New Teaming Arrangements on Infrastructure Projects (The Perfect … · 2017. 7. 27. · Teaming...
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Teaming Arrangements onInfrastructure Projects (The PerfectPair . . . or the Odd Couple?)*
Theresa A. Goetz, Charles E. Hardy, Stephen H. Reisman,Brian J. Schoolman**
I. Introduction
The scale and complexity of construction projects, along with adesire of many project owners to spread available work amongmultiple contractors, has led an industry trend towards variousarrangements among contractors that are referred to as jointventures, teaming agreements, consortia, partnerships and thelike (all of which are collectively referred to as “teaming arrange-ments” in this paper). Although teaming arrangements are notnew to the construction industry, their utilization has acceleratedover the years and is now quite common in both the public andprivate sector. They are regularly used in all types of construc-tion, especially on large infrastructure projects.
This paper is intended to review various forms of teaming ar-rangements utilized by contractors with each other and withdesign professionals. It considers some of the principal consider-ations that motivate contractors to “team up” and some key fac-tors to be addressed in creating a legal framework for the chosenteaming arrangement. Since many teaming arrangements involvemajority and minority “partners,” consideration has been given tothe perspectives of both. For practical guidance, several industrystandard documents for teaming arrangements are referenced inthis paper.II. Forms of Teaming Arrangements
A. Teaming/Association AgreementsUnder a “Teaming Agreement” or “Association Agreement,” a
potential prime contractor enters into a written agreement withanother �rm (an “associated contractor”) that agrees to act as apotential subcontractor or consultant for a proposed constructionproject that has not yet been awarded. Pursuant to this structure,
*This paper is derived from a presentation to the American Bar Associa-tion Forum on Construction Law at its 2014 Fall Meeting.
**Theresa A. Goetz of Schlemlein Goetz Fick & Scruggs, PLLC, Charles E.Hardy of Slates Harwell LLP, Stephen H. Reisman of Peckar & Abramson, P.C.and Brian J. Schoolman of Safran Law O�ces.
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the lead contractor seeks the expertise or quali�cations of one ormore associated contractors in order to win and ultimatelyperform a scope of work that will arise if a prime contract isawarded.1 Though the parties' relationship tends to be “vertical”in nature (where the lead contractor exercises some degree ofmanagement or control over the associated contractor) the Team-ing Agreement is not itself a subcontract. Instead, the TeamingAgreement is a good faith agreement that the lead contractor andthe associated contractor will work together to pursue a construc-tion contract, with the understanding that they will enter into asubcontract or other joint agreement if the owner awards a primecontract to the bidding entity. Therefore, the scope of work forthe parties operating pursuant to this structure is two-pronged:(1) preparation and submission of a bid to obtain a contract forconstruction; and (2) performing the actual construction and/ordesign work if the contract is awarded.
A Teaming Agreement will typically detail how the parties willallocate or share responsibilities both in bidding and during per-formance if a prime contract is secured. Generally speaking, thelead contractor will be the sole bidding entity, serving as a primecontractor and the designated point of contact for the owner. Insuch an instance, the owner and/or other competitive bidders willlook to the lead contractor, and not the associated contractor,with respect to claims or disputes that arise as a result of biddingand/or construction.2 On the other hand, the associated contrac-tor will remain liable for obligations that arise from its delineated“scope.”
Additionally, a Teaming Agreement may specify that only thelead contractor will negotiate with the owner, or it may contain amore collaborative structure whereby the associated contractortakes an active role in owner interaction. It may also providethat each team member shall be responsible for its own costs andexpenses incurred in preparing the bid, versus the lead contrac-tor bearing the burden of such expenses.
Teaming Agreements frequently set forth a division of respon-sibilities relating to the bid, the scope of the associated contrac-tor's work, payment terms, con�dentiality of any informationexchanged between the parties, a process for adding additionalteam members, ownership of bid documents, and rights and
1There are circumstances where two subcontractors can enter into a team-
ing agreement as well to win work from a general contractor.2Killian, Fazio, Creating and Enforcing Teaming Agreements, 25-SPG
Construction Law. 5, 5–6 (2005). We explain below how in a joint-venture, themembers tend to be jointly and severally liable to the owner. In a teamingagreement, the associated contractor remains somewhat insulated from theowner as claims are more naturally asserted against the lead contractor.
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obligations that will apply if the owner �nds that a team memberis not properly quali�ed to perform under a contract. They mayalso include exclusivity and non-compete clauses, dispute resolu-tion processes, governing substantive law, and clauses clarifyingwhether public documents, such as letterheads, signage, andmedia releases will include the names of both the lead contractorand associated contractor.
If a contract for construction is ultimately awarded to the primecontractor, then the associated contractor's role transitions intosomething much like a traditional subcontractor and/orconsultant. Insofar as subcontract terms are often negotiated af-ter prime contract award, however, and executed at the time theTeaming Agreement is formed. Therefore the Teaming Agree-ment may also account for how the subcontract will be enteredinto, and they may recite agreed deal points such as pre-negotiated markups on change orders, material pricing, etc.3 Ifthe lead contractor fails to win the proposed work, then the Team-ing Agreement may terminate, depending upon whether it islimited to a single project rather than a longer-term relationshipbetween the parties.
B. Joint-Venture AgreementsA joint-venture agreement involves many similarities to the
previously described Teaming Agreement structure, in that twoentities will be working together to win a project award. However,a joint-venture agreement generally represents a more horizontalrelationship where the co-venturers share some level of property,management responsibility, pro�ts, and liability.4 The resultingaward of the project that was procured by a joint venture willresult in some form of partnership that manages the ensuingconstruction. A joint venture, which is normally formed for aspeci�c and �nite purpose such as bidding and constructing aparticular project, is de�ned more speci�cally as follows:
an association of two or more persons formed to carry out a singlebusiness enterprise for pro�t for which purpose they combine theirproperty, money, e�ects, skill, and knowledge. More speci�cally, ajoint venture is an association of persons with the intent, by way ofeither express or implied contract, to engage in and carry out asingle business venture for joint pro�t for which purpose such
3See Newton, The Legal E�ect of Government Contractor Teaming Agree-
ments: A Proposal for Determining Liability and Assessing Damages in Eventof Breach, 91 Colum. L. Rev. 1990 (1991).
