Merged Company Did Not Need a Novation to Submit a Valid Claim under Operation of Law Exception to Anti-Assignment Act
Who is a government contractor for purposes of submitting a claim against the Government under the Contract Disputes Act (CDA)? A decision from the Civilian Board of Contract Appeals (CBCA) in an appeal handled by Oles Morrison highlights the “operation of law” exception to the Anti-Assignment Act under a merger. Ats Trans LLC DBA Around the Sound/transpro, Appellant, 22-1 B.C.A. (CCH) ¶ 38151 (June 27, 2022). A merged contractor can still submit a CDA claim without a novation of the contract under the Federal Acquisition Regulation (“FAR”) from the Contracting Officer.
In 2014, the Veterans Administration contracted with TransPro, Inc. to provide transportation services to veterans. On January 1, 2016, TransPro merged with Around the Sound LLC (“ATS”), another local transportation company. The surviving company, ATS Trans LLC dba Around the Sound/TransPro (“ATS Trans”), continued the contract with the VA, and did not receive a novation under FAR Subpart 42.12 – Novation and Change-of-Name Agreements. ATS Trans consisted of the same management, staff, and equipment as TransPro, and, in 2015, Transpro informed the VA of the merger. After the merger, ATS Trans submitted all of its invoices as ATS Trans.
In 2021, ATS Trans submitted a detailed certified CDA claim to the Contracting Officer (CO) stemming from the VA’s failure to pay for invoiced services. After the CO denied ATS Trans’s claim in a multi-page final decision, ATS Trans, appealed to the board. The VA moved to dismiss the appeal for lack of jurisdiction, claiming that any assignment of TransPro’s contract was invalid under the Anti-Assignment Act (AAA), and ATS Trans is not a government contractor under the Contract Disputes Act. 41 U.S.C. 7101 et seq. ATS Trans argued that the merger makes the assignment of the contract valid under the “operation of law” exemption to the Anti-Assignment Act.
Who is a contractor under the CDA?
The Contract Disputes Act defines a contractor as a party to a government contract other than the Federal Government.
The Veterans Administration argued that while TransPro had a contract with the VA, when TransPro and ATS merged, “ATS Trans” failed to obtain a novation from the Contracting Officer. While surviving entities generally absorb subsumed entities’ liabilities, this poses a question in government contracts where assignment is generally not allowed during contract administration by the contracting officer without a novation.
The Anti-Assignment Act (AAA) prohibits assigning contracts or claims to prevent fraud and complex multi-party litigation for government contracts. 41 U.S.C. 6305. However, there are exceptions, and an assignment or transfer will be upheld if it does not violate the policy that the AAA was intended to protect. Typically, the assignment is upheld if the government recognizes it expressly via novation under FAR 42.1203, or implicitly via ratification or waiver.
Operation of Law Exception
The Supreme Court has long recognized an “operation of law” exception to the AAA which exempts assignments arising from mergers, name changes, or corporate restructuring so long as the contract continues with the same entity but in different form. Erwin v. United States, 97 U.S. 392 (1878). Unfortunately, the Government paid no heed to this authority, relying on the FAR’s requirement for a novation and the inapplicability of any exception to the AAA. The Government argued that ATS Trans was not a contractor under the CDA because “ATS misrepresented or failed to disclose the existence of the merger in a timely manner, which should preclude the assignment by operation of law.” Ats Trans LLC DBA Around the Sound/Transpro, Appellant, 22-1 B.C.A. (CCH) ¶ 38151 (June 27, 2022).
ATS Trans was the surviving entity from the ATS and TransPro merger. ATS Trans is essentially the same as TransPro, only the name is different. The CBCA reasoned that the merger did not violate AAA policy and fell squarely within the “operation of law” exemption. The CBCA has repeatedly held that assignments based on names changes and mergers are exempt from the AAA. The CBCA determined that the contract was validly assigned from TransPro to ATS Trans. The CBCA’s application of the “operation of law” exemption makes ATS Trans a government contractor under the CDA without a novation under the FAR from the contracting officer.
The CBCA hinted at the fact that ATS Trans may be considered a contractor even without the operation of law exemption. The Board noted that the contractor did not violate AAA’s statutory purpose. The opinion also mentions that the VA may have implicitly ratified the assignment by paying invoices to “ATS Trans dba TransPro” instead of “TransPro.” While the opinion did not reach the issue of implicit ratification, it intimated that the factual circumstances would have led to a similar decision.
The Policy Implications from this Decision
This ruling solidifies that contractors who perform their contracts under a new name or as part of a merged company can be considered CDA Government contractors under the AAA “operation of law” exemption without needing a novation from the contracting officer. Such contractors that perform government contracts under a different name than on the contract must not fear being considered a non-contractor without recourse to submit a claim under the CDA.
A contractor considering a merger should inform the CO. However, if the CO will not recognize the operation of law exception or requires a novation, the merged contractor is not without recourse to submit a CDA claim to the contracting officer and request a CO’s final decision on that claim. Contractors may sidestep jurisdictional challenges and have a board of contract appeals recognize the merged contractor’s CDA claim as a matter of law. An appeals board will recognize the CDA claim of the merged contractor under the AAA.
If you have any questions, please contact Howard Roth and Joey Haughney of the Oles Morrison Government Contract law team.