Federal contracting client prevails in teaming agreement appeal

Gentry Locke for the Defense

Supreme Court of Virginia

Gentry Locke attorney Monica Monday represented FCi Federal, Inc., the appellee, in an appeal involving a dispute between government contractors. On June 27, 2018, the Supreme Court of Virginia affirmed the circuit court’s decision to set aside a multi-million dollar jury verdict. This case provides guidance on breach of contract claims arising out of teaming agreements. Additionally, the Supreme Court also addressed a question of first impression, holding that lost profits for fraudulent inducement are not recoverable when they are based on the terms of an unenforceable agreement.

CGI Federal, Inc. entered into a teaming agreement to help FCi Federal, Inc. prepare a proposal for a government services contract with the United States Department of State. The teaming agreement provided that FCi would submit a proposal as the prime contractor, and include CGI as a subcontractor. It further provided that “subject to the final solicitation requirements, CGI will receive 45% workshare of the total contract value, but the work share commitment may not be exactly 45% each year.” If FCi was awarded a prime contract, the teaming agreement stated that the parties would negotiate in good faith for a subcontract for CGI. The agreement contemplated that the subcontract was subject to numerous conditions, including the inclusion in the prime contract of CGI’s statement of work and the parties’ agreement to the statement of work, financial terms, and reasonable subcontract provisions. If the parties could not agree to a subcontract within 90 days of the award of the prime contract, then under the terms of the teaming agreement, that agreement would expire. The teaming agreement included exclusions for lost profits for breach of contract, and acknowledged that the parties would bear their own costs, expenses, risks and liabilities arising out of performance of the teaming agreement.

FCi submitted a proposal to the State Department that gave CGI a 38% workshare. During an evaluation of the government’s response to the initial proposal, FCi later agreed to revise the teaming agreement to provide CGI with a 41% total contract value work share and ten management positions. The parties then executed an amendment to the teaming agreement to reflect these changes. The next day, FCi submitted a revised proposal to the State Department that allocated only a 35% workshare to CGI and reserved all management positions for FCi.

FCi was later awarded the prime contract, but there were several bid protests. To resolve the bid protests, FCi agreed to give part of CGI’s workshare to others. In its final revised proposal to the government, FCi gave CGI an 18% workshare.

FCi was awarded the prime contract valued at $145 million, and the parties began negotiations for a subcontract. As work on the contract was underway, the parties entered into a Letter Subcontract for CGI’s work until their subcontract negotiations could be finalized. CGI was paid over $2 million for work it performed under the temporary agreement. Due to a staffing dispute, FCi later terminated CGI, and the parties never entered into a subcontract.

CGI sued FCi for breach of contract, fraudulent inducement, and unjust enrichment. The jury returned a $12 million verdict for CGI on the first two claims. The circuit court set aside those verdicts, and later granted summary judgment on the unjust enrichment claim. The Supreme Court affirmed.

First, on the breach of contract claim, the Supreme Court held that teaming agreement did not create a promise for FCi to enter into a subcontract with CGI for a 41% workshare and 10 management positions. The teaming agreement was an unenforceable agreement to agree because the post-award provisions of the agreement did not create any enforceable obligation for FCi to extend work to CGI. Under the teaming agreement, the parties would have to negotiate in good faith the terms of a subcontract. The “statement of work” provision in the teaming agreement for a 41% workshare was expressly subject to and dependent on the parties’ successful negotiation of a final subcontract, which never occurred.

Second, on the fraudulent inducement claim, the Court found that CGI could not recover any lost profits based upon its promise that CGI would get a 41% workshare and 10 management positions. This promise did not create an enforceable obligation for FCi to extend a subcontract to CGI with these terms. Instead, all CGI had was a promise to negotiate for a future subcontract. In a matter of first impression, the Court held that “lost profits are not recoverable for a fraudulent inducement claim when they are based on the provisions of an unenforceable contract.”

Third, there was no error in awarding FCi judgment on the unjust enrichment claim, which sought to recover expenses CGI incurred in helping FCi win the prime contract and to disgorge FCi of its profits. Unjust enrichment is an implied contract action based on the principle that one person may not enrich himself unjustly at the expense of another. The existence of an express contract covering the same subject matter of the parties’ dispute precludes a quasi-contract claim for unjust enrichment. Here, the teaming agreement governed the parties’ relationship, and required them to bear their own costs of performance. Thus, it was an express contract covering the subject matter of the parties’ dispute. And, although the post-award provisions of that contract were not enforceable, when CGI elected to sue for tort and contact damages, it affirmed the teaming agreement and bound itself to its provisions.

This decision underscores the importance of carefully drafting agreements, and the challenges of pursuing a fraud claim. The teaming agreement here failed because it did not contain an enforceable promise. Instead, it was merely an agreement to agree in the future. Thus, all that CGI had was a promise to negotiate in good faith for a future subcontract. CGI Federal, Inc. v. FCi Federal, Inc., 814 S.E.2d 183 (2018)