4Killian, Fazio, Creating and Enforcing Teaming Agreements, 25-SPG
Construction Law. 5, 5–6 (2005).
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persons combine their property, money, e�orts, skill, and knowl-edge without creating a partnership or a corporation.5
A joint venture is not technically a partnership, insofar as ajoint venture is not normally considered a separate legal entityfrom its members. In most jurisdictions, however, joint venturesare governed by the rules of partnerships.6 One especially poi-gnant feature of such an arrangement is that co-venturers owe a�duciary duty of good faith and loyalty as to matters within thescope of the venture. Also, each co-venturer generally has author-ity to bind its co-venturer(s) to liability to third parties when act-ing within the scope of the joint venture.7 Therefore, those enter-ing into a joint venture run a risk that their co-venturer's actionscould make them liable to third-parties.
A prudent joint venture agreement should state its scope andseek to de�ne the parties' respective scopes of work and levels ofauthority. Moreover, such an agreement should specify whetherthe entities will form a �ctitious name for the joint venture. It isalso important to address several day-to-day operational func-tions in a joint venture agreement.
The parties will normally want to lay out the purpose(s) forwhich their venture was formed, how their joint bid or proposalwill be prepared, who will bear certain operating expenses, theallocation of ownership and management control, the requiredcapital contributions, the protocol for distributions and otherrevenue/pro�t sharing rights, how insurance and bonds will beobtained, how the contemplated work will be performed, howwork may be subcontracted, the duration of the venture, and howthe venture will wind up upon termination.
In summary, a joint venture agreement, as compared with aTeaming Agreement, generally allows a minority member morecontrol over the joint decision-making process for bidding andconstruction. However, the price for such increased control isthat the minority venture(s) may incur joint and several liabilityfor the acts of the joint venture and of the other joint venture
5Am. Jur. 2d, Joint Ventures § 1.
6In some jurisdictions (e.g., Florida and California), joint venture entities
can be licensed separately as contractors. In fact, a joint venture is likely to betreated as a separate entity for licensing purposes and should normally have itsown quali�er and license to bid and perform work as a construction contractor.Therefore, while the joint venture is usually not a separate entity, certain liber-ties are permitted to allow the joint venture entity to transact business. None-theless, liability generally �ows directly to the individual members of a jointventure, rather than to the joint entity.
7Ingrao, Joint Ventures: Their Use in Federal Government Contracting,
20 Pub. Cont. L.J. 399, 401 (1991).
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member(s). In other words, the trade-o� for increased control andpotential pro�ts is an increased liability exposure.
C. Consortium AgreementA consortium agreement is similar to a joint venture. In a
consortium structure, however, the relationship normally involvessome sort of loan, guaranty or equity �nancing. Rather than be-ing composed only of builders and designers, a consortium oftenincludes a plethora of stakeholders such as a contractor, designer,�nancier, developer, or operator, etc.
The consortium structure is commonly used public-privatepartnerships, where multiple parties pool resources and expertiseto procure and/or perform work together. Each participatingentity retains its separate corporate existence, while their mutualagreement sets forth who is responsible for what, and how themembers' relationships will be governed. At the same time, aconsortium agreement typically does not insulate its membersfrom third parties. Like a joint venture, a consortium structurecan expose team members to liability for other members' actions.
D. PartnershipsA partnership is very similar to a joint venture; however the
biggest distinction is that a joint venture is normally formed for aspeci�c and limited purpose, whereas a partnership tends to bemore general in nature.8 Additionally, a partnership entity is byde�nition separate and apart from the partnership's members.9
Notwithstanding these di�erences, the liability frameworkremains virtually identical: a partnership's partners are jointlyand severally liable for the partnership's actions. Additionally,and in the context of tax treatment, the partnership will gener-ally not pay taxes itself. Instead, the partnership pro�ts willdirectly �ow to the partners, who will then report this as incomeon their respective tax returns.
When construing a partnership structure, the parties' agree-ment should memorialize their respective obligations. Generallyspeaking, the death or withdrawal of a partner will operate toterminate the partnership. Therefore, the life of a partnership is�nite, unless otherwise provided in the agreement. Partnershipagreements may also specify how an ownership interest may be
8See, e.g., In re Roxy Roller Rink Joint Venture, 67 B.R. 479, 483, 15
Bankr. Ct. Dec. (CRR) 714 (S.D. N.Y. 1986) (“Moreover, a joint venture is gener-ally treated as a partnership and not a corporation, the only signi�cant di�er-ence between a joint venture and a partnership being that joint ventures areorganized for a limited time and purpose.”).
9This distinction puts form over substance. As discussed herein, notwith-
standing the existence of a partnership, generally speaking the partners becomejointly and severally liability for the partnership's obligations.
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transferred, usually subject to approval by other partners.Otherwise, the detailed operational terms of a partnership areleft to the partners to negotiate. In these circumstances, thepartners have a high degree of control over such issues as �nanc-ing sources, periodic reporting, and termination of thepartnership.
When drafting joint ventures or partnership agreements, U.S.attorneys should be aware of the Uniform Partnership Act(“UPA”), and the Revised Uniform Partnership Act (“RUPA”),which have been adopted by most states and which provide aseries of default rules that govern the relations among partnerswho fail to provide otherwise in a partnership agreement. Thesedefault rules are designed to re�ect what most partners wouldassume as implicit in their partnership agreements.10
RUPA addresses many issues that are likely to be needed inany teaming arrangement. To the extent a partnership agree-ment in the construction context fails to de�ne the partnership,partnership property, the transfer of partnership property, �du-ciary duties, and dissolution, etc., the RUPA provides guidanceas to these issues. It should be noted that some of these obliga-tions may not be waived even through a partnership agreement.For example, RUPA provides that partners owe an absolute dutyof loyalty and duty of care to the partnership and the otherpartners.11
There are other forms of partnership that purport to limit theliabilities of individual partners. For example, in a limited li-ability partnership, a partner will generally not be liable to thirdparties for the partnership's obligations. However, some statesrequire a limited liability partnership to maintain insurance inorder to secure such obligations.
