Large-Scale Construction Projects: To Arbitrate, or not to Arbitrate – That is the Question

Robert B. Garner, David Kiefer and Gregg Jacobson | King & Spalding | March 8, 2019

Owners and contractors involved in large-scale energy and manufacturing projects face unique challenges in bringing projects to fruition. One challenge is negotiating and drafting a contract that places the parties in a fair position if problems arise during the project. In construction contracts for large-scale projects, multiple areas can be vitally important, such as intellectual property, change order rights, limitations of liability, liquidated damages and insurance. Somewhat overlooked, however, is the dispute resolution clause.

Through a dispute resolution clause, the parties decide in advance how disputes will be handled. The owner usually leads this discussion and develops a dispute resolution strategy early in contract negotiations, carefully considering the various parties (contractors, suppliers, and engineers) involved in the project, their typical requirements and expectations, and its own needs. The most basic question in developing a dispute resolution clause is whether arbitrators or a judge should decide the outcome of the case (and in the latter case, whether or not to permit a jury to have a role in the decision process). Both arbitration and litigation have advantages and disadvantages based on the circumstances.

Once that decision is made, the next issue is drafting the provision. If arbitration is chosen, one significant drafting concern is what law applies – the federal arbitration act or a state arbitration act. Even if the state arbitration act applies, drafters need to keep in mind that the federal act may govern in certain, specific situations. A well-drafted, customized dispute resolution clause will help ensure that the process goes smoothly, protecting against risk and potentially saving untold amounts of time and money.

To Arbitrate . . .

Enforcing a Foreign Judgment

Many sophisticated parties prefer arbitration in their agreements. One significant reason is that it can be much easier to enforce an arbitration award against a foreign party than a court judgment. This is due to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the “New York Convention.” Judgments from U.S. courts can be enforced overseas, but it is often a difficult and drawn-out process involving the Hague Convention. And of course, the longer the process to enforce the judgment, the more expensive it can be and the greater the opportunity for potential assets to slip away.

On the other hand, if a foreign country is a signatory to the New York Convention (and over 150 countries are), that arbitration judgment is directly enforceable in that country, barring a few narrow exceptions. Thus, owners of large-scale construction projects who envision using foreign contractors or suppliers, or contractors dealing with foreign ownership, will almost always find it easier in a foreign country to enforce a U.S. arbitration judgment than one issued by a judge.

Confidentiality

Another potential advantage to arbitration is the confidentiality of the arbitration process. Unlike litigation, which is presumptively public, arbitration proceedings are confidential. This means that whatever the allegations, you are unlikely to read about them in the press. This could be especially useful to owners who may be accused of various safety and environmental violations. However, it is also useful to contractors who are concerned about future clients learning about the number of claims they have made in past projects. However frivolous the lawsuit, if it is in court, it is public, and ripe fodder for the many legal websites following newly-filed litigation. If it is in arbitration, it is private.

Evidence

Construction cases are notorious for involving an extraordinary number of documents. Courts have strict evidentiary rules regarding documents – each one must be authenticated, and each one must have an adequate foundation to meet an exception to the rule against hearsay. These requirements can be a large burden for both sides. For example, if there is no witness to testify as to the date a photograph was taken, a court may exclude that evidence due to lack of authentication. Arbitrators, on the other hand, are likely to consider such evidence and determine on their own how much weight to give it. Thus, parties will face less procedural scrutiny to getting their evidence considered in arbitration than they would in a court.

Experienced Arbitrators

Another arbitration “plus” is the experience of the arbitrators themselves. Arbitrations are products of contract – the arbitration only exists because the parties agreed to arbitrate. Thus, the parties can agree to certain requirements. For example, the contract can state that three arbitrators shall hear the case, and that each party may choose one of the arbitrators (with those two choosing the third member of the panel). This gives flexibility to tailor the arbitrator to the dispute. If the claim involves intellectual property, an IP lawyer can be designated. If the disagreement covers specifications or scope, it could be a construction lawyer, or even an engineer or architect. If the main claim concerns delay, it could be a scheduling expert. Ensuring that certain expertise is on the panel can be extremely beneficial.

