Avoid violations and government criminal investigations for violating contract novation rules and the Anti Assignment Clause.
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Many federal contractors have heard the term contract assignment and contract novation sale. However, the reality is that there are completely different legal theories.
Contract assignment and novation are intended to achieve different results. For federal contractors, the FAR guidelines are particularly important when applying the rules. Failure to follow these rules can end up in suspension, debarment or some legal dispute that causes expensive civil litigation.
What is a Novation Sale?
This term in federal procurement means that there is a sale of a business ( small or large) where the business is currently obligated under a federal government contract.
A novation sale is not a sale unless approved by the Contracting Officer. Therefore, how you plan and the precautions to take are very important.
Anti Assignment Clause & Assignment of Contract Meaning
Under an assignment of contract action as a government contract, your company must continue performance under the contract. Assignment means that you are giving a third party some of your rights to the contract. The common occurrence is when small businesses assign their rights to payment. See 48 CFR 52.232-23 – Assignment of Claims.
Difference Between Assignment and Sale In Government Contract Novations – You can assign your contract or rights to a contract but you cannot sell government contracts.
Note that under the Anti-assignment clause, government contracts are not by themselves intended to be for sale. However, through asset purchase sales and the FAR contract novation agreement process, small businesses and can transfer federal contractors when there is a sale of a business.
Before assigning your contracts rights to a third party, whether it is for financing or not, make sure you seek help from legal counsel and involve the contracting officer. Also, look into whether a continued relationship between the buyer and seller can run afoul of the similarly situated small business rules.
Contract Novation Definition
By comparison, a government contract novation definition allows for the transfer of a federal project to a third party. A novation revokes and discharges a prior contract.
This can only occur if the contracting officer deems it to be in the best interest of the government. There is simply no automatic right to a contract novation.
Novation of contract means understanding a few confusing parts of the FAR 42. For example, not all types of business sales mandate a contract novation.
What are Other Differences Between a Contract Assignment and Novation Contract
As stated earlier, there are subtle differences between assignment and novation of contract with the federal government. If you are in the SBA small business certification programs and an 8(a) certified company or HUBZone certified, you should also keep the SBA informed. Find out more about the SBA HUBZone Program Here.
A common legal question arises as to whether the third party under an assignment of contract scenario becomes a party to the contract. These are all legal issues where consulting your government contracts attorney can be beneficial. If you are involved in allegations of criminal misconduct, call our novation business law lawyers and federal criminal defense attorneys at 1-866-601-5518 now.
- The FAR allows for contract assignments (you should inform the CO)
- If you are a limited liability company and small business, find out how a novation can impact your small business size
- The FAR also provides for contract novations but the initial party may still be on the hook
- The Anti-Assignment Clause prohibits outright sales of government contracts. Learn more about the small business set aside rules.