In a limited partnership, individual limited partners are notgenerally liable for the obligations of the limited partnership, andthey generally do not owe �duciary duties to the limited partner-ship or to other partners.12 Therefore, the limited partner in suchan arrangement enjoys a certain degree of insulation fromliability. On the other hand, a general partner in a limited li-ability partnership is normally liable for the partnership's obliga-tions, and the partnership is probably liable to third parties for
10Elizabeth O' Connor Tomlinson, Construction and Application of Revised
Uniform Partnership Act, 70 A.L.R.6th 209.11
Rev. Uniform Partnership Act Section 103 (2013 to 2014 ed.)12
A limited partner may be liable if (1) the limited partner is also a generalpartner; and (2) to third parties who, as a result of a limited partner's participa-tion in control of the business, reasonably believe that the limited partner is ageneral partner. See Keatinge and Conaway on Choice of Business Entity § 4:5.
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the general partner's conduct. These arrangements are governedby the RULA in most states.
In summary, a partnership is most commonly formed when twoentities want a longer term relationship, whereas their coopera-tion on a single project is more often handled by a joint venture.Overall, partnerships o�er a �exible form of doing business, butthey expose their partners to broader third party liability thanwhat normally arises under a limited partnership or a jointventure agreement.
E. Corporate Entities (Corporations and LLCs)A corporate entity such as a traditional corporation or a limited
liability company (LLC) can be used when members want to sharecontrol and pro�ts but are unwilling to assume joint and severalliability to third parties, as would accrue under a joint-venture ortraditional partnership structure. Corporate forms are widelyused to insulate parties from liability that may otherwise accrueat common law. The legal entity is separate from its shareholdersor members, and liability to third parties is normally limited tothe entity. The corporate entity on a construction project is alsogenerally a separate tax-paying entity, subject to applicableregulations.
One distinction between a corporation and a partnership is thefact that stock certi�cates are the basis of ownership in acorporation. The stockholder thus possesses a relatively fungibleasset, which may be transferred to third parties with relativeease, unless restricted by a shareholders agreement. In otherwords, the corporate existence continues although its stockhold-ers may change, whereas in a partnership, a change in principalstatus will often trigger a termination of the entity.
Another distinguishing feature of a corporation is the need forcorporate entities to �le certain registration papers and pay fees,which include formation fees, �ling fees, and annual fees, in thegoverning jurisdiction. Thus the formation of a corporate entitytends to require more startup and administrative costs than ajoint venture or partnership, which may be launched andmaintained simply by executing an agreement. Additionally, acorporation must adhere to certain corporate formalities, such asholding annual shareholder meetings, recording corporateminutes, having board of director approval for major corporateactions, and providing for shareholder voting. Therefore, themanagement of a corporation is often more time consuming thanthe relatively informal partnership structure. If such formalitiesare not adhered to, a shareholder may incur liability for corporate
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actions through a theory of alter ego or piercing the corporateveil.13
With these features in mind, corporations only come into exis-tence by �ling articles of incorporation and a certi�cate ofincorporation. The articles of incorporation will establish (1) thename of the corporation; (2) the name and address of a registeredagent; (3) the nature or purpose of the business to be conducted;(4) the numbers of shares of stock authorized in each class ofstock; (5) the name and address of each incorporator; and (6) ifthe powers of the incorporators will terminate upon �ling of thecerti�cate of incorporation, the name and mailing address of thepersons to serve as directors until the �rst annual meeting ofstockholders. Additionally, a certi�cate of incorporation mayinclude provisions relating to: (1) regulating corporate powers; (2)compromising of claims; (3) granting preemptive rights tostockholders; (4) requiring supermajority voting for corporate ac-tion by stockholders or by a larger number of directors; (5) limit-ing the duration of the corporation's existence to a speci�c date;(6) imposing personal liability for corporate debts upon thestockholders; and (7) eliminating or limiting the personal liabilityof a director of the corporation or its stockholders for monetarydamages for breach of �duciary duty as a director.14 Finally, andafter a corporate entity comes into existence, it will adopt bylawsto address the day-to-day functioning of the corporation, includ-ing directors', o�cers' and shareholders' rights and duties,management, etc.
Therefore a corporate entity requires more formalities than apartnership or a joint-venture. The insulation from liability is anadvantage of this structure for shareholders, but the separatetreatment of a corporate entity (if formed for a single purpose)could also work against bidders if that entity lacks su�cient re-sources and/or experience to qualify for the contemplated work.
13Generally speaking, for a court to pierce the corporate veil, “two separate,
essential factors must be established.” Dickens v. Alliance Analytical Laborator-ies, LLC, 127 Wash. App. 433, 440, 111 P.3d 889 (Div. 3 2005). ‘‘ ‘First, thecorporate form must be intentionally used to violate or evade a duty’ ’’ (quotingMeisel v. M & N Modern Hydraulic Press Co., 97 Wash. 2d 403, 645 P.2d 689(1982)). “Second, the fact �nder must establish that disregarding the corporateveil is necessary and required to prevent an unjusti�ed loss to the injuredparty.” Dickens, 127 Wn. App. at 441. Furthermore, a court may pierce thecorporate veil under an “alter ego” theory “when ‘the corporate entity has beendisregarded by the principals themselves so that there is such a unity of owner-ship and interest that the separateness of the corporation has ceased to exist.’ ’’Grayson v. Nordic Const. Co., Inc., 92 Wash. 2d 548, 553, 599 P.2d 1271 (1979)(quoting Burns v. Norwesco Marine, Inc., 13 Wash. App. 414, 535 P.2d 860 (Div.2 1975)).
14Keatinge and Conaway on Choice of Business Entity § 3:16.
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F. Design-Build ArrangementsA design-build arrangement is one where a design professional,
such as an architect or an engineer, teams with a contractor inorder to streamline the design and construction processes andprovide a comprehensive solution for an owner that traditionallywould be required to hire separately a designer and a builder.This arrangement tends to overlap the design phase and construc-tion phase of a project and can take any of the organizationalforms described above (joint-venture, partnership, corporation,etc.). The parties entering into such a structure hope to fast trackconstruction by early contractor involvement in estimating andmaterial procurement, as well as a collaborative approach tointerpreting speci�cations.15
A design-build arrangement can be structured vertically, wherethere is a “prime” member, and the associated entity derivessome level of compensation for services rendered. For example, adesign-build team may be comprised of a design professional asthe prime member with a contractor providing construction ser-vices as a “subcontractor” or conversely, it may be comprised of acontractor as the prime member with architects and engineersproviding design services as “subcontractors.” Alternatively, adesign-build arrangement may be horizontal in nature where thedesign and construction entities partner and share in the overallsuccesses and failures of the project. No matter how the agree-ment is structured, a design-build operating agreement usuallyprovides for a team leader, who will provide overall direction andleadership, and will be the conduit for communication with theowner.
