Sparky Electric is an experienced contractor. Most of its business has been in light commercial construction, such as midsize office buildings, an occasional strip mall and a few schools. Now a large project is in the works, and the owner is looking for design/build electrical contractors. The owner also wants the bid proposals to include layouts and a draft set of electrical specifications.
For a number of years, Sparky has had jobs with architect Joe Completely, AIA, and they have a good relationship. Because Sparky thinks that this new job might be a little beyond his company’s reach, he meets with Completely to discuss a joint bid proposal. The idea is that the two companies would prepare a thorough bid package. If Sparky got the job (the owner will not take bids from joint ventures), Completely would provide detailed drawings, handle all paperwork and directly communicate with the owner. Sparky would provide manpower, equipment, materials and supervision. With this general idea in mind, profits would be shared 35 percent for Completely, 65 percent for Sparky. Sparky and Completely sign a multipage memorandum of understanding and proceed with the design proposal.
Do Sparky and Completely have an enforceable agreement? If Sparky gets the contract, is he bound to use Completely under the terms previously agreed upon?
These kinds of understandings generically fall under the heading “teaming agreements.” The parties have not formed a partnership or joint venture, and often the agreement is ad hoc (for one specific job). The motivations for such a collaborative effort are as varied as the parties. It may be that the job would be a financial strain without a team behind it, or the team may combine talents and abilities that neither side has in full.
The problem comes about because of long-standing principles in the law as to what is and what is not a contract. Considering Sparky’s dealings with Completely, it is clear that, if Sparky does not get a contract from the owner, there are no continuing obligations between Sparky and Completely. The agreement should be a current contract, which depends on a future event—the owner awarding the contract. The agreement should not be an understanding that a final contract will be entered into in the future, which is a letter of intent.
In many of the early cases that discussed teaming agreements, the courts characterized the teaming concept as an agreement to agree to a contract in the future. Worse, from a traditional legal perspective, this agreement to agree was contingent on an uncontrollable future event, being the award of contract by the owner. As such, the teaming agreement was in the same no-man’s land as letters of intent.
More recent cases have focused on the amount or lack of detail within the teaming agreement in deciding whether a contract has been formed. Sparky should have read Cyberlock Consulting Inc. v. Information Experts Inc. from the federal district court of Eastern Virginia.
In Cyberlock, two companies agreed to work together, at their own costs, to secure a contract with a federal agency. The written teaming agreement anticipated that, once Information Experts got the contract, it would subcontract specific work to Cyberlock. For that purpose, the teaming agreement specified the parties’ project management responsibilities and included a subcontract form, which was to be used if they got the job.
The weakness of Cyberlock’s agreement, and what made it fall short of being a contract, lay in the parties’ apparent inability to know what the owner’s final scope of work would be or what the owner’s final terms and conditions would include. As a result, Cyberlock and Information Experts inserted some open-ended language that, if there were an award of contract from the owner, the final subcontract terms were subject to further negotiations. The court ruled that “these post-award obligations [to negotiate in good faith] are an unenforceable agreement to agree.”
Making matters worse, so far as the court was concerned, was language in the teaming agreement that the agreement would terminate if negotiations over subcontract terms failed. This termination clause was interpreted as a clear indication that the parties did not have a final agreement between themselves at the time the bid proposal was submitted or at the time of the owner’s contract award.
This issue of having the final contract subject to further negotiations was similarly the basis for a Pennsylvania court to rule that a teaming agreement was not a contract in Trianco LLC v. International Business Machines Corp.
The question is how do you make a teaming agreement so complete that it can be deemed to be contract? A simple answer is to make the agreement look like a contract and not like an agreement to “wait and see what happens, and we’ll work out the details later.”
As with contracts generally, there is no one form or format for a valid teaming agreement. There are, however, examples of agreements that have been accepted by the courts. One approach consisted of the following elements:
• A statement of work that identifies each party’s tasks and responsibilities under “statement of work”
• The statement of work that included the period of performance, the place of performance, requirements for key personnel and project management requirements
• A specific contract or subcontract that the parties intend to enter upon the award by the owner, with a time limit for the parties to sign that contract
The following statements are elements that should not be included:
• Specification that the final contract terms shall be negotiated after the contract award
• A statement that the final contract is subject to further discussions of profit and loss sharing
• A termination clause allowing either party to avoid signing the final contract if final terms are not agreed upon
For electrical subcontractors, understanding these distinctions can help save you money and effort. It may be more likely that a general contractor would want to team up with you than you, like Sparky, would join with a designer.
I have been involved in situations where an electrical contractor spent months as part of a “team,” putting together drawings and specifications only to have his work product turned over to another electrical subcontractor once the general got the award. Without an enforceable teaming agreement, the electrical sub had few options to demand either receiving the subcontract or recouping its bidding expenses.