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Under the legal definitions and implications. When you are buying or selling a business that has federal government contracts, we help you do your homework and improve your chances of getting your novation agreement approved by the contracting officer.
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Novation of a government contract means that there is a contractual document where another contractor replaces the original party to the contract.
In federal procurement, the government contract novation process is governed by FAR 42.1204. Under the FAR novation definition, the agency can also add a party to the contract and therefore share obligations.
In government contracting, the Anti-Assignment Act does not allow contracts to be just sold to another company. This a common misconception by many contractors and business owners when applying the legal novation of contract meaning. However, FAR 42 does allow the contracting officer to transfer government contracts to a new business purchaser through the use of a contract novation agreement.
Far 42.1204 Contract Novation Definition and Meaning In Law– Asset Purchase Agreement or Stock Purchase?
By execution of a valid asset purchase agreement, the buyer and seller of a business can officially move ahead with getting the government’s permission to novate the contract. When it comes to the novation of government contracts, the terms of the original contract do not change. However, the contracting officer may have concerns about potential risks that could be present after the sale or purchase.
When considering what is novation of contract and how it impacts your specific business transaction, if there is a stock purchase, under FAR novation law, then a novation agreement is generally not required. You should always understand the contract novation includes consulting with the contracting officer and an attorney before any novation of contract actions.
- Find out more about implementing an asset purchase agreement in the novation process.
- Learn whether the FAR contract novation legal definition and requirements apply to your situation even as a joint venture
- Get help at the beginning of the purchase or sale transaction for sales in the construction industry.
The Government Contract Novation Process
Businesses or joint ventures involved in the purchase or sale of companies where government contract novations are involved often are surprised that after they execute the buy-sell agreements and the contracting officer does not approve the novation agreement. As mentioned earlier, novation of government contracts is not automatic. The agency would have some level of say. Each situation is looked at on a case-by-case basis. Understanding the process and getting professional guidance is often favored when the agency sees that either the buyer or seller’s attorney understands the federal contracting process.
- First, assess what type of transaction you are dealing with – Asset Purchase or Stock Purchase
- Understand the implication of small business size standards of the buyer
- Apply the statutory requirements for FAR 42.
- Review the novation of contract package for issues that the agency attorneys will look for
- Make sure that all parties to the sale understand that the sale requires the terms of the original contract to be the same
- Novation includes providing a compliant package to the contracting officer for approval
The federal novation contract law process can be tricky. Therefore, having the right legal team in place can get better results and avoid some of the most costly mistakes seen with federal novations. Find out whether your transaction violates any rules about small business joint ventures.
The FAR novation process allows great discretion to the contracting officer. Federal novation contract law states that if the contracting officer decides not to concur with the assignment of a federal government contract to another company, then you, the original contractor remains legally obligated to perform the signed contract. See also information on FAR Part 15.
How Does Your Asset Transfer Agreement Stack Up?
When assessing federal contract novation meaning in law, an asset transfer sale will more than likely require a novation agreement.
When you buy or sell a business that has federal government contracts, you want to be extremely careful not to do so without informing the contracting officer and presenting a formal and compliant novation agreement. There are actual companies that have tried to do this and simply found out the hard way through a small business size protest litigation.
- Be mindful that an asset purchase novation could impact your small business status
- There is more to an asset purchase transfer of assets than simply filling out a novation contract.
Your asset transfer agreement with the other company alone does not force the government to accept your decision to buy or sell the business. Until the government approves the transfer of assets through the novation process, you are still responsible for performing the contract.
Under federal novation contract law, you cannot claim that because the other party signed the Asset transfer agreement that it now has control over the contracts. Without a formal novation agreement, appellate courts will not buy this argument. See Size Appeal of eTouch Federal Systems, LLC, SBA No. SIZ-5280 (2011).
Don’t Want to Execute a Novation Agreement? Watch for Termination for Default.
Termination for Default T4D sanctions possible: If you decide to execute a federal contract novation agreement and asset purchase (other business sale documents), you can be subject to termination for default, suspension and debarment, or other sanctions imposed by the federal government. Remember that novation of contract means that it has to be in the government’s interest.
- If you execute the sale with an asset purchase agreement, close the deal, and then inform the contracting officer, you could very well face termination for default for not following FAR 42.1204.
You cannot simply buy and sell government contracts. A Federal Government contract may not be transferred to a third party. 41 USC 15. The Government may, when in its best interest, recognize a third party as the successor in interest to Government, when the third party’s interest in the government 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).
The Federal Government is not obligated to accept your novation of contract under an asset purchase without the contracting officer’s approval. When the
Government concludes it is not in its interest to novate the contract, it may decline to do so and hold the original contractor liable for performance. FAR 42.1204(c).
If the original contractor does not perform, the Government may terminate the contract for default. Id. This is all the reason to engage a novation law attorney that understands how government contracts can be novated.
Federal contract novation meaning in law and legal definition includes conflict of interests: when considering government contract novations, the contracting agency must look to see whether there are conflicts of interest in accordance with FAR 9.5. If there is a conflict of interest, and cannot be resolved, the contracting officer can approve a waiver if in accordance with FAR 9.503.
Call Our Novation of Contract Lawyers Today
For help complying with the federal contract novation definition and meaning, help going through the process and asset purchase agreement suggestions, need help with criminal defense, call our government contract novation lawyers at 1-866-601-5518. FREE 30 MINUTE CONSULTATION.