One important feature of this arrangement is harmonizing thedesign phase with the construction phase. For example, tensioncan arise between the design-build team members if a designdelay is causing a lag in the construction schedule. To addressthis concern, a design-build arrangement can be structured sothat the designer has a separate contract with the joint venture,and the designer's pro�ts and losses pursuant to that agreementwill have no bearing on its right to pro�ts and losses on the mainjoint venture agreement governing construction.16 However, in apurely “horizontal” structure, the delay in design would have tobe borne equally by all of the team members.
Therefore, and aside from addressing how the design profes-sional and contractor will each function, a design-build agree-ment typically contains many other day-to-day deal points thathave been previously described in this article.
15Bruner & O'Connor Construction Law § 2:12.
16See ConsensusDocs Form 499, Joint Venture Agreement.
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III. Why Team Up? Issues and Considerations that Drivethe Decision Making Process
As in other business decisions, a variety of objective and subjec-tive considerations will factor into the decision to utilize a jointventure or some other Teaming Agreement to pursue a particularproject. The decision making process is very likely the same,regardless of whether the decision is being made by a contractor,an architectural or engineering �rm, or a subcontractor.
A. The Nature of the Project Might Necessitate aTeaming ArrangementThe demands of project itself may be the �rst consideration.
Many large, complex projects e�ectively require more than onecontractor to be involved simply because of the magnitude of thescope of work. There probably is no better example than theHoover Dam. The winning bid in 1931 was $48,890,955, and noneof the �rms pursuing the project had the resources to go it alone.In today's dollars, the Hoover Dam would be a multi-billion dol-lar project. The winning bid was submitted by a joint venture ofUtah Construction Co., Morrison-Knudsen, Paci�c Bridge Co.,Bechtel, MacDonald & Kahn and J.F. Shea Co. The Joint Venturewas called “Six Companies.”
These days, contractors are still teaming up to pursue largeinfrastructure projects such as the LAX Bradley Terminal Proj-ect, recently completed by a joint venture of Austin CommercialL.P. and the Walsh Group.
If a project requires an unusual or unique scope of work, itmay give a competitive advantage to particular contractors ordesigners who have special expertise, but those �rms may lackthe capacity or resources needed for the size of the project. Insuch cases, teaming with an experienced general contractor orconstruction manager or engineer can provide business opportuni-ties not otherwise available to the specialized contractor orsubcontractor if acting alone.
B. A Teaming Arrangement Can Be Utilized to ManageFinancial Risks Inherent in Large ProjectsRisk management and risk mitigation are also important
considerations in determining whether to pursue a teamingagreement. Contractors may simply be looking to manage risk bysharing the potential �nancial exposure on a large or complexproject. As discussed below, allocation of risk among the partnersis a crucial element in crafting e�ective teaming agreements.
The size of the project may bring a surety into the decisionmaking process. The bonding capacity of a single contractor maybe insu�cient to pursue the project, and the contractor's suretymight suggest teaming with another contractor. When consider-
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ing the issuance of performance and payment bonds on a large,complex project, sureties may want to spread the risk among twoor more parties regardless of the bonding capacity of any individ-ual participant in the pursuit.
Cities, counties and metropolitan airport authorities are amongthe project owners on large public works projects that mayrequire more than one contractor to be involved. Contractorsoften �nd that these owners require joint ventures as a means ofproviding security for completing a large project, just as similarconsiderations have traditionally led to requiring surety bonds.Conversely, some owners may prohibit the use of joint ventureswhen awarding a project.
C. Location! Location! Location!One of the most common considerations driving the decision to
form a team is geography. The project could be located in a regionwhere Contractor A has no presence. However, the scope of theproject may �t Contractor A's resume very well. Contractor B hasbeen in the geographical location for many years and knows themarket, the project owner and the local subcontractors very well,but Contractor B may lack experience in building this particularkind of project. A joint venture of these two contractors couldtherefore make a lot of sense. The downside to Contractor B isthat it may be giving Contractor A entry into the local marketand creating new competition. Contractors routinely use thismethod to expand into new geographical markets.
D. Teaming Arrangements Allow for the Pairing ofContractors with Complementary Skills and/orFinancesA project might bene�t from the specialized technical expertise
of a contractor that lacks the capacity, �nancial assets or bondingcapacity that would be needed to pursue the project alone. A jointventure or other teaming arrangement may give this contractoran ability to pursue work it otherwise could not pursue.
Similarly, the project might require a special license or othercredential that one contractor has but another contractor doesnot. Local laws may also require a separate contractor's licensefor the joint venture in addition to the licenses that the individ-ual participants may already have.
E. Teaming Arrangements Enable Contractors to MeetSet Aside RequirementsMinority owned, women owned or disadvantaged business
requirements of a project may also drive the decision. It is com-mon for public projects to have MBE, DBE or WBE requirementsfor participation at the subcontract level. Public sector ownersoften require such participation at the construction manager/
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general contractor level, favoring a joint arrangement in whichthe minority contractor becomes a partner in the joint venture.
F. Design/Build ProjectsDesign/Build or Engineer-Procure-Construct projects may favor
formation of a team that includes a contractor or constructionmanager and an engineer or architect. This delivery system isbecoming more common on large, civil projects such as bridgesand highways. These arrangements require special considerationof the design liability. Architects and engineers generally havecomparatively low policy limits on professional liability insur-ance, so joint venture partners will need to consider how to miti-gate risk of errors and omissions by the engineer-design partner.The joint venture will have joint and several liability to theowner, but its partners will generally negotiate some kind of ap-portionment of risk among themselves. A separate professionalconsulting agreement or subcontract between the joint ventureand the engineer-design partner is one way of creating an “arm'slength” relationship that can shift design responsibility. Project-speci�c professional liability insurance coverage naming the jointventure and all partners as insureds is another way to managethis risk.IV. Essential Steps to Put Together a Successful Team
A. Finding a Suitable Teammate is the First Step inthe Teaming ProcessOnce a decision is made to pursue a project through a teaming
arrangement, the next step is �nding the right entity (or entities)to form the team. Depending on the complexity and size of theproject (both in scope of work and �nancial outlay), the due dili-gence process will vary. However, the following questions shouldbe fundamental parts of such due diligence.