Enforceability of Choice of Law and Choice of Venue

Finally, one last arbitration advantage is the likelihood that choice of venue and choice of law provisions are upheld. Many states across the nation have statutes that invalidate choice of venue provisions if the provisions require that the parties resolve disputes outside the state where the project is located. These state laws not only invalidate choice of venue provisions, but often restrict choice of law clauses as well. However, an advantage of arbitration is that there is ample precedent indicating that the Federal Arbitration Act preempts these laws with respect to venue and choice of law restrictions. In those cases, the parties are free to determine the location of where the disputes will be handled and the law governing the parties’ agreement.

. . . or Not to Arbitrate . . .

Neutrality

While there are many advantages to arbitration, litigation also has its benefits. One advantage is the neutrality of the judges. While using experienced arbitrators can be an advantage for complex disputes, one must keep in mind that along with experience comes biases and pre-conceived notions. That experienced arbitrator who looks wonderful on paper may harbor a hidden animosity against one party due to a lifetime defending owners or contractors. Or, he may deem unenforceable any clause that he would not have agreed to himself. Most construction dispute arbitrators will be current or former construction litigators who have, throughout their career, primarily represented one type of party. A judge, on the other hand, is unlikely to have presided over many construction cases in his career. He or she is a blank slate, waiting to be informed. Savvy lawyers can use this to their advantage.

Dispositive Motions

Another benefit to litigation is the strict rule of law found in courtrooms, particularly regarding dispositive motions. A dispositive motion (typically a summary judgment motion) is a motion that decides part or all of a case just on the written motion – no testimony or hearings needed. Those with well-written, customized contracts hold a huge advantage here if the contract requirements are clear and unambiguous. These summary judgment motions are much more likely to be granted in litigation than in arbitration. One reason, as stated above, is that a judge is truly neutral – he or she typically does not care about the case itself, and is happy to make the docket lighter if part or all of a case can be dismissed on summary judgment. Conversely, an arbitrator has a financial disincentive to grant a dispositive motion. Arbitrators get paid by the hour and by the day, and any motion that removes part of a case cuts down on that work. Arbitrators will say that this disincentive does not come into play, and for most arbitrators it does not. At the least, however, that disincentivising undercurrent exists.

Another reason is the general informality of the arbitration process. Arbitrators prefer a less formal hearing than a trial, and generally allow the parties to put on all relevant evidence. Then, the arbitrators decide for themselves what weight to give that evidence. Courts, on the other hand, strictly follow the rule of law. If the contract is clear and unambiguous, the court can decide a dispute for itself – no hearing or trial needed. Thus, while an arbitrator is more likely to allow the evidence to be heard and then decide whether it affects the outcome, a judge will pare down the dispute as he or she can. Here, customized and clear contracts hold the advantage.

Discovery

Construction projects, perhaps more than any other type of case, involve a huge number of documents. Depending on the arbitration, the rules may restrict discovery so that it is difficult for either side to get all the information it wants. For example, international arbitrations typically rely on the IBA Rules on the Taking of Evidence and do not allow for pre-trial depositions. A court is much more likely to allow for broad discovery.

Further, any dispute will likely involve a third-party – someone not directly involved in the dispute, but someone who has important, perhaps even dispositive, information. Information from a third-party is much easier to obtain in court than in arbitration. In court, the process is relatively easy. The court (or even just the lawyers themselves) issues a subpoena, and the third-party is obligated under law to produce documents. The process may be a bit more complex for out-of-state parties, and more so for foreign parties, but it is still a straightforward process. Third-party discovery in an arbitration, conversely, is anything but straightforward. To obtain discovery in arbitration, you would need to specify that discovery is permitted in the contract itself, and that depositions may be held.

If the discovery rules for the arbitration are not clearly set out in the contract, you have to figure out whether third-party discovery before the hearing is even permitted. Currently, there is a circuit split in the courts as to when third-party discovery is allowed. The Federal Arbitration Act states that arbitrators can summon any third-party to come before the arbitrators and bring any documents. Some courts interpret this as only allowing certain discovery on the day of the hearing (trial), while others allow discovery in line with the federal courts. In court, those rules are already set.

