Teaming Agreement Challenges for Subcontractors
A recent Virginia Supreme Court case underscores the hurdles government subcontractors may face when they seek to enforce common teaming agreement terms. CGI Fed’l Inc. v. FCi Federal, Inc., No. 170617 (Va. June 7, 2018). This case of the “disappearing workshare” also illustrates that strategic choices made during teaming agreement negotiations and in litigation may dictate whether the subcontractor has any recourse against the prime contractor.
In 2012, CGI signed a teaming agreement with FCi to jointly prepare a proposal for a State Department contract for which FCi would act as the prime contractor and CGI as the subcontractor. Slip. op. at 2-3. FCi retained exclusive rights to finalize the proposal and negotiate any resulting prime contract with the government. Id. The teaming agreement said CGI “will receive” a 45% workshare of the awarded total contract value, but the “commitment may not be exactly 45% each year,” and it required the parties to enter into “good faith negotiations” for a subcontract after prime contract award. Id. If the parties could not mutually agree on a subcontract within 90 days after award, the teaming agreement would expire. Id.
CGI and FCi worked together on the proposal for three months. Id. at 3. The government identified weaknesses in the proposal and invited a revised proposal. Id. at 3-4. CGI agreed to help FCi with the revised proposal if FCi committed to give CGI a 41% workshare and ten management positions on the resulting project. Id. at 4. The parties signed an amended teaming agreement with those new terms, but the other terms of the original teaming agreement did not change. Id. With CGI’s help, FCi prepared a revised proposal to the government. Id.
The government awarded the prime contract to FCi, but a competing bidder filed a series of protests. Id. at 5. FCi resolved the last protest by giving the competitor and the competitor’s affiliates part of the workshare and, without CGI’s knowledge, submitted a second revised proposal to the government reflecting a reduced CGI workshare. Id. The government then awarded to FCi a prime contract with a potential value of $145,000,000. Id.
After that award, CGI and FCi began negotiations for a subcontract, with FCi offering only a 22% workshare. Id. They never agreed on a final subcontract, and FCi terminated the relationship. Id.
CGI sued FCi in Fairfax County, Virginia circuit court, asserting three claims. Id. CGI alleged breach of the amended teaming agreement because FCi never granted a subcontract for the 41% workshare and ten management positions. Id. For this claim, CGI sought the indirect cost reimbursement it would have received from that workshare. Id. at 5, 7. CGI pled an alternative claim for unjust enrichment, seeking to recover its proposal preparation costs and disgorgement of FCi’s profits from the prime contract. Id. at 6. CGI also claimed it was fraudulently induced to help with the revised proposal by FCi’s promise of the workshare and ten management positions, seeking the profit it expected to earn from the subcontract. Id. After a trial, a jury awarded CGI $3,465,000 of indirect costs for breach of contract, and $8,533,000 of lost profits for fraudulent inducement, but the trial judge set aside both awards and granted summary judgment for FCi on the unjust enrichment claim. Id. at 7-8.
The Virginia Supreme Court Decision
CGI appealed to the Virginia Supreme Court, which affirmed the trial court’s decision. The court first rejected CGI’s breach of contract claim, holding there was no enforceable agreement for a subcontract. Id. at 8-10. Rather, the parties had expressly conditioned the formation of a subcontract on future events and good faith negotiations. Id. There was an enforceable agreement to negotiate in good faith, but CGI never contended that FCi failed to negotiate a subcontract in good faith. Id. CGI therefore could not prevail on its breach claim.
The court then held CGI could not recover lost profits for fraudulent concealment — the only damages CGI sought for that claim — because the lost profit calculation was speculative. Id. at 11-12. CGI’s calculation was premised on the workshare that the parties never incorporated into a subcontract. Id. The court concluded, “Stated simply, CGI cannot recover profits based on a bargain for a subcontract it never struck.” Id. at 12. Thus, even though FCi did not appeal the jury’s finding that it had fraudulently induced CGI to help with the revised proposal, CGI could recover no damages for the fraud.
Finally, the court rejected CGI’s alternative claim for unjust enrichment. Id. at 13-14. The court noted that CGI could have elected to rescind the amended teaming agreement because of the fraud, but instead affirmed the contract and sued for damages. Id. at 14. A plaintiff cannot seek unjust enrichment in Virginia when there is an enforceable express contract covering the subject matter. Id. at 13. While there was no enforceable agreement for a subcontract, the parties’ mutual promises to prepare the proposals and to negotiate a subcontract in good faith were enforceable agreements covering the subject matter, so CGI could not seek unjust enrichment. Id.at 15.
The terms of the CGI/FCi teaming agreement, as reported by the court, are rather typical. For example, it is common for two contractors to mutually agree to jointly prepare a proposal, to outline a post-award work scope and workshare, and to agree that, upon award, they will negotiate a subcontract “in good faith.” Parties often trust that they will be able to work out the details after award. Sometimes, they cannot work it out, and the potential subcontractor ends up with no contract despite its support of the winning proposal.
As CGI Federal shows, those common terms can form a nearly impenetrable web of barriers to a successful subcontractor claim. It was well-established before this case that an “agreement to agree” is unenforceable, at least under Virginia law, so the case plows no new ground there. The court concluded that FCi made an enforceable agreement to negotiate in good faith, but CGI did not claim bad faith negotiations by FCi. While the jury found that FCi misled CGI, the CGI strategic decisions to affirm the amended teaming agreement and seek lost profits for the fraud foreclosed CGI’s right to obtain a monetary award for fraud or unjust enrichment.
CGI Federal confirms that potential subcontractors should negotiate the material subcontract terms with the teaming agreement, and minimize any conditions to a subcontract. The CGI/FCi amended teaming agreement identified several conditions to a subcontract and acknowledged that even the 41% workshare was not set in stone. Because CGI did not, or could not, negotiate more definitive terms or a remedy (such as liquidated damages) if FCi did not award a subcontract to CGI, CGI had to trust that good faith negotiations after award would result in an acceptable subcontract. Once those negotiations broke down and the dispute ripened, CGI chose to affirm the teaming agreement and seek speculative lost profits as a fraud remedy, rather than a constructive trust that may have forced FCi to disgorge the fruits of any fraud.
 Plaintiffs seeking damages in government prime-sub disputes often calculate losses to include lost contributions to indirect cost pools, as well as lost profits, that the contract revenue would have generated. See McGeehin & Johnson, Lost Profits Issues Unique to the Government Contracts Industry, in The Comprehensive Guide to Lost Profits Damages for Experts and Attorneys (4th ed. 2016). The CGI/FCi teaming agreements precluded the recovery of lost profits for breach of the agreement. CGI Federal, slip op. at 3, 6.