1. Who Is the Target Team Member?This inquiry should include, without limitation, analyzing the
proposed member's legal structure, authorized representative(s),quali�cations to do business, licenses, and technical expertise. Ofcourse, these criteria must be examined in the context of theproject owner's stated requirements for bidder responsibilityunder the advertised contract (the “Target Contract”) and theproposed member's, if any, with that owner.
2. What Is the Financial and Bonding Strength of theProposed Team Member?
To answer this question, it will generally be prudent to obtain�nancial statements from the proposed team member, andperhaps also to run a credit report. The goal is to determinewhether the potential member can bear its share of in the
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�nancial support of the team arrangement. The �nancial strengthof a team member also bears on the joint entity's potential needto request guaranties from individual owners of the proposedmember.
3. What Is the Potential Team Member's Past WorkPerformance, and What Has Been Its Relation-ship with Past Customers?
In assessing this aspect, it can be useful to ask a potentialteam member about other projects in which it has been involvedin a teaming arrangement, and the outcome of those projects (inorder to ascertain whether the proposed team member has li-abilities that may a�ect its performance on the Target Contract).It is also prudent to inquire whether the proposed team memberhas been terminated on any other projects (at least during thepast �ve years) and general questions related to its relationshipwith customers.
4. What Is the Litigation or Claim History of theProposed Team Member?
Inquiries should be made as to whether the proposed teammember is currently involved in litigation or has been involved inlitigation or claims in the recent past. Inquiries should also bemade as to whether the potential team member is party to anycurrent litigation or investigation.
5. What Is the Prospective Team Member's SafetyRating?
It is important to determine the prospective team member'ssafety rating, as a number of public and private contracts have aminimum industrial insurance rating requirement for contractors.Some public entities will also request the insurance experiencemodi�cation ratings as another measure of a participant's safetypractices.
6. Is the Prospective Member Truly Compatible withthe First Party?
A �nancially �ush proposed member or entity, with a particu-lar skill set that will give the team either a leg up on competitorsor satisfy underlying requirements for the Target Contract, canbe seductively appealing. However, it is important to evaluatewhether the members will be compatible and be able to worktogether. It follows that corporate culture and previous experi-ence with a particular potential member should be examined.
7. Does the Prospective Member Have a Quali�cationor Certi�cation that the First Member Lacks But IsNecessary to Secure the Target Contract?
Additionally, the nature of the Target Contract may require
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consideration of special attributes of a potential team member.For example, an owner may require participation by a Disadvan-taged Business Enterprise/Women Business Enterprise/MinorityBusiness Enterprise (collectively referred to as “DBE”). Both thefederal government and a number of states have set asides forpublic works projects that call on contractors to provide a certainpercentage of DBE participants. Because the federal governmentpermits such preferences, even states, such as Washington, thathave statutes prohibiting preferential treatment in publiccontracting, have exceptions for federally funded projects.17 Ad-ditionally, a growing number of companies in the private sector,such as Microsoft, permit preferences or require DBEcerti�cations. Where DBE participation is encouraged or required,a contractor should verify the certi�cation status of a potentialteam member.
B. Potential Team Members Must Take A�rmativeSteps to Protect Their Interests During Initial Discus-sions and Performance of the Construction Contract.
1. Protection of Proprietary Information DisclosedDuring Negotiations Leading to a Teaming Ar-rangement and the Performance of the UltimateContract
Inevitably, �nancial information will be disclosed during thedue diligence investigation of potential team members and thepreparation of a bid. The parties will often disclose other types ofcon�dential and proprietary information, both before and afteraward of the Target Contract. To facilitate the free �ow of infor-mation and foster team building, it is essential to impose an af-�rmative obligation to treat and hold non-public information ascon�dential. A properly drafted Con�dentiality Agreement shouldassure that neither party will improperly use the other party'sproprietary information. Because preliminary discussions for aTeaming Agreement may not result in the consummation of anactual agreement, it is imperative that a Con�dentiality Agree-ment be entered into before substantive disclosures begin.
A Con�dentiality Agreement should of course de�ne the docu-ments and/or information that will be considered “con�dential,”how they will be handled, and the consequences of a failure tofollow the agreement. The parties should also discuss whether ei-ther party will be precluded from submitting a bid to an owneron its own or with a di�erent partner under any circumstances.
17See RCW 49.60.400(6).
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2. Preliminary Agreements May Be Enforced Againsta Party Who Determines It Does not Want to Proceedwith a Teaming Arrangement.
While the parties may believe they have exhausted the due dil-igence process and are comfortable formalizing a teaming ar-rangement, a party may decide that it no longer wants to pursuethe joint teaming arrangement. Such a decision can occur at anytime during the negotiation process and before a written Team-ing Agreement has been �nalized. At that point, one importantquestion is whether the parties have already reached a legallybinding agreement. In analyzing whether the parties intended tobe bound even before executing a written contract, courts will ex-amine the magnitude and complexity of the proposedarrangement. If there are numerous written drafts, or if it isclear that major deal points had not yet been resolved when oneparty gave notice of its decision to drop out of the transaction,the parties probably did not intend to be bound unless and untilthe partied executed a formal written agreement.18 Where partiesto a negotiation evidence intent not to be bound until they havesigned a formal agreement, a court is unlikely to hold that theywere mutually bound at an earlier date.19 Indeed, there is a strongpresumption against �nding a binding agreement when the par-ties expressly contemplated the future preparation and executionof a formal written contract.20 This presumption can prevail evenwhen the parties had orally agreed upon all material terms of theproposed contract.21
However, where there are no essential terms missing from an
18See Reprosystem, B.V. v. SCM Corp., 727 F.2d 257, 262–263, Fed. Sec. L.
Rep. (CCH) P 99667 (2d Cir. 1984) (“The magnitude and complexity of the dealas re�ected in the numerous written contract drafts not only reinforced the par-ties' stated intent not to be bound until written contracts were signed, but alsore�ect a practical business need to record all the parties' commitments in de�n-itive documents.”); Kona Hawaiian Associates v. Paci�c Group, 680 F. Supp.1438, 1454 (D. Haw. 1988) (Business entities ordinarily do not enter into multi-million dollar transactions in the absence of a comprehensive writing.).
