The passage of President Donald Trump’s comprehensive tax and sending bill, the One Big Beautiful Bill Act, has significant implications for private companies in the defense industry. Among its provisions, the bill provides for a total defense budget for fiscal year 2026 of more than $1 trillion, with billions of dollars earmarked for the development of entirely new programs.
In order to take full advantage of these opportunities from increased defense spending, companies must familiarize themselves with the legal regime that governs preliminary contracts in the industry. In particular, companies considering entering into a teaming agreement — often used to meet the multifaceted needs of a government contract — must understand their agreement’s enforceability and the obligations each party in the “team” incurs. Without this knowledge, companies might find themselves tied up in disputes over the requirements of a potential subcontract, which may delay the project’s completion and undercut its ultimate success.
The Benefits and Pitfalls of Teaming Agreements
Because prime government contracts often require expertise in disparate areas, many of which might be outside the prime contractor’s expertise, prime contractors will frequently execute teaming agreements with other companies to help evaluate and prepare their bid on the prime contract. Generally, the participants in a teaming agreement expect that, if a prime contract is awarded, they will subsequently enter into a subcontract governing the work contemplated in the teaming agreement.
Teaming agreements are standard in the defense industry, but they can also create unexpected problems for parties after a prime contract is awarded. Subcontractors, for example, might want to memorialize certain terms of the anticipated ultimate subcontract into the teaming agreement to set a negotiation baseline. More commonly, teaming agreements will leave major terms open but will expressly contemplate that the parties will negotiate in good faith toward an ultimate subcontract. Understanding whether such provisions will be enforced — and what obligations they entail — is critical for parties executing teaming agreements to ensure they are protected against liability or nonperformance by their counterparty.
Determining Contract Enforceability
Consider, for example, a teaming agreement that specifies one counterparty will deliver a certain volume of product but also states the parties are specifically leaving the price per volume subject to future negotiations. In a minority of jurisdictions, including Texas, the “promise” to negotiate on a future price will not be enforceable because it will be construed as a mere “agreement to agree,” as the Texas Supreme Court held in Dallas/Fort Worth International Airport Board v. Vizant Technologies. While courts have acknowledged this is the minority position and “the trend line appears to be moving steadily in favor of recognize a cause of action for breach of a contract to negotiate,” as the 1st U.S. Circuit Court of Appeals noted in Butler v. Balolia, practitioners should ensure the teaming agreement is governed by law that permits for the enforcement of such promises to enter into or negotiate future contracts at all.
By contrast, other courts, including the U.S. District Court for the Southern District of New York in Teachers Insurance and Annuity Association of America v. Tribune Company, will enforce promises to negotiate as “binding preliminary commitments” where the parties have “express[ed] mutual commitment to a contract on agreed major terms, while recognizing the existence of open terms that remain to be negotiated.”
The agreement on major — or “material” — terms is significant in this analysis, because a disagreement on material terms may indicate to a court that the parties did not intend the preliminary agreement to be binding. Thus, preliminary agreements have been found to be unenforceable if they fail to define certain material terms such as price, quantity and scope of the work requested.
But even preliminary agreements with undefined material terms may nonetheless be held to be enforceable in certain circumstances. In some cases, for example, courts have supplied definitions for undefined material terms based on the parties’ course of conduct or an objective standard referenced in the contract. And while courts have emphasized the language of the purported preliminary agreement is the most important factors to consider, the case law indicates courts will also look at the context surrounding the negotiations to ascertain the parties’ intent in executing the preliminary agreement.
Intent to be bound can be gauged, in part, by the extent to which one or both parties have performed their obligations under the preliminary agreement. Essentially, courts are unlikely to conclude that the parties do not intend to be bound by preliminary agreements if they acted as though the contract is enforceable. Similarly, courts consider the context of the negotiations around the preliminary agreement. They have found that “deep discussions” between the parties before entering into a preliminary agreement weights in favor of finding promises in the preliminary agreement are enforceable. Courts have also found the commercial circumstances to be relevant in determining parties’ intent, especially whether the execution of such preliminary agreements is standard commercial practice for the parties.
