Underlying Assertion of Negligent Misrepresentation Is Not Necessarily an Occurrence

Nora Valenza-Frost | PropertyCasualtyFocus | September 14, 2018


Courts sometimes struggle with the issue of whether property damage arising in the context of a contractual relationship, particularly in construction contracts, constitutes an “occurrence” under a standard commercial general liability (CGL) policy. Generally, but not always – and it varies from jurisdiction to jurisdiction – courts regard contractual breaches as non-accidental conduct, and/or apply the so-called “business risk” exclusions (such as the standard CGL “Your Work” exclusion), in finding no coverage. Lexington Ins. Co. v. Chicago Flameproof Wood Specialties Corp., No. 17-cv-3513 (N.D. Ill. Aug 10, 2018), a recent decision from a federal court in Illinois, is illustrative.

Lexington Insurance Company (“Lexington”) issued a CGL policy to Chicago Flameproof and Wood Specialties Corporation (“Chicago Flameproof”). The policy provided that Lexington would pay sums that Chicago Flameproof “becomes legally obligated to pay as damages because of bodily injury or property damage” that is “caused by an occurrence that takes place in the coverage territory” and that “occurs during the policy period.”

A framing contractor, required by contract to use fire-retardant-treated lumber meeting International Building Code (IBC) requirements, procured lumber from Chicago Flameproof to be used for the exterior walls of four buildings. The framing contractor contracted with Chicago Flameproof to buy D-Blaze lumber, but instead, was provided non-IBC-compliant lumber. As a result, the framing contractor was ultimately instructed to remove and replace the non-compliant lumber and sued Chicago Flameproof for negligently or fraudulently misrepresenting the type of lumber it was providing, resulting in damage to the exterior walls, wiring, and Tyvek insulation on the buildings, among other things (the “Underlying Actions”).

Chicago Flameproof sought coverage from Lexington, but Lexington challenged coverage and filed a declaratory judgment action, arguing that its duties to defend and indemnify were not triggered “because the claims against Chicago Flameproof do not involve property damage, were not the result of an occurrence, and were otherwise excluded by the policy’s business risk exclusions.” The parties moved for summary judgment, agreeing that no factual dispute existed and the only issue was the interpretation of the CGL policy, a question of law.

The court disagreed with Lexington’s argument that there was no “property damage” as the framing contractor sought to hold Chicago Flameproof “liable for physical injury to tangible property.” The court also disagreed with Lexington’s argument that the damage alleged was “nothing more than economic injuries stemming from the repair and replacement of the non-compliant lumber,” as there were “allegations of physical alterations to property other than the insured’s product” caused by the removal process which could fall within the definition of “property damage.”

However, the court acknowledged that, “for property damage to be covered by the CGL policy, it must be caused by an ‘occurrence.’” Illinois courts find an “occurrence” in the insurance context to mean:

An unforeseen occurrence, usually of an untoward or disastrous character or [a] … sudden, or unexpected event of an inflicting or unfortunate character…. However, even if the person performing the act did not intend or expect the result, if the result is the rational and probable consequence of the act, or, stated differently, the natural and ordinary consequence of the act, it is not an accident for liability insurance purposes.

Chicago Flameproof argued that the Underlying Actions satisfy the “occurrence” requirement “because they assert negligent misrepresentation and because Chicago Flameproof did not expect or intend the injuries to other building materials.” The court disagreed, and focused on the conduct alleged: Chicago Flameproof “failed to exercise reasonable care when it represented that it had D-Blaze lumber in stock and when it did not inform [the framing contractor] that its orders could be fulfilled.” Although couched in negligence terminology, the thrust of the complaints “is that Chicago Flameproof engaged in deliberate conduct – the shipping of the wrong lumber and the concealment of that fact – that caused the alleged property damage.”

The court reasoned that, even though Chicago Flameproof’s delivery of the lumber was allegedly intentional “does not necessarily mean that it expected or intended the collateral injuries to the exterior walls, wiring, and insulation…. Chicago Flameproof could have and should have reasonably anticipated that such injuries could result from supplying” the wrong lumber, which had to be torn out of the buildings. “These damages are the natural and ordinary consequence of knowingly supplying a non-compliant product and thus do not potentially fall within the CGL policy’s coverage.”