Right to Appeal

Finally, the automatic right to appeal a court’s decision is a benefit to choosing litigation over arbitration. If you are dissatisfied with the court’s judgment, you have the right to appeal that decision to the state or federal Court of Appeals, and you can even try to have the case heard by the applicable Supreme Court. Conversely, you can only appeal an arbitration decision in a very few, narrow circumstances. The American Arbitration Association does allow for an appeal process, but it is optional. Therefore, contract drafters need to remember to put the appeal process in the contract if that option is desired. If it is not there, even if you did not know about it, you cannot use it.

What to cite

Once the decision to arbitrate is made, the next issue is knowing exactly what to say in the contract itself. Arbitration clauses, especially for large, complex projects, can be extremely detailed. Provisions regarding the number of arbitrators (which may change depending on the size of the claim), the arbitrators’ experience, the process through which the arbitrators are chosen, and the governing law, among other things, must be set out. It is especially important to set out what arbitration law applies. Many agreements, especially on large projects such as power projects, choose the Federal Arbitration Act (“FAA”). The FAA is federal law and can be used throughout the United States.

The FAA states that “[a] written provision in any . . . contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract . . . shall be valid, irrevocable, and enforceable.” Thus, for the FAA to control, the agreement must “involve[e] commerce.” A contract involves commerce to the same extent that Congress has power over interstate commerce under the Constitution. Congress’ interstate commerce power is extremely broad, and all agreements involving international parties should be covered. However, for domestic contracts involving local parties, the answer might not be so clear-cut – make sure to check with counsel.

Therefore, if the parties agree to arbitrate, the contract involves interstate commerce, and the FAA is cited, the FAA will control. On the other hand, if the parties decide that they would prefer to use a state arbitration act, they may do so as long as they cite it in the agreement. The FAA will only step in and govern over that state arbitration act if the state act renders the arbitration clause unenforceable. For example, even in an international construction project, the parties might agree to have a state arbitration act apply. Perhaps the project is in South Carolina, and through negotiation, the parties agreed to use the South Carolina arbitration act. That act states that notice of the arbitration clause must be proximately displayed on the very first page of the contract. Even if the notice is on the second page, the arbitration clause is unenforceable. If the agreement is rendered unenforceable due to the state arbitration act, and the agreement involves interstate commerce, one argument is that the FAA preempts, and controls on that issue. Federal law holds that in such a case, even though the state arbitration act holds otherwise, the arbitration agreement will likely be found enforceable.

. . . that is the Question.

There are numerous reasons to choose arbitration over litigation, and many reasons to do the opposite. Project owners and contractors in large-scale construction projects should consider the specifics of each project, and, with the advice of counsel, determine what best fits each endeavor. Some agreements may even use both arbitration and litigation, stating that only claims under a certain amount use one method, while all other claims use the other. Further, if the parties do agree to arbitrate, the agreement must be written so that the right arbitration act controls.

Though not as flashy as a negotiation over payment terms and scope of work, the time used on the dispute resolution clause will be well-spent if issues arise during the project. Thus, it is important to determine what is right for each development project, and to write each contract accordingly.

Subcontractors Have Remedies, Even If “Pay-If-Paid” Provisions Are Enforced

John P. Ahlers | Ahlers Cressman & Sleight | January 23, 2019

In a recent case in Kentucky[1], a sub-tier subcontractor sued the general contractor and owner for failure to pay for extra work. At the trial, the court held the subcontractor was entitled to recover under the theories of implied contracts and unjust enrichment, even though the subcontract contained a “pay-if-paid” clause. All parties appealed. In particular, the general contractor asserted that the pay-if-paid provision in the subcontract precluded recovery by the subcontractor. The issue was petitioned to the Supreme Court of Kentucky.

The question to be resolved by the Supreme Court of Kentucky was whether a pay-if-paid provision was enforceable as between a general contractor and subcontractor, and if so, whether the subcontractor could nevertheless pursue the owner directly for payment notwithstanding a lack of privity between the owner and subcontractor.