19See V'Soske v. Barwick, 404 F.2d 495, 499 (2d Cir. 1968) (where parties
to a negotiation “intend not to be bound until they have executed a formal docu-ment embodying their agreement, they will not be bound until then”). See alsoBuilding Service Employees Intern. Union, Lodge No. 6 v. Seattle Hosp. Council,18 Wash. 2d 186, 194, 138 P.2d 891 (1943) (“Where it is clearly understood thatthe terms of a proposed contract, though tentatively agreed upon, are to bereduced to writing and signed before it is complete and binding on the parties,there is no �nal contract until that is done.”).
20Teachers Ins. and Annuity Ass'n of America v. Tribune Co., 670 F. Supp.
491, 499 (S.D. N.Y. 1987).21
Chromalloy American Corp. v. Universal Housing Systems of America,Inc., 495 F. Supp. 544, 550 (S.D. N.Y. 1980), a�'d, 697 F.2d 289 (2d Cir. 1982)
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oral teaming agreement and there is no evidence the partiesintended to be bound only if a written agreement was executed, acourt may �nd that an enforceable teaming arrangement existed.Cable & Computer Technology, Inc. v. Lockheed Sanders, Inc.22 isa signi�cant decision illustrating the dangers of one party pullingout of an oral Teaming Agreement after the parties had reachedthe essential, albeit not yet formalized in writing, terms of anagreement. In Cable, the Ninth Circuit Court of Appeals upheldthe enforcement of an oral Teaming Agreement to pursue asubcontract with the Boeing Company. In that case, Cable andLockheed Sanders had not yet reached �nal accord on the�nancial terms of the Teaming Agreement when Lockheed Sand-ers withdrew from the team two weeks before the project biddate. Cable could not bid the project on its own and sued forenforcement of the Teaming Agreement. Lockheed Sandersprevailed on summary judgment as to the dismissal of the breachof contract claim. The Ninth Circuit reversed the trial court'ssummary judgment dismissing the breach of contract claim, not-ing in its decision to publish the opinion:
In some respects a garden variety contracts dispute, this case is setparticularly in the world of defense contracting and draws a cleardistinction between mere agreements to agree and agreements toteam together to bid a subcontract, so that we think it may be help-ful to publish our opinion.
Cable & Computer Technology, Inc., 214 F.3d at 1033. The courtwent on to state:
No naked agreement to agree constitutes a contract. If Cable canprove no more than that to a jury, Sanders must prevail. But whatCable o�ered in evidence to the district court was an exchange ofpromises, supported by consideration, to be a team with Sandersand as a team submit a bid to Boeing. If believed, that evidenceestablished an oral contract. Unlike an agreement to agree, anagreement to use best e�orts to achieve a common objective is aclosed, discrete, and actionable proposition.
Cable & Computer Technology, Inc., 214 F.3d at 1035 (citationsomitted). The case was remanded to the trial court, and the juryawarded not only compensatory damages but punitive damagesto Cable.
One lesson to be learned from Cable and its successor cases isthat if parties do not intend to be bound to a teaming arrange-
(“If parties ‘contemplate a reduction to writing of their agreement before it canbe considered complete, there is no contract until the writing is signed.’ Thisrule obtains even if the parties have orally agreed upon all the terms of theproposed contract.”).
22Cable & Computer Technology Inc. v. Lockheed Sanders, Inc., 214 F.3d
1030, 2000-2 Trade Cas. (CCH) ¶ 72991 (9th Cir. 2000).
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ment until they sign a written agreement, they should protectthemselves at the outset so that discussions regarding deal pointsfor a teaming arrangement do not become a binding contract. Aletter of intent is one form of preliminary agreement that canprotect the preliminary negotiations. Speci�cally, a letter ofintent can recite that the proposed terms of agreement are pre-liminary and non-binding, that a Teaming Agreement is not ef-fective until it is mutually signed, and that any oral statementsor representations to the contrary are not binding.V. Drafting a Successful Teaming Agreement
It is of course important to exercise care in drafting a de�nitivedocument, whether it is a joint venture agreement, partnershipagreement, limited liability company operating agreement orother form of contract between general contractor andsubcontractor. While the type of entity chosen to be the formatfor the team may vary, certain essential elements of any teamingarrangement are likely to include the following:
A. Identi�cation of Project for Which the Teaming Ar-rangement Is OrganizedIn an introductory section, a Teaming Agreement, it should
identify the parties and their relationship (e.g., joint venture vs.contractor/subcontractor arrangement) and the purpose of theteaming arrangement (typically identifying the Target Contract).
B. Interests of Team MembersThe percentage interest of each Team Member in the pro�ts,
assets, capital contributions, contributions of personnel and otherresources, surety support, losses, liabilities and voting controlshould either be set forth in the body of the agreement or in anexhibit. It is also good practice to include mutual indemni�cationprovisions that protect members if they incur a loss or liabilitywhich exceeds their percentage interest share of the loss or if theother Team Member engages in some wrongful action.
C. Scope of Work/Division ofResponsibilities/Management of Team ArrangementThe scope of work performed by each party should be set forth
in detail, not only in preparing the Target Contract bid, but alsoin completing the contract work itself if a contract is awarded.With regard to the scope of work, it is also important to delineatea decision-making process to guide each stage of the project. Thatprocess should include preparation and submittal of a bid,negotiation of the Target Contract, performance of the underly-ing contract work, and possible activities after completion ofconstruction (such as defending or prosecuting potential claims).
D. Delineation of Financial Obligations and Bene�tsIn addition to allocating scope of work, a Teaming Agreement
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should clarify each party's �nancial responsibility for costs as-sociated with the underlying project. Generally, a distinction ismade between costs incurred before bid submission and costsincurred after a potential award of the Target Contract. Withregard to the former, each party generally bears its own costs. Asto costs of performing the Target Contract, however, the teamtypically bears the costs.23 Equally important is setting forth howeach party will be paid, when it will be paid, and what costs willbe reimbursed before any pro�ts are distributed. The agreementshould also provide a remedy if one party fails to timely pay its�nancial obligations on the project. Finally, the parties mustdetermine how �nancial loss on the Target Contract will be al-located and what provisions can be added to protect a party thatmay have paid more than its allocated share of a loss.