In concluding, the court stated that, although the Underlying Actions contain “one count for negligent misrepresentation, mere inclusion of a negligence theory does not – and cannot – by itself satisfy the occurrence requirement. Nowhere in the complaint are there allegations of an unforeseen or accidental event that produced property damage.”

This case is a helpful reminder that liability insurance cannot be used as a warranty for an insured’s failure to fulfill contractual undertakings, and that even if couched in a complaint as “negligent” conduct, when assessing an insurer’s duty to defend and indemnify under a CGL policy, careful consideration should be paid to the cause of the alleged damages when determining if there is an “occurrence.”

Teaming Agreements: Avoiding Unenforceable ‘Agreements to Agree’

Chris A. Raftery | Faegre Baker Daniels | September 4, 2018

In the construction industry, we see a growing trend of contractors, subcontractors and designers collaborating to pursue large construction contracts. Among many benefits, these collaborations enable companies to pursue projects that would otherwise be too large by combining their resources and skill sets with compatible partners. The terms of these collaborations are often outlined in “teaming agreements,” which define the relationships, rights and responsibilities of both parties during both the pursuit of the contract and, if the contract is awarded, performance of the project.

However, what happens when one of the parties breaks the terms of that teaming agreement?

When teaming agreements contain sufficient specificity of terms, they are typically enforced and the breaching party will likely be found liable for damages. However, teaming agreements that are not reasonably complete, definite and clear may be declared unenforceable as mere “agreements to agree.” Under this scenario, a party to a teaming arrangement that fulfills its obligations while pursuing a contract may be left shortchanged if its partners don’t fulfill their promises when the project is ultimately awarded.

Parties to a teaming agreement can increase the likelihood that their agreement will be enforced by adhering to the following “Don’ts” and “Dos”.


  • Agree to negotiate essential terms at a future date. In its recent ruling in Navar, Inc. v. Fed. Bus. Council, the Supreme Court in Virginia found that an agreement between a contractor and subcontractors for a federal construction contract was unenforceable as it “merely set out agreements to negotiate future subcontracts in good faith.”
  • Rely on oral agreements. In Abt Assocs., Inc. v. JHPIEGO Corp, a federal court in Maryland held that a teaming agreement was unenforceable since it was not executed and did not indicate mutual agreement on the essential terms.
  • Include uncertain terms. In W.J. Schafer Assocs., Inc. v. Cordant, Inc, the Supreme Court in Virginia found a teaming agreement between a contractor and subcontractor unenforceable as it, among other things, did not identify a price for the item to be supplied by a subcontractor.


  • Identify essential terms. Typically, every contract must at least include the identity of the parties, the subject matter and consideration. Within those parameters, each project is different, and therefore the essential terms of an agreement differ project-by-project. For instance, under most scenarios, pricing is an essential term that must be carefully delineated. However, one California court found, in Krantz v. BT Visual Images, L.L.C., that identification of a specific price was not essential to the enforceability of a teaming agreement, as price there was necessarily dependent on subsequent events.
  • Draft a teaming agreement that clearly outlines the arrangement, and support the existence of the agreement with other written evidence. A federal case in Pennsylvania, ATACS Corp. v. Trans World Commc’ns, Inc., exemplifies this need. Under a teaming arrangement in which two contractors pursued a contract from the Greek army, one party agreed to assume financial responsibility for the contract, while the other party agreed to be a major subcontractor to assist in the proposal preparation. The terms of the parties’ understanding were documented in a letter which described the relationship as a “strategic alliance.” After the Greek government awarded the contract, the prime contractor awarded the proposed subcontractor’s work to another company that offered to do the work for less. The federal court upheld the “teaming agreement” as valid and enforceable given the specificity of the duties carefully described in the letter and the existence of several other written communications which supported the terms of the agreement. The judgment was affirmed by the United States Court of Appeals for the Third Circuit.

In sum, in order to avoid potential problems in your teaming arrangement, carefully consider the essential terms of the collaboration and clearly incorporate them into a written agreement.

Avoid Delay or Get Ready to Pay: The Risks of “Time-Is-of-The-Essence” Clauses

Stephen Orlando | Gordon & Rees Scully Mansukhani | August 10, 2018

Like death and taxes, construction delays are inevitable. Even the most cautious, diligent contractor may face subcontractor disputes, supply shortages, or inclement weather which slows down a project. Even if the contractor avoids unexpected problems, the sheer complexity of a job may cause a contractor to exceed the deadlines proposed in a contract.