The Supreme Court of Kentucky held that because the owner had not paid the general contractor, as a result of the pay-if-paid clause, the general contractor had not breached the subcontract for failure to pay the subcontractor’s extra work. The relevant subcontract provision was:

[P]ayment [to] the Contractor from the Owner for the Subcontractor Work is a condition precedent to payment by the Contractor to Subcontractor. The Subcontractor hereby acknowledges that it relies on the credit of the Owner, not the Contractor, for the payment of the Subcontract Work.

Another subcontract provision read that:

Unless the Contractor has collected corresponding additional compensation from the Owner or other party involved, no compensation for any claim arising out of the performance of the Subcontract is allowed.

Reading these two clauses together, the Supreme Court concluded that the general contractor’s receipt of payment from the owner was a condition precedent to the obligation to pay the subcontractor. It was established that the general contractor had not received payment from the owner. Therefore, there could be no breach.

The court ruled, however, that because the subcontractor was left with no useful contract remedy against the general contractor, the subcontractor was not barred from bringing unjust enrichment claims against the owner. The court acknowledged that typically “unjust enrichment is unavailable when the terms of the express contract control,” but noted that here the “adequacy” of a “legal remedy” (or the actual realization of that contract remedy) was absent due to the “contractual gridlock” caused by the owner. If the contract was the only avenue for contractors to obtain relief, the result would allow the owner to take advantage of its own failure to pay after receiving “a substantial benefit” from the subcontractor’s work.

Comment: Unjust enrichment and implied contract theories have been used to provide remedies to contractors caught in similar dilemmas in other jurisdictions. See Town Concrete Pipe of Washington, Inc. v. Redford, 43 Wn. App. 493, 717 P.2d 1384 (1986). This is another theory of recovery that a subcontractor should keep in mind if it has failed to recover because of the pay-if-paid provision, when the owner is the cause of the failure of the general contractor to make payment and the subcontractor has not for some reason perfected its lien rights.

[1]Superior Steel, Inc. v. Ascent at Roebling’s Bridge, LLC, 540 S.W.3d 770 (Ky. 2017).

. All parties appealed. In particular, the general contractor asserted that the pay-if-paid provision in the subcontract precluded recovery by the subcontractor. The issue was petitioned to the Supreme Court of Kentucky.

The question to be resolved by the Supreme Court of Kentucky was whether a pay-if-paid provision was enforceable as between a general contractor and subcontractor, and if so, whether the subcontractor could nevertheless pursue the owner directly for payment notwithstanding a lack of privity between the owner and subcontractor.

The Supreme Court of Kentucky held that because the owner had not paid the general contractor, as a result of the pay-if-paid clause, the general contractor had not breached the subcontract for failure to pay the subcontractor’s extra work. The relevant subcontract provision was:

[P]ayment [to] the Contractor from the Owner for the Subcontractor Work is a condition precedent to payment by the Contractor to Subcontractor. The Subcontractor hereby acknowledges that it relies on the credit of the Owner, not the Contractor, for the payment of the Subcontract Work.

Another subcontract provision read that:

Unless the Contractor has collected corresponding additional compensation from the Owner or other party involved, no compensation for any claim arising out of the performance of the Subcontract is allowed.

Reading these two clauses together, the Supreme Court concluded that the general contractor’s receipt of payment from the owner was a condition precedent to the obligation to pay the subcontractor. It was established that the general contractor had not received payment from the owner. Therefore, there could be no breach.

The court ruled, however, that because the subcontractor was left with no useful contract remedy against the general contractor, the subcontractor was not barred from bringing unjust enrichment claims against the owner. The court acknowledged that typically “unjust enrichment is unavailable when the terms of the express contract control,” but noted that here the “adequacy” of a “legal remedy” (or the actual realization of that contract remedy) was absent due to the “contractual gridlock” caused by the owner. If the contract was the only avenue for contractors to obtain relief, the result would allow the owner to take advantage of its own failure to pay after receiving “a substantial benefit” from the subcontractor’s work.