E. Events of Default and RemediesA prudent Teaming Agreement should set forth what events
constitute a default. Typically, events of default include not onlya breach of the terms of the agreement, but a Team Member's �l-ing for bankruptcy, liquidation or making a material misrepre-sentation of its �nancial position. The Teaming Agreement shouldset forth the consequences of a default (e.g., upon the occurrenceof the default, the defaulting Team Member may lose its right tovote) and the remedies available to the remaining Team Members(e.g., a right to dissolve the teaming arrangement).
F. Termination ProvisionThe Teaming Agreement should clarify the circumstances in
which a party may terminate the agreement, and the conse-quences of such a termination. In particular, a provision shouldaddress what will occur if one party �les bankruptcy.
G. Protection of Con�dential/Proprietary Informationand/or Intellectual PropertyRegardless of whether the parties executed a separate Con�-
dentiality Agreement, the Teaming Agreement itself should ad-dress the exchange and handling of con�dential/proprietary partyinformation, such as �nancial information. The agreement shouldidentify who will own any intellectual property resulting from, orarising out of, the Teaming Agreement and what will happen toany con�dential information when the project is completed orterminated.
H. Choice of Law/Venue ProvisionsThe Teaming Agreement should provide for choice of law and
23One exception is a line item joint venture, under which each party to a
joint arrangement undertakes separate responsibility for costs incurred inperforming speci�ed parts of the design and/or construction work.
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venue for any action arising out of, or related to, the TeamingAgreement. The choice of law provision should tie into anyalternative dispute resolution procedure that the parties haveadopted.
I. Alternative Dispute Resolution ProceduresThe parties should consider whether to require mitigation,
mediation and/or arbitration in the event of any dispute arisingout of, or relating to, the Teaming Agreement. Typically, a Team-ing Agreement provides a tiered approach to resolving disputes.A typical �rst step calls on the parties to engage in direct discus-sions and, if a resolution cannot be achieved within a certainnumber of days, the Team Members may bring in senior execu-tives to attempt a resolution. If that process also fails to resolvethe dispute after a speci�ed period of time, Teaming Agreementsoften require each party to participate in a mitigation process, af-ter which any remaining issue is referred to mediation and/or abinding adjudication process like arbitration.
Typically, a dispute mitigation process refers an issue to aProject Neutral or Dispute Review Board, through mutual selec-tion by the parties. Generally, the parties would share the cost ofthe Project Neutral or Dispute Review Board and would outlinethe relevant decision-making process. Contract provisions alsotypically provide that the recommendations/decisions of a ProjectNeutral's or Dispute Review Board are nonbinding, and they willclarify whether such input may be used as evidence in asubsequent binding adjudication of the matter. If the nonbindingmitigation process fails to achieve a resolution, Teaming Agree-ments can then require the Team Members to proceed eitherwith mediation or a binding adjudication process.
When mediation is enabled, it should generally be convenedwithin a set period of time after one of the parties asks for it.Teaming Agreements generally provide that the costs of media-tion are shared equally by the Team Members.
Anticipating that the matter may not be resolved at mediation,Teaming Agreements often provide that any party may submitthe matter to binding arbitration or to litigation in a designatedforum venue. As to the former option, it is important to provideboth for arbitrator selection and for the parameters of thearbitration. The agreement will also frequently address whetherthe parties will engage in discovery and, if so, the extent ofpermissible discovery, because discovery is one of the greatestdrivers of cost and delay in dispute resolution. The arbitrationprovision should: (1) specify what rules will apply to the arbitra-tion (for example, local court rules, AAA Construction Arbitrationrules, or JAMS rules); (2) whether the number of witnesses willbe limited in arbitration; and (3) whether dispositive motions willbe allowed and the length of the time of the arbitration.
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A carefully worded dispute resolution provision can signi�cantlyreduce dispute expenses and shorten the period of time for theresolution of problem.
J. Limitations of LiabilitiesThe parties may elect to limit their liability to each other in
various ways. It is common to include waivers of consequentialand punitive damages, and a variety of other damages can becapped or liquidated. Parties may also agree to indemnify eachother in connection with certain categories of third party claimsarising from their acts or omissions. To the extent a partyprovides such an indemni�cation, it should consult with its in-surance broker to see whether it can obtain insurance coveragefor a contractual indemni�cation (generally it cannot).
K. Miscellaneous ProvisionsGenerally, the “miscellaneous” section of a Teaming Agreement
will be a “catch all” for boiler plate contract provisions, such asthe severability of unenforceable provisions in the agreement, aswell as the following:
E Joint Defense/Prosecution Agreement. While everyone hopesthat a project will go smoothly, there are many things thatcan go wrong. If the Team becomes involved in disputeswith the Owner or another third party, the Team will wantto present a united front. More importantly, the Teammembers will want the ability to discuss such issues freelyamong themselves and their attorneys without fear of waiv-ing attorney-client privileges. A Teaming Agreement can setthe groundwork for preserving such privilege. It may alsofacilitate cooperation by incorporating language such as,“the Parties covenant to work together in a relationship oftrust, good faith and fair dealing and will take all actionsreasonably necessary so that the Work can be secured andperformed in an economical and timely manner consistentwith good workmanship and sound business practices.”Alternatively, the Agreement may include language to thee�ect “that in the event of the prosecution of or defense of aclaim related to the Owner, the Parties will execute a JointProsecution/Defense Agreement, as applicable, and will worktogether in a relationship of trust, good faith and fair deal-ing to prosecute/defend the claim”;
E Prohibition against assignment of the interests and rights ofa Team Member without the consent of the other TeamMembers;
E Reasonable disclosure of each party's �nancial informationthroughout the term of the teaming arrangement upon therequest of the other Team Member;
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E A limitation of rights of any creditor or other third partiessolely to the right to claim or receive a Team Member's dis-tributive share of pro�ts after completion or termination ofthe project; and
E Non-solicitation of employees of another Team Member for acertain period of time following the completion of the TargetContract.
L. The Teaming Agreement Should Address SituationsUnique to the Team MembersIn addition to the kinds of boilerplate contract items above
identi�ed, the attorney drafting and/or reviewing a proposedTeaming Agreement should consider the unique circumstances ofthe Team Members. One such circumstance may be the projectowner's requirements for DBE participation. For example, if theowner requires removal of a decerti�ed participant, is there aprovision in the Teaming Agreement document to address the sit-uation? If the Teaming Agreement allows a Team Member to beterminated due to such decerti�cation, that party might want aprovision clarifying that such termination would be treated atermination for convenience and not for “cause.” The terminating(non-certi�ed) party, on the other hand, would probably wantsuch termination to be for “cause.”