Fortunately, courts recognize the practical reality of construction projects and the unavoidable delays which may arise. Therefore, as a general rule, a contractor is only liable for delayed completion of a project if the delay resulted from the contractor’s unreasonable performance of his or her work. Reasonable performance will typically serve as a defense to a claim of delayed completion. This defense is a vital asset when a contractor surpasses the project’s expected timeframe.

Like many defenses, however, a contractor can contractually waive his or her right to rely on reasonable performance. This type of waiver is referred to as a “time-is-of-the-essence” clause. The American Institute of Architects provides an example of such a clause:

Time limits stated in the Contract Documents are of the essence of the Contract. By executing the Agreement the Contractor confirms that the Contract Time is a reasonable period for performing work.

In its commentary to the example, the AIA explains that this clause makes timely performance an “express condition” of the contract. Any delay by the contractor constitutes a material breach. This clause precludes the contractor from asserting that the deadlines within the contract were unreasonable or that the contractor acted reasonably in attempting to prevent delays.

In light of this, contractors should proceed with caution before agreeing to a “time-is-of-the-essence” clause. Under such an agreement, a contractor’s failure to meet deadlines could excuse the owner’s financial obligations under the contract. Additionally, the owner may pursue a claim for any foreseeable damages stemming from the delay, including expenses, lost revenue, and lost business opportunities. In the context of commercial properties, these damages can be significant.

If a contractor does proceed with a “time-is-of-the-essence” clause, he or she should also consider a liquidated damages clause establishing the specific damages which the owner would recover in the event of a breach. This clause provides certainty to the owner, who avoids the burden of proving actual damages at trial. The clause also minimizes risk for the contractor, who can assess the consequences of a breach prior to commencement of the project. In any contract which identifies time as an express condition of performance, the contractor should consider liquidated damages as a means of mitigating risk.

A contractor should also consider insurability prior to entering into any time-contingent contract. Courts regularly interpret a failure to comply with “time-is-of-the-essence” clauses as a breach of contract rather than an act of negligence. Many insurance policies provide coverage for negligent performance of a contract, but expressly exclude coverage for breach of contract. Other policies may provide coverage only for “wrongful conduct,” which is generally limited to the ream of tortious conduct. Therefore, while an insurance policy may provide coverage for delays caused by a contractor’s unreasonable performance (i.e., negligent performance), the same policy may not provide coverage for a contractor’s failure to comply with a “time-is-of-the-essence” clause.

In the context of litigation, time-contingent contracts expose the contractor to additional theories of liability, reduce the plaintiff’s burden, and limit the contractor’s defenses. The plaintiff can still assert a claim of negligence for unreasonable delay. The plaintiff can simultaneously assert a claim for breach of contract. Even if the jury does not find negligence, it can still award damages under a theory of breach. In defending such a claim, the contractor is limited to contractual defenses such as waiver or impossibility.

Unfortunately, owners often set time-contingent clauses as non-negotiable terms in a contract. In particular, government contracts frequently contain such clauses. Before entering into this type of an agreement, the contractor should carefully evaluate his or her potential exposure as well as applicable insurance coverage in order to mitigate risk.

As a final note, particularly cautious contractors can also consider a “no-damages-for-delay” clause. Under this clause, the owner waives any damages arising out of delays in completion, even if the delays result from unreasonable performance. Courts generally uphold such agreements, which provide further protection to the contractor in the event of a delay.

Can’t Get a Written Change Order? Document, Document, Document

Todd M. Heffner | Smith Currie | August 20, 2018

Most construction contracts require that any changes to the work be made formally, in writing, via a change order, work directive, or similar written document. Frequently, however, changes to the work or extra work are communicated orally by the architect, engineer, or owner’s representative, instead of in writing. What is the contractor to do in such a situation? The best option is follow the provisions of the contract and demand a written change order before performing changed work. Unfortunately, the realities of construction sometimes make it impossible to get the changes in the proper format in a timely manner. Savvy contractors will maintain schedule and produce written documentation of the change in lieu of a formal change order or directive. But many contractors will simply proceed with the changed work, relying on the owner, architect, or engineer to do the right thing and stand by their oral instructions.

