Monday, May 21, 2012

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.

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