To team or not to team

In transactions involving combinations of hardware and software licenses and related services, two parties often enter teaming agreements or other joint marketing arrangements to attempt to make a sale. Just as often, the parties envision that one of them will make the proposal to and secure the contract from the prospective customer and the other will become a subcontractor on the project.

Because these arrangements generate revenue only if a sale is secured, and contemplate a future contractual relationship, the big question becomes, what, if any, enforceable obligations are created by such relationships?

In an effort to remove that question from such strategic partnerships, the Court of Appeals for the Third Circuit, applying Pennsylvania law, put real teeth in a teaming agreement.

The case involved a contract to provide communication shelters for the Greek Army. By an exchange of letters, the parties agreed that Trans World Communications, the defendant, would bid on the prime contract, and Atacs Corp., the plaintiff, would be a subcontractor. However, after bidding the project with Atacs’ assistance and negotiating the price with the Greek government, Trans World elected to use a different subcontractor at a considerable cost savings to it.

When Atacs brought suit, it was met with the argument that its teaming arrangement with Trans World was legally unenforceable because it was a mere “agreement to agree,” and that, in any event, Atacs could not recover damages because there was no way to calculate them since no subcontract had ever been entered into between Atacs and Trans World.

The trial court found the teaming arrangement was an enforceable contract but awarded only one dollar in nominal damages because it concluded there was no reasonable basis on which to assess actual damages. Both parties appealed.

The Court of Appeals affirmed the findings of an enforceable contract but reversed the conclusion that damages could not be calculated. It concluded that Pennsylvania law would recognize a teaming agreement as an enforceable contract, provided the parties intended to be bound by the teaming arrangement and the agreement contained sufficient terms for enforcement. It concluded that the district court was correct in finding both of these conditions were satisfied.

The court then turned to damages. It noted that three theories of damages exist to remedy a breach of contract:

1. Expectation damages, to put the innocent party in as good a position as if the contract had been performed;

2. Reliance damages, to put the innocent party in as good a position as if the contract had never been made by returning to it its actual expenditures in performance of or anticipation of performance of the contract; and

3. Restitution damages, to return to the innocent party the value of any benefit it conferred on the party in breach.

The Court of Appeals concluded that it didn’t have enough information to calculate expectation damages because the terms of the subcontract with the plaintiff had never been concluded.

However, it ruled that the plaintiff could recover restitution damages through the use of expert testimony of the value of the plaintiff’s technical and consulting services provided pursuant to the teaming agreement. It also stated that the trial court could base an award on the extent to which the defendant’s savings in utilizing a different subcontractor reflected the use of preliminary services provided by the plaintiff.

Two lessons emerge from this case. One is that teaming agreements (or joint marketing agreements) cannot be casually ignored when a better opportunity arises. Second, much depends on the particular terms of the teaming agreement. Parties contemplating such an arrangement must make certain it contains the provisions to implement their true intentions, be they to make it enforceable or unenforceable.

John McN. Cramer is a partner with Pittsburgh law firm Reed, Smith & McClay LLP. Reach him at (412) 288-3131.