Contributor: John Ford | Senior Consultant, Government Contracting Industry Practice
We sometimes have clients ask us about the possibility of buying or selling a contract. This results in us having to explain the prohibition against the buying or selling of contracts contained in the Anti-Assignment Act (AAA) and how it applies to the concept of novating a contract. We will discuss these issues here.
The Anti-Assignment Act, 41 U.S.C. §6305 states in part:
The party to whom the Federal Government gives a contract or order may not transfer the contract or order, or any interest in the contract or order, to another party. A purported transfer in violation of this subsection annuls the contract or order so far as the Federal Government is concerned, except that all rights of action for breach of contract are reserved to the Federal Government.
Note that this section only prohibits a contractor from transferring a contract. The AAA has been interpreted as permitting the government to waive the application of the AAA and consent to the transfer of a contract when it is in the government’s interest to do so. Such consent is a discretionary act on the part of the government and the AAA does not require the government to grant such consent. If a contractor transfers a government contract without the government’s consent, the AAA specifies that the transfer “annuls the contract or order so far as the Federal Government is concerned.” Thus, the recipient of the contract will receive no benefit from it and the transferring contractor may be liable to the government for breach of contract damages.
The AAA has also been interpreted as not applying to transfers by operation of law. Thus, it does not prohibit the transfer of a contract if the transfer is incident to the transfer of a business through a will or a transfer incident to an order by a bankruptcy court. Therefore, if such a transfer occurs, it is not prohibited by the AAA and the contract is not subject to being terminated for default by the government.
As stated above, the AAA has been interpreted as giving the government discretion to consent to the transfer of a contract when it is in the government’s interest to do so. This concept has been incorporated in Federal Acquisition Regulation (FAR) Subsection 42.12.
FAR 42.1204(a) states in part that:
The Government may recognize a third party as the successor in interest to a Government contract when the third party’s interest in the contract arises out of the transfer of-
(1) All the contractor’s assets; or
(2) The entire portion of the assets involved in performing the contract.
Examples of such transactions include, but are not limited to-
(i) Sale of these assets with a provision for assuming liabilities;
(ii) Transfer of these assets incident to a merger or corporate consolidation.
It should be noted that some mergers constitute a transfer by operation of law. When this occurs, no novation is necessary.
In contrast, FAR 42.1204(b) provides that “[a] novation agreement is unnecessary when there is a change in the ownership of a contractor as a result of a stock purchase, with no legal change in the contracting party, and when that contracting party remains in control of the assets and is the party performing the contract.”
To begin the novation process, the contractor (transferor) must submit a request to the responsible contracting officer. If any of the contracts proposed for transfer have been assigned to an Administrative Contracting Officer (ACO), that ACO will be the responsible contracting officer. If none of the affected contracts held by the transferor have been assigned to an ACO, the contracting officer responsible for the largest unsettled (unbilled plus billed but unpaid) dollar balance of contracts will be the responsible contracting officer. Along with the request, the contractor must submit the documentation listed in FAR 42.1204(e) and (f).
If the government consents to the transfer, FAR 42.1204(i) provides a model novation agreement. This model contains the minimum information that must be included in the novation agreement. However, the parties can add additional terms.
Once a contract is novated, the transferee becomes liable for performance of the contract and is responsible for the actions of the transferor that occurred prior to the transfer. For example, if the transferor submitted defective pricing in regard to a contract, the transferee is responsible for the price reduction. On the other hand, if a claim accrued to the transferor prior to the transfer, the transferee can assert that claim.
As the foregoing demonstrates, novations can be a complicated process. They generally should not be undertaken without the benefit of professional assistance. The documentation required for submission to the ACO that is responsible for reviewing and executing the novation agreement can be extensive. It is advisable to start planning and engage with the ACO soon after the need for a novation is identified. Detailed information on the affected contracts is needed early in the process, so contractors should ensure they have done their due diligence identifying the contracts that will be novated.
Regarding a change of name, FAR 42.1205 describes the process for doing so. Such agreements are executed by the responsible contracting officer as described above after the contractor submits a request for a name change. Like FAR 42.1204, 42.1205 contains a model change of name agreement.
If you have questions concerning novations or other contracting matters, do not hesitate to contact us for advice and assistance.