So what happens if changes are communicated orally and a dispute over the changes arises? The general trend is for courts to allow a contractor to recover for the extra work that was performed. But there are still certain jurisdictions and situations in which contractual requirements for changes to be in writing will be strictly enforced. Even in jurisdictions where contractors have been able to recover, it is an expensive and time consuming challenge to convince a court to ignore the plain language of a contract.

Relying on the good will of the owner, architect, or engineer is rarely a good idea, even for contractors who have a long working relationship. If the work must proceed without formal authorization, it should be possible to obtain informal documentation. For example, the contractor can send an email to whoever is directing the work requesting clarification of what is to be done. The email chain will provide written evidence that the contractor did not proceed as a volunteer or consider the changed work to be in the original scope.

Even if the owner, architect, or engineer refuses to respond to an email request for clarification, the contractor can still create written documentation of the oral directive to perform extra work. This can be done initially by sending a long email documenting exactly what was directed and why it constitutes a change to the work. Any such email should be followed by a letter sent via certified mail. Both email and letter should give the owner, architect, or engineer a limited time to disagree, e.g., “We will proceed with this work in x days unless you direct otherwise.”

If the party directing the work is unwilling to send something informal in lieu of whatever the contract requires, the contractor must proceed very cautiously. Why the reluctance to put the changes in writing? Whatever the reason, this is not an enviable situation to be placed in, as most contracts will also impose penalties if work is delayed or stopped. Along with producing its own written documentation, the contractor can point out that it was the owner who put the requirement for written documentation in the contract, while also noting that it is mutually beneficial to have a common understanding of the required work at the time the work is to be performed. Any misunderstanding is far easier to address contemporaneously rather than months or years after the work is complete. This issue also affects subcontractors. Subcontractors who rely on particular general contractors for repeat work will especially benefit from a conciliatory approach. Many subcontractors simply cannot afford to bring a lawsuit because there was misunderstanding about a verbal change to the work.

Another contract clause to be aware of in this context is what can generically be called an “anti-waiver” clause. An anti-waiver clause is one that claims to invalidate the waiver of any contract provision, unless the waiver is expressly in writing. In other words, an anti-waiver clause could require written confirmation that the verbal change at issue does not need to be provided per the terms of the contract. Generally speaking, anti-waiver clauses are no more effective than the changes clauses. The legal principles that would allow a contractor to overcome not following a written change requirement are the same legal principles that would allow it to overcome the anti-waiver clause. That said, it is always better to follow the terms of the contract to the greatest extent possible. If this is impossible—document, document, document.

Virginia Supreme Court Puts Contractor Teaming Agreements on Life Support

Paul R. Hurst, Kendall R. Enyard and Thomas P. Barletta | Steptoe & Johnson LLP | July 17, 2018

Although teaming is not officially dead under Virginia law, teaming agreements typically used by contractors may well be on life support after a recent Virginia Supreme Court decision holding that the post-award provisions of a teaming agreement relating to the award of a subcontract were unenforceable.

In CGI Fed. Inc., v FCi Fed., Inc., Record No. 170617 (Va. S. Ct. June 7, 2018), the Virginia Supreme Court (the Court) affirmed a lower court’s decision to set aside a jury verdict for $12 million in damages arising out of breach of contract and fraudulent inducement claims. The Court determined that the teaming agreement at issue did not create an enforceable obligation to enter into a subcontract with specific terms, but rather included language that expressly conditioned the formation of a subcontract on future events and negotiations and included other terms indicating that the relationship might terminate without the formation of a subcontract. Further, the Court found that CGI Federal, Inc. (CGI) could not recover damages on its fraudulent inducement claim because CGI was not entitled to lost profits under a subcontract in which the final terms were uncertain and unenforceable. The Court also affirmed the lower court’s ruling granting summary judgment in favor of FCi Federal, Inc. (FCi) on CGI’s alternative claim of unjust enrichment.


In 2012, CGI and FCi entered into a teaming agreement to prepare a proposal for a US State Department contract for visa processing that was set aside for small businesses. The decision to form a team arrangement provided benefits to each party – CGI, as a large business, was not eligible to bid on the contract and FCi, although it was small, did not have the capabilities to perform the contract alone. The teaming agreement provided that FCi would submit the proposal as the prime contractor and CGI would be included in the proposal as a subcontractor.