Comment: Unjust enrichment and implied contract theories have been used to provide remedies to contractors caught in similar dilemmas in other jurisdictions. See Town Concrete Pipe of Washington, Inc. v. Redford, 43 Wn. App. 493, 717 P.2d 1384 (1986). This is another theory of recovery that a subcontractor should keep in mind if it has failed to recover because of the pay-if-paid provision, when the owner is the cause of the failure of the general contractor to make payment and the subcontractor has not for some reason perfected its lien rights.

[1]Superior Steel, Inc. v. Ascent at Roebling’s Bridge, LLC, 540 S.W.3d 770 (Ky. 2017).

“If it isn’t Broken…”: A Practical Guide to the Effective Use of Standard Forms of Contract

Kiran Giblin and Inga Hall | K&L Gates | February 21, 2019

Standard form building contracts play an important role in many construction and engineering projects. There are various advantages to using standard form contracts (as further detailed below), with a wide array of standard forms available to suit the particular types of parties, works and procurement routes involved in virtually all construction and engineering projects.

Tried and tested wording aims to reduce negotiation time, cost and subsequent disputes, and most practitioners are familiar with them.

Although a standard form will always need to be tailored to include project-specific details or requirements, amending a standard form will provide an opportunity to achieve this while still benefitting from the generally accepted ‘standard’ wording in the rest of the contract.

It is often the case that the only changes needed are completion of the ‘Contract Particulars’, ‘Contract Data’ or ‘Particular Conditions’ i.e. the portion of the standard form allocated to details such as party names, prices, completion dates, liquidated damages rates, insurance details and the like.

In other cases, a more extensive revision to the standard form terms may be needed to suit the parties’ specific requirements.

Take care, however, to amend only what is completely necessary. It is also advisable to check whether an amendment already exists that meets your particular requirement as similar projects are likely to have encountered similar issues.

The main standard forms used in the construction industry include the JCT standard forms of contract (particularly across UK domestic projects), the NEC3/4 forms (across both UK and international construction and engineering projects) and the FIDIC forms (primarily for international infrastructure projects). These are supplemented by a range of other forms with a narrower focus, such as the Association of Consulting Engineers forms and Infrastructure Conditions of Contract.

Why use a standard form of contract?

The most commonly cited reasons for using standard forms, and the reasons for their long standing popularity include:

  • reduced drafting time;
  • provision of a checklist of items to be agreed between the parties;
  • provision of a negotiation benchmark;
  • to benefit from case law on the interpretation of terms and/or the impact of legislative change; and
  • to benefit from familiarity.

Evolving forms

As touched on in the list of benefits above, one of the attractions of using standard forms is the fact that they are produced by major industry bodies, often representing the viewpoints of a number of stakeholders, and which have the resources to keep the content of a suite of standard form contracts under constant review.

That review role means that new editions of contract suites are published periodically, addressing statutory and case law changes, as well as addressing any perceived gaps or ambiguities in the drafting. The recent overhaul of the New Engineering Contract from NEC3 (last updated in 2013 to reflect the impact of the Local Democracy Economic Development Act 2009) with the publication of NEC4 in June 2017 provides a recent example. The updated suite aimed to “support the on-going drive for further collaboration and integration of teams, greater use of modern work methods, better avoidance of disputes and more effective identification and management of risk and opportunity”.

New editions also enable completely new forms to be published to address market demand. A Design, Build and Operate Contract and an Alliance Contract were included in the NEC suite for the first time in NEC4, for example.

Further, the JCT began to publish an updated suite of contract documents in 2016 following industry-wide consultations. This was intended to consolidate the updates and supplements released since 2011 and ensure that they are in line with current market practice.

FIDIC have also recently started to update its suite of contracts, which is the first major update since 1999, in order to reflect current industry best practice. For further information, the 2017 FIDIC Red, Yellow, Silver and White Books are all available online.

