A Contractor with a Novated Contract Is Still a Contractor
May 18, 2018
When an awardee novates it contract to another contractor, can the new contractor assert any claim that the original awardee could have pursued? That was the question in the recent Armed Services Board of Contract Appeals (ASBCA) decision in Cooper/Ports America, LLC, ASBCA No. 61461. According to the ASBCA, the answer depends on the terms of the novation agreement. In this case, the answer was an emphatic “yes”. Where the novation agreement is clear, the ASBCA will enforce that language and allow the claim to move forward.
In Cooper/Ports America, the initial awardee of the subject contract incurred financial losses that led it to seek out other firms to take over contract performance. Eventually, the initial awardee (Transferor), Cooper/Ports America (Transferee), and the Government entered into a novation agreement that provided, in pertinent part that:
The Government recognizes the Transferee as the Transferor's successor in interest in and to the contracts. The Transferee by this Agreement becomes entitled to all rights, titles, and interests of the Transferor in and to the contracts as if the Transferee were the original party to the contracts. Following the effective date of this Agreement, the term “Contractor,” as used in the contracts, shall refer to the Transferee.
This language “closely tracks” the suggested format contained in FAR 42.1204.
The dispute arose when Cooper/American Ports asserted a claim arguing the initial awardee’s bid was based on a unilateral mistake as it was 63% below that of the next lowest bidder. The Government moved to dismiss the claim arguing Cooper/Ports America lacked “privity of contract to qualify as a ‘contractor’ with standing to pursue a claim that accrued at a time that it was not a party to the contract.” The Government further contended that an “express assignment” of that particular claim was required in order for the “Board to find a valid … waiver of the statutory prohibition against assignment of claims,” relying on Delmarva Power & Light Co. v. United States, 542 F.3d 889 (Fed. Cir. 2008).
In response, the ASBCA first noted its prior decision in Vought Aircraft Company, ASBCA No. 47357, which involved a novation agreement and in which it held that successors in interest are “entitled to all the rights” of their predecessors as if they were the original party. Relying upon Vought, the ASBCA found the Government’s reliance upon Delmarva was misplaced. The ASBCA distinguished Delmarva by noting it did not involve a novation agreement and simply stood “for the proposition that, in the absence of government consent by way of a novation agreement, the government may, in other ways, recognize an assignment of claims.” The ASBCA further found that Delmarva and its predecessor, Tuftco Corp. v. United States, 614 F.2d 740 (Ct. Cl. 1980), actually recognized that the government may validly waive the application of the Anti-Assignment Act; “in each case the issue was whether the government, by its actions, had in fact done so.”
Here, the Government had expressly recognized Cooper/Ports America as the “contractor” in the novation agreement. Thus, the ASBCA explained it was unnecessary to conduct the consent/assignment analysis found in Delmarva and Tuftco. Moreover, the ASBCA noted that Cooper/Ports America was “entitled to all rights, titles and interests of the Transferor [initial awardee] in and to the contracts as if the Transferee [Cooper/Ports Amercia] were the original party to the contracts.” In so finding, the ASBCA held that the Government’s attempt to carve out the right to bring a claim from the novation agreement’s broad language “would do violence to the clear intent of the agreement.” It further noted that:
If the tables were turned, and [the second contractor] had urged us to limit its assumption of ‘all obligations and liabilities of, and all claims against, [the initial awardee] under the contracts as if [the second contractor] 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. That the reciprocal provision entitling the transferee to ‘all rights, titles, and interests’ of the transferor does not expressly include the word ‘claims’ does not change our conclusion.
There are a few takeaways from this decision. First, make sure your novation agreement clearly spells out your expectations in taking over a contract. The ASBCA will look to and apply that language if it is clear. The FAR clause provides standard language that has now been enforced on multiple occasions. Second, understand what the liabilities are before you get involved. As the ASBCA noted, the second contractor accepts the good with the bad, i.e., you may have claim that arose from the initial awardee’s performance, but you may also have exposure to liability from the Government because of some problem with the initial awardee’s performance. Thus, it’s important to use due diligence—before entering into a novation agreement—to get a good handle on everything that has transpired before the novation and to make sure you fully understand the potential liability to which novation may expose you.
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