Under the teaming agreement, CGI agreed: (a) that it would not team with or assist any other contractor competing for the visa contract; (b) to furnish personnel, materials, and information necessary to assist FCi in preparing the proposal; and (c) to reasonably cooperate with FCi to ensure the success of the proposal. CGI’s and FCi’s teaming agreement also included provisions relating to a subcontract for CGI if FCi won the prime contract. Those provisions included:

  • A Statement of Work which provided that CGI would receive a workshare of 45% the total contract value, but which also made CGI’s workshare “subject to the final solicitation requirements” for the visa processing contract;
  • An agreement to engage in good faith negotiations to enter into a subcontract subject to applicable laws, regulations, terms of the prime contract and CGI’s best and final proposal to FCi;
  • A provision subjecting the subcontract to various additional conditions, including the “‘[m]utual agreement of the parties to the statement of work, financial terms and reasonable subcontract provisions;’” and
  • A clause providing for the expiration of the teaming agreement if the parties could not agree on terms and conditions for a subcontract within 90 days of the contract award to FCi;

The teaming agreement also provided that each party would bear its own costs, expenses, risks and liabilities arising out of the performance of the teaming agreement, and precluded the recovery of lost profits for a breach of the teaming agreement.

FCi submitted the jointly prepared bid to the State Department on December 6, 2012; however, FCi did not share the proposal with CGI and failed to inform CGI that the proposal allocated only 38% of the workshare to CGI. The State Department identified certain deficiencies in FCi’s proposal and directed FCi to submit a revised proposal. In response, FCi informed CGI additional subcontractors were needed and that CGI’s workshare therefore could not exceed 41%. In exchange for accepting a 41% workshare, CGI requested and FCi agreed to allocate 10 management positions for CGI employees for work on the contract. The parties executed an amended teaming agreement that reflected the agreed upon changes to the workshare percentage and the allocation of 10 management positions to CGI, but did not amend or alter any of the other provisions of the original teaming agreement. However, the day after the parties executed the amended teaming agreement, FCi submitted a revised proposal to the State Department that reflected only a 35% workshare for CGI and reserved all management positions for FCi employees.

On August 2, 2013, the State Department awarded FCi the visa processing contract, but the performance of the contract was delayed due to multiple protests related to FCi’s small business status. To resolve the protests, FCi agreed to give the protester work under the contract which, in turn, reduced CGI’s workshare even more. After FCi’s settlement with the protester, the State Department requested a revised proposal. In its second revised proposal, FCi increased its workshare to 75% and it lowered CGI’s workshare to 18% without CGI’s knowledge.

On March 31, 2014, the State Department finalized FCi’s contract award for a base year contract with four annual renewal options for a total value of $145 million, and FCi and CGI then began negotiations of a subcontract. Initially, FCi offered CGI 18% workshare and subsequently increased the offer to 22% workshare. The parties agreed to a temporary agreement that allowed CGI to perform work on the visa contract under which CGI was paid $2 million. On November 10, 2014, FCi terminated CGI for cause related to a staffing dispute.

The Trial Court’s Decision

On March 25, 2015, CGI initiated a lawsuit against FCi for breach of contract for FCi’s failure to extend a subcontract to CGI with a 41% workshare and 10 management positions for CGI employees, unjust enrichment (which was plead in the alternative to the breach of contract claim) and fraudulent inducement relating to the amended teaming agreement under which CGI sought to recover the lost profits it expected to earn under the subcontract. At the close of evidence, FCi moved to strike on the basis that the post-award provisions of the teaming agreement were unenforceable and that CGI failed to prove its damages on the fraudulent inducement claim. The trial court found that the provision in the teaming agreement that required the parties to enter into a subcontract within 90 days of contract award, limited damages. The court also took FCi’s motion to strike under advisement, but submitted the case to a jury. The jury awarded CGI $11,998,000 for the breach of contract and fraudulent inducement claims.

After holding a hearing on FCi’s motion to strike, the court vacated the jury verdict on CGI’s breach of contract claim and the $12 million award to CGI. On the breach of contract claim, the court found that the teaming agreement was unenforceable because the post-award terms were “aspirational only” as neither party agreed to be bound by the teaming agreement’s post-award provisions related to workshare and management positions until a formal subcontract was negotiated and executed.