Key tips on amending a standard form

When amending standard forms regard should be had to the following:

  • only make amendments which are strictly necessary to comply with the parties’ requirements;
  • if the guidance notes to the standard form recommend a particular way of making amendments, follow the recommended practice wherever commercially possible;
  • check whether the relevant industry body has already drafted an amendment which meets the particular requirement and, if it is appropriate, follow their recommended wording;
  • if the employer is making amendments, remember these may have the effect of increasing the contract price;
  • amendments to one clause may have a consequential effect on other clauses including the clause-numbering;
  • amendments to the conditions of contract may necessitate amendments to ancillary documents such as agreements for lease, financing documents, bonds and guarantees where the same terminology including and for example, contract periods should be referred to throughout;
  • always attach to the contract copies of the agreed forms of ancillary documents;
  • avoid letters of intent wherever possible and, if it is not possible to do so for commercial reasons, make sure the letters are preliminary or interim contracts which can be enforced subject to a financial cap; 
  • if amending a subcontract, remember to delete inappropriate main contract terms which may otherwise be incorporated by reference;
  • make sure the subcontract contains appropriate limitations of liability, normally by reference to the subcontract price;
  • take legal advice on complex amendments or when unsure of the effect of an amendment;
  • make sure that the Appendix or Contract Particulars and other essential contract documents are properly completed, otherwise the contract may be unworkable or ineffective;
  • always ensure that the contract is signed properly by duly authorized persons, and resist the temptation to sign contracts before all the detailed terms have been agreed;
  • if a contract has to be varied after it has been signed, make sure the variation is made by authorized representatives of the parties in accordance with the requirements, if any, specified in the contract;
  • if there are no specified requirements for varying the contract, make them by way of a Deed of a Variation to avoid any argument over lack of consideration;
  • check all ancillary documents such as bonds and guarantees to see whether they are affected by the variation and notify bondsmen/guarantors; and
  • make sure each party to the contract has a copy of the signed contract documents and any subsequent variations to the contract.

Bailout for an Improperly Drafted Indemnification Provision

David Adelstein | Florida Construction Legal Updates | December 22, 2018

A recent opinion came out that held that even though an indemnification provision in a subcontract was unenforceable per Florida Statute s. 725.06, the unenforceable portion is merely severed out of the indemnification clause leaving the rest of the clause intact.  In essence, an otherwise invalid indemnification clause is bailed out by this ruling (which does not even discuss whether this subcontract had a severability provision that states that if any portion of any provision in the subcontract is invalid, such invalid portion shall be severed and the remaining portion of the provision shall remain in full force and effect). 

This opinion arose from a construction defect case, CB Contractxors, LLC v. Allens Steel Products, Inc.,43 Fla.L.Weekly D2773a (Fla. 5thDCA 2018), where the general contractor, sued by an association, flowed down damages to subcontractors based on thecontractual indemnification provision in the subcontracts.  Subcontractors moved to dismiss the contractual indemnification claim because it was not compliant with Florida Statute s. 725.06.  The indemnification provision required the subcontractors to indemnify the general contractor even for the general contractors own partial negligence, but failed to specify a monetary limitation on the extent of the indemnification as required by Florida Statute s. 725.06.  (The indemnification clause in the subcontract was the standard intermediate form of indemnification that required the subcontractor to indemnify the general contractor for claims regardless of whether the claims were caused in part by the general contractor.) 

The trial court held that because the indemnification clause was unenforceable under Florida Statute s. 725.06, the general contractor’s contractual indemnification claims fail.   But, the appellate court reversed providing a bailout to an unenforceable indemnification clause by simply severing out the unenforceable portion. Thus, while a subcontractor would be required to indemnify the general contractor for its own negligence, it would not be required to indemnify the general contractor for any partial negligence caused by the general contractor.  

This case leads to a couple of very important takeaways:

  • Make sure the indemnification clauses in your construction contracts comply with Florida Statute s. 725.06.  Have a construction attorney review the indemnification provision.  Do not, and I mean, do not, bank on this ruling that even if the indemnification provision is noncompliant, only the unenforceable part will be severed.  That is not good practice.
  • Include a severability provision in your contract. Always.  Even though this case did not discuss such a clause, the clause will bolster the argument that only the unenforceable aspect of the provision should be severed. 

Terms of Your Teaming Agreement Matter

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.