TEAMING AGREEMENTS - WHAT SHOULD BE COVERED?

TEAMING AGREEMENTS - WHAT SHOULD BE COVERED? Introduction 1. This paper deals with the teaming of two entities to bid for a specific contract. We set out the legal issues you will need to consider when negotiating such a teaming agreement. 2. This paper does not deal with a teaming that is the precursor to an on-going joint venture (e.g. a teaming to develop and exploit technology generally rather than to win a contract to provide one customer with such technology). 3. Note that teaming agreements also go by other names including bid phase agreement, bid participation agreement or even memorandum of understanding. The name of the document does not alter the issues set out in this paper. Why team? 4. Here are some examples why entities team: 4.1 the entities together but not alone have the resources and expertise to carry out the works under the contract; 4.2 for a smaller entity teaming is a means of bidding for a project that it could not sensibly obtain or perform on its own; 4.3 for large contracts one entity alone does not meet the customer s stated financial minimums (balance sheet size) or cannot provide the required performance securities (bank guarantees); 4.4 one of the entities has proprietary IP or expertise which would give the bid a competitive edge but does not have the other resources to perform the contract; 4.5 an entity has the resources to carry out the contract but does not wish, or its financiers will not allow it, to take on the risk of the contract alone; 4.6 where one entity is to be the prime it may wish to lock in at an early stage the other entity and its pricing (including to prevent that entity from working with a rival team); 4.7 one of the entities has a reputation or relationship with the customer which could improve the bids prospects (e.g. an international entity teams with a well respected South Australian entity for a South Australian contract); 4.8 the customer requires a locally based entity to be part of the successful bid team (e.g. it is a requirement in some US Department of Defense contracts that large companies team with smaller companies); 4.9 in practice by teaming the number of competitors bidding is reduced so increasing the chances of the team winning the contract (there may well be competition issues with this - see paragraphs 41 and 42 below). The two main teaming options 5. The two main teaming options are: 5.1 both entities are primes - your entity and the other entity agree to jointly submit a bid for the contract and, if successful, both contract with the customer to carry out the works; or 5.2 one entity is prime and the other is its subcontractor - one entity submits the bid for the contract and that entity, if successful, subcontracts a substantial portion of the works to the other entity. 6. Different issues are relevant to each of these types of teamings. Exclusivity 7. Usually the teaming will be excusive in nature. However, care is needed to ensure that the teaming agreement only extends

2 the exclusivity to the bid for the specific contract and not for the customer s work generally. 8. See paragraphs 28 and 29 below as to issues with exclusivity when an entity withdraws or the teaming agreement is terminated. Managing the bid 9. The teaming agreement should deal with how the bid is managed. In bids for large projects the teaming agreement should provide for a formal management committee and set out: 9.1 the senior managers of each entity who will sit on the same; 9.2 how meetings are called and conducted; 9.3 the voting regime (usually unanimous agreement is required); and 9.4 the procedure for preparing and approving minutes of meetings. Preparing the bid 10. In a prime/subcontractor teaming does the subcontractor get a right: 10.1 to review or approve the bid?; 10.2 to be involved in the negotiations of the subsequent contract with the customer (this is important if the subcontract is to be on back to back terms with the contract between the customer and the prime)? 11. In a prime/prime teaming will: 11.1 one prime be given responsibility for preparing the bid?; 11.2 the bid be prepared by an integrated team of staff from both entities?; or 11.3 specific portions of the bid be allocated to each entity? 12. In large projects often the teaming agreement will attach or require the entities to agree a division of responsibilities (i.e. setting out in detail the bid preparation tasks of each entity). 13. Some projects may have a two phase bid process (i.e. preparing and submitting a expression of interest which, if successful, is followed by a formal bid or proposal). If so, the teaming agreement should cover this two stage process. Bid pricing 14. In most cases the entities will not be able to agree the bid pricing on signing the teaming agreement. As such, will the teaming agreement try and ensure that the entities pricing is competitive or leave that to the entities self interest (i.e. if the pricing is not competitive the bid will not succeed)? If bid pricing is to be covered how prescriptive will the drafting be (e.g. just an obligation to ensure pricing is competitive or perhaps based on a margin not exceeding cost plus 10% )? Bid costs 15. Internal costs: Will each entity meet its own internal costs of the bid phase? This may not be appropriate if one entity is doing most of the bid preparation work. If so, the teaming agreement may state that this entity is able to recover a specified dollar amount from contract payments if the bid succeeds (i.e. to reimburse that entity for taking on a greater share of cost and risk during the bid phase). 16. External costs: For large projects the entities will need to involve consultants to assist with the bid (for example architects and engineers on large infrastructure bids). The costs of such external fees can amount to many millions of dollars. So the teaming agreement should deal with how the entities will pay for such costs. 17. The teaming agreement should also deal with how such consultant contracts are agreed and entered into by the entities. 18. Discounted prices may be obtained from consultants in the bid phase in return for a lump sum payment if the bid succeeds (i.e. a risk return payment). Subsequent arrangements - what happens if the bid succeeds 19. What should happen if the bid succeeds? In simple terms the entities will need to negotiate and agree the definitive documents being:

3 19.1 in a prime/prime teaming the contract with the customer and a joint venture agreement between the entities (the joint venture agreement governs how the entities will manage the works under the contract and the sharing of the related risks and returns). In large projects there will also be numerous other ancillary documents; 19.2 in a prime/subcontractor teaming the subcontract (a joint venture agreement will not be needed). 20. In most cases the terms of the definitive documents cannot be negotiated and finalised until after the bid is successful. For example, in large projects bidders usually have to detail any proposed changes to the customer s draft contract and the rationale for the same - on the bid succeeding these contract terms are then negotiated with the customer. Likewise, often there is not the time, inclination or resources for the parties to agree a complete joint venture agreement at the time of signing the teaming agreement. 21. Teaming agreements often provide that the parties will seek to negotiate in good faith the definitive documents. An obligation of good faith imposes real legal obligations on the parties (including to act reasonably and fairly etc). However, in practice this obligation may not amount to much more than an agreement to agree (which is not enforceable). So it is best if the teaming agreement deals with what happens if the parties cannot agree the definitive documents. We now deal with the different issues that arise in this regard in our two types of teamings. 22. Prime/prime teaming: The teaming agreement will invariably provide that both entities must agree the terms of the contract with the customer. Such a provision will focus the entities on resolving the contract with the customer (otherwise the contract may be lost). 23. Often the teaming agreement will require the entities to agree the joint venture agreement before they enter into the contract with the customer. Usually a specified period for doing so is stated. One option is to provide that an entity may terminate the teaming agreement after that period expires but if it does so it is prevented from then obtaining the contract. Commercial pressure (including from the customer) will often ensure the entities agree the joint venture agreement so they can progress and sign the contract with the customer. 24. Best practice would be to agree and attach the joint venture agreement to the teaming agreement. At the very least the teaming agreement should outline the proposed key features of the joint venture (e.g. a 50/50 unincorporated, fully integrated joint venture in terms of the allocation of resources, scope of work, risk and rewards). Better still an agreed schedule can be attached setting out in some detail the key terms of the joint venture or perhaps an agreed pro forma joint venture agreement (which the entities agree will form the basis of preparing the definitive joint venture agreement). 25. In a prime/prime teaming is it proposed that the entities will perform the works under the contract on an integrated basis or in several portions. For example, if the contract requires building works at 7 sites across Australia will the parties jointly perform the works at each site or divide the sites and related works between them? If the works are to be in several portions the teaming agreement should flag that the joint venture agreement will provide that the entities (as between themselves) will bear the risk of performance at their respective sites. 26. Prime/subcontractor teaming: The subcontractor should be alert to the proposed subcontract negotiation provisions. Often the prime is only under an obligation to negotiate the subcontract in good faith. As mentioned above, subject to meeting this requirement, if the subcontract is not agreed the prime will be free to engage a third party for the subcontract work. From the subcontractor s perspective it is better if the teaming agreement provides that the prime cannot enter into the contract unless it also enters into the subcontract. If the subcontractor cannot obtain this right it will often have good commercial leverage as: 26.1 the prime may have an agreed price with the subcontractor which it may now not get on the open market; 26.2 the prime may not have sufficient time to find, negotiate and subcontract with a third party (including because of the customer s time line);