The court upheld the jury’s finding that FCi fraudulently induced CGI to enter into the amended teaming agreement. However, it vacated the jury’s award of lost profits because the parties had not agreed to a subcontract within 90 days of contract award to FCi; it went on to hold that CGI therefore was precluded from recovering lost profits beyond the 90 day period and that CGI had failed to prove lost profits during that limited period. The court also granted FCi’s motion for summary judgment on the unjust enrichment claim and entered final judgment for FCi on all claims.

Virginia Supreme Court’s Analysis

On appeal, the Virginia Supreme Court affirmed the trial court’s ruling vacating the jury’s verdict on the breach of contract claim. The Court found that the “amended teaming agreement did not create any enforceable obligation for FCi to extend a subcontract with a 41% workshare and 10 management positions to CGI.” Relying on Navar, Inc. v. Fed. Bus. Couns., 291 Va. 338, 347 (2016) (Steptoe’s Navaradvisory can be found here), the Court found that the amended teaming agreement, read as a whole, did not create any enforceable post-award obligations for FCi to extend work to CGI as a subcontractor and that, at most, the amended teaming agreement imposed a framework for good faith negotiations of a final subcontract.[1]

Specifically, the Court determined that the amended teaming agreement contained several provisions that expressly conditioned the formation of a subcontract on future events and negotiations which, the Court concluded “make clear the parties never agreed to the final terms of a subcontract.” For example, the Court found that the Statement of Work’s provision regarding CGI’s post-award workshare was subject to the final solicitation requirements of the visa processing contract. Similarly, it pointed to the amended teaming agreement’s requirement that parties enter into “good faith negotiations for a subcontract . . . subject to applicable laws, regulations, terms of the prime contract and . . . [CGI’s] best and final proposal to FCi;” and the provision for termination of the teaming agreement if the parties could not reach an agreement on the terms and conditions of a subcontract within 90 days of award of a prime contract as evidence that the parties’ “contemplated [that] a subcontract may not materialize after the prime contract award to FCi and [had] created a mechanism for ending their relationship.” Finally, the Court also stated that just as CGI could not rely on the teaming agreement to get a subcontract from FCi, “FCi could not have relied on the agreement to require CGI to perform work as a subcontractor.”

The Court also found that the trial court correctly vacated the jury’s damages award, but the Court did not concur with the lower court’s ruling that CGI’s fraud damages were limited by the 90-day termination provision in the amended teaming agreement. Instead, the Court held that “lost profits are not recoverable for a fraudulent inducement claim when they are premised on the unenforceable provisions of a contract;” here, the unenforceable post-award provisions of the amended teaming agreement. The Court also noted that CGI proved the existence of its lost profits based on the amounts it would have earned under the subcontract. The Court, however, concluded that because the final terms of the subcontract, including CGI’s workshare, were uncertain (subject to negotiations and contingencies), any damages based on lost profits under the prospective subcontract were therefore also uncertain and not recoverable.

Finally, the Court affirmed the lower court’s entry of summary judgment in favor of FCi on CGI’s unjust enrichment claim under which CGI sought to recover the expenses it incurred in helping FCi prepare the proposal and any profits that FCi realized from performing the work it had promised to CGI. The Court rejected CGI’s claim on the basis that the amended teaming agreement created an enforceable express contract that governed the parties’ relationship in preparing the proposal for the State Department contract. For example, the amended teaming agreement set forth reciprocal obligations related to proposal preparation and negotiation of a subcontract and included provisions that required the parties to bear their own costs of performance and precluded them from recovering lost profits for a breach of the amended teaming agreement. As a result, the Court determined that CGI, as a victim of fraudulent inducement, was entitled to either rescind the contract or affirm the contract and sue for damages. Here, the Court held that CGI was not entitled to recover on its quasi-contract claim because CGI sued for contract and tort damages and therefore, it affirmed the amended teaming agreement and agreed to be bound by its provisions, which expressly barred the recovery of lost profits or expenses incurred to prepare the proposals.

Takeaways and Conclusion

CGI involved a fairly typical contractor teaming agreement – e.g., one that did not expressly provide for the award of a subcontract upon the award of a prime contract, made the award of a subcontract contingent on various future events, and provided for good faith negotiations of a subcontract and for termination of the teaming agreement if the parties failed to successfully negotiate a subcontract.