Conscious of the challenges of enforcing agreements that lack material terms, some teaming agreements will include a promise to negotiate toward an eventual subcontract in good faith rather than an agreement on any particular term. The enforceability of such agreements to negotiate in good faith likely turns on the governing law, the teaming agreement’s specific terms, and the parties’ conduct.
Defining a Negotiation Made in “Good Faith”
Assuming the promise to negotiate in good faith is enforceable, the logical next question is: “What does it mean to negotiate in good faith?”
Parties to teaming agreements may be unable or unwilling to agree to major terms in a preliminary agreement, but they still want insurance that an ultimate subcontractual agreement can be reached. In these circumstances, parties to a teaming agreement may promise each other to negotiate in good faith toward executing a future subcontract without expressly defining the terms left to be negotiated.
Whether such promises will be enforced turns on the same considerations outlined above, including the governing law for the teaming agreement, the terms of the teaming agreement and whether the teaming agreement and surrounding circumstances indicate the parties intended to be bound by their promise to negotiate in good faith.
Perhaps most importantly, a promise to negotiate in good faith does not meanthe parties must reach agreement on an eventual subcontract. Parties are not required to act contrary to their own interests, to capitulate to the counterparty’s demands or to propose only those terms that are acceptable to their counterparty. Instead, as the 2nd U.S. Circuit Court of Appeals held in L–7 Designs, Inc. v. Old Navy, LLC, a promise to negotiate in good faith is merely “an assurance that the transaction will falter only over a genuine disagreement.” Similarly, parties will likely be found to negotiate in good faith even if they propose terms that are potentially inconsistent with the preliminary agreement.
However, courts have concluded that a party crosses the line into bad faith negotiations when it insists upon terms that are inconsistent with the preliminary agreement, rather than merely proposing them. In effect, courts will not permit parties to assume negotiating positions “designed to alter or scuttle the transaction” contemplated in the preliminary agreement by walking away from negotiations when the counterparty refuses to accede to contradictory terms, as the court wrote in Teachers Insurance and Annuity. Courts have also found parties acting in bad faith where the party misrepresents material facts, the party’s position, or the party’s interests, because honesty in such matters is required by the good faith standard.
As the court held in L-7 Designs, parties have been determined to act in bad faith when their negotiations are characterized by “arbitrary or capricious action taken out of spite or ill-will,” which can include prematurely ending negotiations and intentionally failing to respond to overtures by the counterparty. Ultimately, as long as parties can demonstrate that any failure to reach ultimate agreement is the result of a decision rooted in business judgment — rather than an intentional attempt to avoid contracting at all — courts are likely to find the parties negotiated in good faith.
Takeaways
Companies in the defense space should review their form teaming agreements with legal counsel to determine where the agreements might be vague or unclear. Perhaps most importantly, teaming agreements should include language specifically noting what promises the parties are making (and, just as importantly, what promises they are notmaking).
Where a teaming agreement includes a promise to negotiate in good faith, parties would also be wise to retain counsel during the subcontractual negotiations to ensure there is no risk of breach of the promise to negotiate in good faith.
Finally, litigating these types of agreements can present unique procedural and substantive issues, including the potential availability of extra-contractual remedies and differing scopes of enforceability. Parties to these teaming agreements would do well to consult litigation counsel with extensive experience litigating these matters to ensure the projects progress to completion.
Andy Hicks is the managing partner at the trial and appellate boutique firm, Hicks Johnson PLLC. He represents plaintiffs and defendants in complex commercial disputes and tort claims and has built an exceptional track record both in the courtroom and before arbitral tribunals in the United States and abroad.
Fraser Holmes is an associate at Hicks Johnson and litigates complex commercial disputes at both the trial and appellate levels, as well as in arbitration proceedings.
Megan Mitchell, a summer associate who is a 2L at Northwestern University Pritzker School of Law and current managing editor of the Northwestern University Law Review, also contributed to this article.