4 26.3 the customer may have accepted the prime s bid based on the subcontractor s involvement (i.e. the customer may decide not to proceed with the prime or require the prime to engage the subcontractor). 27. Subcontract terms: The teaming agreement should also deal with the terms of the proposed subcontract. A common approach is to state that the subcontract will be on back to back terms with the contract between the customer and the prime. However, not all of the obligations and rights in the contract should flow down unaltered into the subcontract. The teaming agreement should flag these (e.g. provisions in the subcontract such as price, insurance, securities, limits of liability, IP etc will not be identical to those in the contract). The subcontractor should carefully consider these matters at the teaming agreement phase. Withdrawing from the team 28. Usually an entity is restricted from withdrawing from the team without the other party s consent. Even so, the teaming agreement should deal with what happens where an entity withdraws - perhaps providing that: 28.1 the continuing party is released from the obligation to exclusively bid with the withdrawing party; 28.2 the withdrawing party is prohibited from itself obtaining the contract or from assisting others to do the same; 28.3 the withdrawing party cannot use the jointly created IP but the continuing party can use such IP plus any other IP contributed by the withdrawing party (i.e. so it can properly continue with the bid); and 28.4 the withdrawing party is obliged to pay any third party costs it is responsible for under the teaming agreement. Termination and the continuing entity 29. The termination triggers should be set out in the teaming agreement. Triggers invariably include material or specified breaches of the teaming agreement or an entity becoming insolvent. Where the non defaulting entity terminates the non defaulting party should have the option to continue the bid alone along with the other rights set out in paragraph 28 above. 30. The teaming agreement should also deal with the teaming ending in other circumstances. Some of these triggers may be relevant: 30.1 the customer pulls the project; 30.2 the bid is unsuccessful; 30.3 the customer materially changes the structure of the project (say from a construction contract to a PPP arrangement); 30.4 the bid is successful and the parties (a) enter the definitive documents, or (b) fail to enter the definitive documents within a specified period; or 30.5 a specified period comes to an end. 31. Consideration should be given as to whether an entity can terminate if there is a management deadlock (i.e. the management committee can not agree an important issue) and the consequences of such termination. Confidentiality 32. The entities should enter into a confidentially agreement before negotiating the teaming arrangement. The teaming agreement should have specific provisions as to confidentiality in carrying out the teaming. Intellectual Property 33. The entities are likely to contribute or create (jointly or individually) IP in carrying out the teaming. As such, the teaming agreement should deal with the ownership, use and licensing of such IP. 34. A common approach is: 34.1 an entity owns any existing IP (i.e. IP developed before or other than in carrying out the teaming) contributed to the teaming but grants the other entity a license to use the same for the teaming;

5 34.2 the entities jointly own IP which they jointly create in carrying out the teaming; and 34.3 an entity owns any new IP it alone creates in carrying out the teaming but grants the other entity a licence to use the same for the teaming. 35. The teaming agreement should deal with the future exploitation of IP which is developed during the bid. This is particularly important where such IP has a wide potential for future exploitation. Unless otherwise agreed the general law provides that both entities must agree to any use or licensing of jointly owned IP. Such consent may be difficult for your entity to obtain in the future (e.g. your relationship with the other entity may deteriorate or perhaps it is taken over by one of your competitors). So sometimes it is best to state that either entity may use joint IP without consent in return for paying a preagreed royalty (this could be a percentage of the license fee obtained by the entity). Securities and finance 36. Does the customer require parent company guarantees from each entities parent company? If so the teaming agreement should oblige the entities to try and obtain such parent company guarantees. Importantly it should deal with the cost of such parent company guarantees. For example, if only one entity has a parent company it may later surprise the other entity that the parent company requires a substantial fee for the provision of the parent company guarantee. 37. Does the customer require other securities such as bank guarantees? If so, does your entity have the ability to obtain such bank guarantees? Has the cost of the same been factored in to the bid pricing? Will the bank guarantees be provided as one common security (i.e. from one bank) or separately by each entity s banks? The decision may come down to pricing. Dispute resolution 39. Will there be a formal dispute resolution process? Often it is best to at least include a provision requiring very senior managers of the entities to meet and seek to resolve any dispute. Mediation and arbitration provisions may also be appropriate in certain teaming arrangements. Employees - don t lose you best staff 40. If the teaming is for a large project your best senior staff will work closely over extended periods with the other entity s senior staff. That entity may in usual trade be one of your key competitors. As such, the other entity will have the opportunity to assess and target your best staff talent. So it is prudent to include a properly drafted restraint that seeks to restrict the other entity from poaching your key staff. Competition issues 41. Consideration needs to be given as to whether the teaming could breach the anticompetition prohibitions in the Competition and Consumer Act 2010. 42. Special care must be taken with large projects where there are limited entities who could successfully perform the contract. Risk 43. Some other matters to consider: 43.1 will the teaming agreement contain an exclusion of consequential loss?; 43.2 what warranties are included in the teaming agreement and can your entity satisfy the same? A publication of Crawford Legal by Adam Gamble (partner) (agamble@crawfordlegal) and Luke Corletto (solicitor) (lcorletto@crawfordlegal.com.au) Phone: 08 8110 2100. 38. You should confirm that your finance arrangement allow you to proceed with the bid or seek any consent required by your financers. Often bank facility and company charges provide that the financier must approval any joint venture or a teaming (especially for a major project).