Novating a contract that involves a federal government contract can be painless so long as buyers and sellers of businesses understand how the process works. In addition, before committing to a future sale or purchase of a business, understand the difference between a novation vs assignment.
All should be aware that the contracting officer does not have to approve every assignment of contract transactions under the FAR 42.1204 contract novation clause.
- Avoid the costly mistake of assuming that the government must approve all novations.
- If done improperly, contractors can be found in breach of contract terms and can even face suspension or debarment.
Novation Agreement FAR 42.1204 Definition
In federal government contracting, developing a novation can be somewhat unique because depending on the facts of each case, the original parties may still be responsible for performance to the government. Whereas, in the commercial sector, the contract novation definition means that a new party to the contract essential substitutes the original party. In other words in the commercial sector, the original party’s obligation is discharged and substitution of an original party to a contract with a new party, or substitution of an original contract with a new contract.
Federal Government Contract Novation vs Assignment of Contract
Business Asset Purchase Agreement and Contract Assignment Clause Issues
What is the difference between assignment and novation? Simply executing a business asset purchase agreement and a signed novation contact agreement when buying or selling a business is not the end of the legal analysis when there is a government contract involved. The contracting officer must approve the assignment of government contracts and or novation agreement. Your novation letter should address critical issues that answer the contracting officer’s concerns about the risk of performance. Novating government contracts is all about minimizing the risk to the agency.
In one case, SBA OHA ignored the argument that when novating a contract, its purchase and sale contract with the buyer had the legal effect of divesting the seller of any control over the current contracts. In that case, there was no formally approved novation agreement FAR contract. As a result, the whole transaction went to waste because the parties lacked a full understanding of the rules. A Government contract may not be automatically transferred to a third party. See 41 USC 15.
- In government contracting, if there is a performance problem, for example in construction, and a termination for default is an issue, or the surety is called upon for obligations under a performance bond, then the original party may not necessarily be discharged.
- Assignment of government contracts decisions when there is a purchase and sale agreement involving a company that has existing government contracts should be met with caution.
On the issue of contract , although the FAR 42.1204 assignment novation clause allows the buying and selling parties to execute an novation vs assignment agreement due to an asset purchase or stock sale, companies should still assess legal issues related to violation of SBA small business size standards.
- Companies should always keep the agency involved from the beginning of the process to the end.
41 USC 6305 – Contract Assignment Clause – Prohibition on transfer of contract and certain allowable assignments
Under the federal contract assignment clauses, when there are business sales that involve government contracts, the purchase and sale agreement suggests that the contracts would be transferred to the buyer either through a business asset purchase agreement sale or stock sale.
However, the reality is that although FAR 42.1204 allows for a novation of contract agreement, the contracting officer is not obligated to approve it. A federal government contracting agency , only when it determines it to be in its interest, may accept a third party as the successor in interest when the third party’s interest in the contract arises out of the transfer of all of the contractor’s assets or the entire portion of the contractor’s assets involved in performing the contract. FAR 42.1204 (a). See also How Do Federal Government Contractors Deal With COVID-19 Problems?
- The contracting officer is not forced to approve the FAR novation clause language if the transaction is not in the government’s best interest.
- If the government declines to novate a contract, the original contractor is still responsible for performance. FAR 42.1204 (c) contract novation clause.
- If the assignment of contract is not recognized by the contracting officer, and the original contractor does not perform, the original contractor can be terminated for default.
Potential SBA Size Standard Violations
When assessing government novation contract law rules, the SBA found in one case that since there was no approved assignment of the contract through an approved government novation agreement, the two businesses were deemed affiliated through the identity of interest rule.
On appeal, OHA found that since there was no formal contract novation, that the seller was still responsible for the contract performance, both companies were in the same line of business.
In that case, the SBA also found that there was no clear fracture between the buyer and seller. The two businesses were therefore also affiliated with the newly organized concern rule.
Legal Issues Regarding Novation Vs Assignment
There are several legal issues that arise under federal contract novation agreement FAR law during the purchase and business sales, assignment and transfer of federal contract when government contracts are involved. Common issues that occur with the assignment novation clause terms include: (1) whether the seller is simply trying to sell the contract with no real assets, (2) how to structure the asset purchase agreement and whether wait for contracting officer novation approval first, and (3) to what degree does the contracting officer have to approve the novation. The first step is to be proactive in the early stages of the asset purchase or stock sale process.
Having the right contract clauses in the sales agreement is critical in the event that the contracting officer does not approve the contract novation. Other issues with novating a contract include the buyer maintaining its small business status in the event of recertification or option year decisions. Find our more about Signs of Being Under Investigation (Federal)
For additional questions about what is the difference between assignment and novation for federal contractors buying and selling a business that includes an assignment and FAR novation agreement or assignment of contract issues under FAR 42.1204 FAR novation clause, call Watson & Associates’ government contract novation law lawyers for immediate help. Call 1-866-601-5518. FREE INITIAL CONSULTATION.