Contractors Can File Claims Pertaining to Novated Contracts

The Government filed a motion to dismiss a claim filed by Cooper/Ports America (CPA) with the ASBCA (Armed Services Board of Contract Appeals) because the company was not the contractor within the meaning of the Contract Disputes Act at the time the claim accrued.

In 2015, the Government awarded a contract to Shippers Stevedoring Company (Shippers) for stevedoring and related terminal services. IN 2016, CPA acquired Shippers and entered into a novation agreement with the Government.

CPA opposed the Government's motion arguing that under the novation agreement executed by the Government, it has the legal right to assert claims that pre-date the novation agreement, i.e. as the successor in interest under the contract, has the right to assert a claim accruing prior to the novation agreement.

The Board did not sustain the Government's motion. The Board ruled that the Government expressly recognized CPA as the contractor in the novation agreement and recognized CPA as "entitled to all rights, titles and interest of the Transferor in and to the contracts as if the Transferee were the original party to the contracts.

To read this broad recognition as excluding the right to pursue a claim accruing to the original contractor, as the government urges us to do in this case, would do violence to the clear intent of the agreement.

If the tables were turned, and CPA had urged us to limit its assumption of "all obligations and liabilities of, and all claims against, the Transferor under the contracts as if the Transferee were the original party to the contracts" to those liabilities or claims expressly spelled out in the agreement by the Government, we doubt the Government would acquiesce.

The Government cannot have it both ways.

You can read the full decision by clicking here.

Does a Contractor Name Change Require a Novation Agreement?

From time to time, companies are bought and sold, divisions are spun off or sold, and mergers and business combinations occur. Laws prohibit transfer of Government contracts from a contractor to a third party unless the Government, when it is in its interest, recognizes a third party as the successor in interest to a Government contract. The third party's interest must have arisen out of the transfer of all the contractor's assets or the entire portion of the assets involved in performing the contract. When it is not in the Government's interest and the assets are transferred anyway, the Government has the right to terminate the contract for default.

If the Government agrees to the transfer of assets, a "novation agreement" is required. A novation agreement is a legal instrument executed by three parties - the contractor (or the transferor), the successor in interest (or the transferee), and the Government - by which, among other things, the transferor guarantees performance of the contract, the transferee assumes all obligations under the contract, and the Government recognizes the transfer of the contract and related assets.

FAR (Federal Acquisition Regulations) 42.12 prescribes policies and procedures for recognizing a successor in interest to Government contracts when contractor assets are transferred (which requires a novation agreement) and recognition of a change in a contractor's name (which does not require a novation agreement but requires a "change-of-name" agreement). FAR 42.12 also contains examples of novation terminology and content.

A simple name change does not require a novation agreement so long as the contractor's rights and obligations remain unaffected. Nor does a change in organizational structure, say from a sole proprietorship to an LLC require a novation agreement. The Government however will require a "change-of-name" agreement which must include an authenticated document effecting the name change, an opinion from the contractor's legal counsel stating that the change of name was properly effected under applicable laws, the effective date of the name change and a listing of all contracts remaining unsettled between the contractor and the Government (see FAR 42.1205).

Contractors contemplating buying or selling business segments need to assess the Government's interest when conducting due diligence reviews.

Novation Agreements - Part II

Novation agreements are required whenever a contractor is acquired by a third party. Sometimes the Government will block such moves as in such notable cases involving Lockheed and Northrup, General Dynamics and Newport News, and Litton Industries and Newport News. The Government has also blocked some acquisitions of DoD contractors by foreign entities. If the Government is not convinced that an acquisition is in its best interests, it is not bound to novate contracts to the new or to the acquiring company.

When a contractor asks the Government to recognize a "successor in interest", the contractor must submit to the Government

• The proposed novation agreement
• The document describing the proposed transaction, e.g. purchase/sale agreement or memorandum of understanding
• A list of all affected contracts between the transferor and the Government, as of the date of sale or transfer of assets showing 
• contract number and type
• name and address of the contracting office
• total dollar value, as amended,, and
• approximate remaining unpaid balance
• Evidence of the transferee's capability to perform
• Any other relevant information requested by the contracting officer.

Several years ago, there was an acquisition involving a contraction contractor. The acquiring company did not perform adequate due diligence and after the transaction was finalized, discovered that several large Government construction contracts were in significant loss positions, so significant that it drove the acquiring company into bankruptcy. (Although the bonding companies stepped in to finish the work, completion was significantly delayed as a result). Since then, the Government has been heavily emphasizing reviews of the financial capability of acquiring companies when considering novation agreements.

The requirement to provide "any other relevant information requested by the contracting officer" is the gateway for requiring voluminous amounts of additional detail. This might include such information as board of directors meeting minutes, shareholder meetings, articles of incorporation, legal counsel correspondence, financial statements, security clearances, and many others.

Companies who are contemplating acquiring Government contractors and Government contractors who are seeking to be acquired, need to expect and anticipate a prolonged determination process.

Novation Agreements - Part 1

A novation agreement, as used in Government contracting, is the act of replacing a party to an contract with a new party. A novation is valid only with the consent of all parties to the original contract (both the Government and the contractor). A contract transferred by the novation process transfers all duties and obligations from the original contractor to a new contractor.

While Government contractors are prohibited from transferring their Government contracts to a third party (see 41 U.S.C. 15) there are times the Government will, when it is in their interest, recognize a third party as the "successor in interest" to a Government contract. Its never a sure thing that the Government will go along with the deal however. There are many factors that the Government needs to consider and there are a few hoops that contractors will need to jump through as well.

A "successor in interest" arises out of the transfer of

• All the contractor's assets to a different entity (Company A acquires Company B)
• The entire portion of the assets involved in performing the contract.(Company A acquires a "segment" of Company B). Some examples include:
• Sales of these assets with a provision for assuming liabilities
• Transfer of these assets incident to a merger or corporate consolidation
• Incorporation of a proprietorship or partnership, or formation of a partnership.

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. However, whether there is a purchase of assets or a stock purchase, there may be issues related to the change in ownership that appropriately should be addressed in a formal agreement between the contractor and the Government. For example, if the new owners have been suspended or debarred from contracting with the Government, the Government would obviously have issues with the new ownership team.


Sometimes, the Government will determine that it is not in their interest to concur in the transfer of a contract from one company to another company. In those circumstances, the original contractor remains under contractual obligation to the Government, and the contract may be terminated for reasons of default, should the original contractor not perform.

When considering whether to recognize a third party as a successor in interest to Government contracts, the responsible contracting officer must identify and evaluate any significant organizational conflicts of interest. If the responsible contracting officer determines that a conflict of interest cannot be resolved, but that it is in the best interest of the Government to approve the novation request, a request for a waiver may be submitted.

Tomorrow we will discuss contractor data requirements and contracting officer considerations.