Martin Corporation (LMC), the United States Court of Appeals for the Ninth Circuit, in affirming the District Court for the Central District of California, CCT v. Lockheed, and LMC, found that defendant, Lockheed, had "breached its teaming agreement with CCT," interfered with CCT's prospective economic advantage of a prospective relationship with its customer, and committed a reprehensible fraud along the way. Although the punitive damages were not awarded for a breach of the teaming agreement per se, awarding punitive damages arising from the fraud associated with the breach of the teaming agreement is certainly a giant step forward in the overall enforceability of teaming agreements.
The facts giving rise to this extraordinary award were as follows: Lockheed and CCT entered into a teaming agreement to submit a bid to Boeing for a computer upgrade to the B-1B bomber. At the time, Lockheed was allegedly working on submitting the bid with its team member, CCT, Lockheed was supplying information on CCT's pricing to LMC, a Lockheed affiliate, who was also bidding on the same Boeing procurement. Less than two weeks before the bid submission, Lockheed withdrew from the CCT effort, leaving CCT without a partner to bid with and allowing LMC to win the Boeing contract on its own.
Again, it must be stressed that it was the fraud and not the breach of the teaming agreement that led to the award of punitive damages.
In another ground-breaking teaming agreement decision, a Virginia Circuit Court for Fairfax County, in EG & G Technical Services Inc. v. The Cube Corp., 2002 Va. Cir. Lexis 444 (Va. Cir. 2002), found that there was not only an enforceable teaming agreement but also a breach, and the appropriate remedy was specific performance.
Specific performance is an equitable remedy, requiring the defendant to perform some specific act. As an equitable remedy, it is generally not awarded if the plaintiff has a remedy at law (i.e., monetary damages). Courts traditionally refrain from awarding specific performance because it is injunctive in nature and very difficult to enforce--thus, such an order is extremely rare and unusual. Unlike most injunctive relief, which prohibits the defendant from doing some act, specific performance requires the defendant to perform some obligation that is far more difficult to enforce and therefore rarely imposed. Specific performance is usually restricted to instances where the subject matter of the litigation is unique in nature, such as real estate or personal services. A court-ordered specific performance in a contractual action is extremely rare and unusual. Here, the court not only dismissed the defendant's argument that the teaming agreement was unenforceable because it was an "agreement to agree"--it went even further, granting the extremely unusual remedy of specific performance.
The underlying facts of the EG & G Technical Services case (EG & G) are as follows: The government issued a solicitation for certain services at a flight facility on Wallops Island, Virginia. The contract was for an initial four-year term with a possible award for an additional six years. Only small businesses were permitted to compete for this procurement. Cube Corp. (Cube), being a small business, was eligible for the contract but lacked certain experience in some of the requirements of the contract and therefore teamed with EG & G (a large business) for certain services. The parties entered into a teaming agreement where Cube was to be the prime contractor and EG & G the subcontractor. Thereafter, Cube submitted its proposal, identifying EG & G as a significant subcontractor.
Cube was awarded the contract by the government but was unable to finalize the subcontract with EG & G, due to both disagreements over G & A rates and the scope of the termination for convenience clause. Notwithstanding the disagreements, the parties started work under the contract, using a Letter Subcontract Agreement. Upon the expiration of term of this agreement and the impasse in reaching a definitive subcontract, Cube advised EG & G that it would not further extend such a Letter Subcontract Agreement, thereby effectively terminating EG & G. EG & G brought an action to enjoin Cube from terminating EG & G's efforts.
The Fairfax VA Circuit Court initially issued a preliminary injunction, and after a trial, found that a valid contract existed between the parties. The court granted EG & G specific performance by requiring Cube to perform its subcontract with EG & G. Although the court could have made a finding of a valid contract and awarded the plaintiff EG & G monetary damages instead of specific performance, the court looked at the facts of the case and held that where "a legal remedy is especially difficult to fashion and damages are too speculative to calculate," specific performance was the appropriate remedy.
Such a finding in the EG & G case--which states that lost profits from future performance were speculative--leads us to examine what may be the next frontier in awarding damages for breach of teaming agreements. In many instances where there is a breach of a teaming agreement by a prospective prime contractor, the prospective subcontractor, even when it overcomes the "agreement to agree" defense, is oftentimes left with no adequate remedy.
On one hand, typically, the court will award the frustrated subcontractor its bid and proposal costs, which only restores the subcontractor to where he started, with no compensation for the lost business opportunity. The breaching prime contractor, on the other hand, continues to capitalize on his contract award and perhaps even enhances profits by finding a subcontractor that will perform the subcontract requirements for less compensation. This clearly does not adequately compensate the wronged subcontractor and allows the wrong-doing prime contractor to prosper.
Notwithstanding the EG & G case, I believe many courts will be hesitant to award specific performance because of concern for enforcing such awards. Therefore, I believe that the only valid remedy in such cases is to award the subcontractor lost profits, irrespective of the fact that they are speculative. While no party should receive a windfall, nevertheless, the subcontractor's windfall is clearly a lesser evil than allowing a wrongdoing prime to continue to profit from his breach. The time has come for the courts to revisit the awarding of future damages in breach of teaming agreement cases--regardless of concerns about their speculative nature.
In conclusion, it appears that the courts will no longer turn a deaf ear on enforcing teaming agreements. In fact, some such as those mentioned in this article are prepared to enforce teaming agreements, using remedies historically reserved for only the most egregious of breach of contract cases.
Furthermore, although the courts have resisted awarding lost profits to frustrated subcontractors in breach of teaming agreement cases, such recoveries, given the right fact pattern, are conceivable in the near future. Therefore, now more than ever, careful consideration guided by good expert advice should be expended in their drafting and negotiations of all teaming agreements.
1. See W.S. Shafer Assoc. Inc., v. Cordant Inc., 254 Va 514, 493 S.E.2d 512 (Va. 1997).
2. See Atacs Corp. v. Trans World Comm., Inc., 155 F.3d 659, 1998 U.S. App. Lexis 21851 (3d. Cir. 1998).
About the Author
GARY MARCUS, ESQ., is of counsel to the federal contracts practice group of Goldberg & Connolly and brings 30 years of experience in state, local, and federal contracting. He is also on the continuing studies faculty at Hofstra and Villanova Universities. Send comments on this article to firstname.lastname@example.org.
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|Date:||Apr 1, 2005|
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