The Court’s decision essentially holds that such an agreement is unenforceable under Virginia law insofar as a prospective subcontractor seeks breach of contract damages for failure to award a subcontract pursuant to the teaming agreement. Likewise, the prime contractor under a teaming agreement cannot rely on that agreement to compel its teammate to perform as a subcontractor. The Court’s opinion also appears to foreclose recovery of lost profits under a fraudulent inducement claim insofar that claim is based on an unenforceable contract.

On the other hand, the Court’s opinion recognizes that the typical contractor teaming agreement can create an enforceable express contract relating to the preparation a proposal and negotiation of a subcontract. The opinion also leaves open the possibility of a breach of contract action for failure to conduct good faith negotiations for a subcontract. However, the damages potentially recoverable in such an action are uncertain, although B&P costs could be one potential measure. Moreover, assertion of a contract (or tort) claim might preclude recovery under an unjust enrichment theory for failure to engage in good faith negotiations for the award of a subcontract.

CGI was not well served by the teaming agreement with FCi: A jury found that CGI was fraudulently induced to execute the amended teaming agreement; and although CGI continued to assist FCi in proposal preparation, it was then “left at the altar” without a subcontract or a remedy. However, government contractors will continue to use teaming agreements because joining complementary capabilities improves the ability of the team members to obtain contract awards and because many procurements are now “team versus team.”

A typical teaming agreement may be entered into well before the RFP has been issued and at the time of formation issues such as whether the teammate improves the ability to win the award and whether the teammates can work together will predominate over considerations of enforceability. However, the Court’s decisions in CGI and Navar demonstrate that enforceability can be a significant issue if one party seeks to require its teammate to meet certain of its obligations under the teaming agreement or to recover damages for its failure to do so. Given this uncertainty, the companies entering teaming agreements should consider exploring alternative choice of law provisions that are more hospitable to the enforcement of teaming agreements.

They should also consider drafting teaming agreements that are as specific as possible regarding the terms of the anticipated subcontract and that limit or avoid provisions that condition the formation of a subcontract on future events and negotiations. However, accomplishing this can be difficult if the program’s requirements are not known or finalized at the time the parties negotiate the teaming agreement so that it may be difficult to negotiating a teaming agreement early in the pursuit of a contract opportunity that will be fully enforceable in Virginia.

That said, the decision of the US District Court for Eastern District of Virginia in Cyberlock Consulting, Inc. v. Info. Experts, Inc., 939 F. Supp. 2d 572, 578 (E.D. Va. 2013), aff’d, 549 Fed. Appx. 211 (4th Cir. 2014), may provide some guidance for developing a potentially enforceable teaming agreement. There, the District Court, applying Virginia law, struck down a teaming agreement as an unenforceable agreement to agree where, looking at the agreement as a whole, the Court concluded that the parties did not manifest an intent to be bound by the agreement. In reaching that result the Court cited the several elements of the teaming agreement (similar to those in the FCi/CGI teaming agreement) as evidence that the parties contemplated that a formal subcontract would have to be negotiated and executed and that the future transaction “might not ever come to fruition.” See 939 F. Supp. 2d at 575-75, 581-82. In that regard, the District Court’s interpretation of Virginia law as applied to the teaming agreement at issue was consistent with the Virginia Supreme Court’s decision in CGI. However, in setting out the facts of the case, the District Court noted the teaming agreement at issue was the second of two teaming agreements between the parties relating to contract opportunities with the Office of Personnel Management. Although the first teaming agreement was not at issue in the case and the Court did not otherwise discuss its enforceability, its discussion of that agreement provides an interesting contrast with the second, unenforceable, agreement. In particular, the Court observed that the first teaming agreement:

  • Had several attachments, including (i) a Statement of Work, which “specifically covered provisions including the period of performance, place of performance, the requirement for key personnel, the format of the contract [IDIQ], and project management requirements for the work that Cyberlock would be performing for [the prime contractor],” (see id. at 574), and (ii) “the specific subcontract” that parties intended to enter following award of a prime contract, id. at 574-75;
  • Provided that the prime contractor “‘will . . . enter into the subcontract attached to this Agreement as Exhibit D” within five business days of award of the task order to the prime contractor. id.; and
  • Identified a number of events that would result in its termination, but “none of [them] was the failure of the parties to successfully negotiate a subcontract.” Id.[2]

While provisions such as these do not ensure enforceability, they do address some of the shortcomings in teaming agreements like those in CGINavar and Cyberlock that have been found to be unenforceable under Virginia law.