Another special circumstance may arise if only some (but notall) owners/members/shareholders of the Team Members arerequired to execute personal guaranties for the project (the “Proj-ect Guarantors”). In such an event, the Project Guarantors wouldprobably want an assurance that the non-signing owners wouldindemnify their proportionate share of any sum that ends up be-ing paid on the personal guaranties. See sample forms of Team-ing Agreements from ConsensusDocs (Forms 296 (TeamingAgreement), 297 (Joint Venture Line Item Agreement BetweenConstructors For a Project), 298 (Joint Venture Agreement Be-tween Constructors For a Project), 299 (Joint Venture LLCOperating Agreement Between Constructors For a Project), 498(Teaming Agreement for a Design-Build Project) and 499 (JointVenture Agreement for a Design-Build Project)).VI. Conclusion
Teaming arrangements are generally intended to combine thestrengths of each party to help obtain and perform a constructionproject. Whether the parties enter such an arrangement as co-equals or with one party subcontracting to the other, the goal ofgetting the work and performing it more e�ciently remains thesame. When two or more parties team together, each of themmust consider the risks—whether �nancial, structural, orpsychological—of being bound to each other in ways that could
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cost both parties if there is a falling out. This is why there is noone single best type or structure of teaming arrangement.Ultimately, the parties need to �gure out the best way to standtogether, so as to keep everything from falling apart.
DRAFTING A SUCCESSFUL TEAMING AGREEMENT—CHECKLIST
Teaming arrangements can be memorialized in various formsof de�nitive document, whether it is a joint venture agreement,partnership agreement, limited liability company operatingagreement or contract between general contractor andsubcontractor. While the type of entity chosen or the form ofagreement may vary, the following essential terms are likely tobe included:
1. Identi�cation of Project for Which the Teaming Arrange-ment Is Organized.E Who are the parties to the arrangement?E What is the target Project?E What form of teaming arrangement (e.g., joint venture,
limited liability company) will be used?2. Interests of Team Members.
E What percentage interest will each Team Member havein the pro�ts, assets, capital contributions, contributionof personnel and other resources, surety support, losses,liabilities and voting control?
E Consider whether to have mutual indemni�cation provi-sions that protect members if they incur a loss or li-ability which exceeds their percentage interest share ofthe loss or if a Team Member engages in a wrongfulaction.
3. Scope of Work/Division of Responsibilities/Management ofTeam Arrangement.E Identify in detail the scope of work performed by each
party.E Delineate the decision-making process for each stage of
the project: that is from preparation and submittal of abid, negotiation of the Target Contract, to performanceof the underlying contract work, to any activities aftercompletion of the Target Contract (such as defending orprosecuting claims or litigation against the owner).
4. Delineation of Financial Obligations and Bene�ts.E Identify the �nancial responsibility of the parties in con-
nection with formation of the Teaming Agreement.E Identity the �nancial responsibility of the parties for the
costs associated with performance of the TargetContract.
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E Set forth a remedy if one party fails to timely pay its�nancial obligations related to the Target Contract.
E Set forth how �nancial loss related to and/or arising outof the pursuit or performance of the Target Contractwill be allocated.
E Set forth provisions to protect a party that pays morethan its allocated share of a loss.
5. Events of Default and Remedies.E What events constitute a default (e.g., breach of the
agreement/�ling for bankruptcy by a team member)?E What are the consequences of the default? (e.g., upon
the occurrence of the default, the defaulting TeamMember loses its right to vote)
E What remedies are available to the remaining Teammembers in the event of a default? (e.g., in the event ofa default, may the remaining members elect to dissolvethe Teaming Arrangement?)
6. Termination Provision.E Identify the circumstances pursuant to which a party
may terminate the agreement, and the consequences ofa particular type of termination
7. Protection of Con�dential/Proprietary Information and/orIntellectual Property.E Address the exchange and handling of intellectual prop-
erty and con�dential/proprietary party information,such as �nancial information.
E Identify who will own any intellectual property result-ing from, or arising out of, the Teaming Agreement.
E Identify what will happen upon termination of theagreement to any con�dential and/or proprietary infor-mation exchanged between the parties.
8. Choice of Law/Venue Provisions.9. Alternative Dispute Resolution Procedures.
E Consider whether to require mitigation, mediationand/or arbitration in the event of any dispute arisingout of, or relating to, the Teaming Agreement.
† “Executive Resolution Process”: Senior levelexecutives attempt to resolve the issue.
† “Dispute Mitigation”: Should the Executive Reso-lution Process fail, the parties may refer the mat-ter to a Project Neutral or Dispute Review/Resolution Board.
† “Mediation”: If the matter remains unresolvedfollowing the issuance of nonbinding �ndings bythe PN/DRB, or the PN/DRB cannot issue non-
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binding �ndings, the agreement may provide theparties proceed to mediation.
† Litigation v. Arbitration: If the agreement pro-vides the parties shall arbitrate, the agreementshould provide for arbitrator selection and theparameters of the arbitration (e.g., to what extentdiscovery will be allowed, what rules will apply tothe arbitration, whether the number of witnesseswill be limited, whether dispositive motions willbe allowed and the length of the time of thearbitration).
10. Limitations of Liabilities.E Consider whether there should waivers of consequential
damages, punitive damages or liquidated damages.E Consider whether to include an indemni�cation provi-
sion in favor of the other party or relating to, or arisingout of, or connected to the �rst party's involvement inthe Teaming Agreement.
11. Miscellaneous Provisions.E Include a Joint Defense/Prosecution Agreement in the
event issues arise with the Owner of the Project.Alternatively, the agreement may contain language suchas, “the Parties covenant to work together in a relation-ship of trust, good faith and fair dealing and will takeall actions reasonably necessary so that the Work canbe secured and performed in an economical and timelymanner consistent with good workmanship and soundbusiness practices.”
E Include a clause prohibiting the assignment of theinterests and rights of a Team Member without theconsent of the other Team Members.
E Include a clause that limits the rights of any creditor orother third parties solely to the right to claim or receivea Team Member's distributive share of pro�ts aftercompletion or termination of the project.
E Include a clause that prohibits a team member fromsoliciting employees of another Team Member for acertain period of time following the completion of thetarget contract.
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