As we discussed in a prior Alert, parties buying or selling a business must consider how to properly transfer the seller’s contracts to the buyer. Part 42 of the Federal Acquisition Regulation (“FAR”) addresses the contract administration and audit services for federal Government contracts. FAR Subpart 42.12 addresses a contractor’s ability to transfer federal Government contracts. 48 CFR § 42.12. Federal Government contracts cannot be transferred unless buyer and seller comply with detailed “novation” requirements, the federal Government approves of the proposed transfer, and a novation agreement is signed by the Government, the buyer and the seller. 48 CFR § 42.1203.

Less traditional federal agreements may not be subject to these time-consuming and expensive novation requirements. For example, agreements made under the federal Government’s “other transaction” authority (sometimes referred to as “OTAs”) are not subject to the provisions of the FAR and should be much easier to transfer.

This Alert provides (i) an overview of the law regarding the assignability and novation of federal Government contracts, (ii) a background of Congress’s “other transaction” authority, (iii) an explanation of why OTAs are not subject to the novation requirements of FAR Subpart 42.12; and (iv) practical considerations when seeking to transfer an OTA.

Government Contracts – Unlike Non-Government Contracts – Are Not Freely Assignable

Contracts are freely assignable under the laws of most States. A contract at common law is presumed to be assignable unless the contract expressly says otherwise. See Restatement (Second) of Contracts § 317. Moreover, unless an anti-assignment provision within a contract expressly states that an attempted assignment is “void” or “void ab initio,” many courts will give effect to an attempted assignment, notwithstanding a contract’s anti-assignment provision, and will find the assigning party to be in breach of the contract. See Restatement (Second) of Contracts § 317; 29 Williston on Contracts § 74:22 (surveying anti-assignment cases).

Federal Government contracts, unlike traditional contracts at common law, are not freely assignable. The 1949 Anti-Assignment Act, 41 U.S.C. § 6305(a) (formerly 41 U.S.C. § 15), prohibits the transfer of a contract where the Government is a party. Under the Anti-Assignment Act, any attempted assignment of a federal Government contract is prohibited and void, regardless of whether the contract addresses its assignability. An attempted assignment in violation of the Anti-Assignment Act annuls the contract, except for the Government’s right to pursue remedies for breach of contract. 41 U.S.C. § 6305(a).

Notwithstanding this statutory prohibition, and because the Anti-Assignment Act is intended for the protection of the Government, the Government may consent to a transfer of its contract after receiving and approving a detailed, written request submitted by the proposed transferor. See FAR 42.1204(e), (f). If this “novation package” is approved by the Government, the buyer, seller and the Government will sign a novation agreement which allows the Government to recognize the transferee as the successor-in-interest and avoid a violation of the Anti-Assignment Act. See FAR 42.1204(h), (i). The steps required to obtain a novation are discussed in our earlier Alert. A successful novation process may require weeks, or even months, to complete, depending on the circumstances.

Other Transaction Agreements

What are OTAs?

Congress authorized several major agencies to enter into “other transaction” agreements to carry out basic, applied and advanced research projects. 10 U.S.C. § 4021(a). OTAs refer generally to transactions with federal agencies other than grants, cooperative agreements, or FAR-regulated contracts. OTAs are legally binding instruments that can be structured in a variety of ways, offering greater freedom of contract than traditional federal Government contracts, and allowing for contract terms that more closely resemble business-to-business agreements. The “other transaction” authority gives federal agencies the flexibility to access state-of-the-art, cutting-edge technology solutions through a contract tailored to the particular project and needs of the Government.

While FAR-based contracts encourage competitive bidding and the continuity of regulated FAR clauses, OTAs, by contrast, allow agencies to bypass certain FAR requirements, which can speed up the acquisition process and decrease the cost of administering such agreements. The flexibility of OTAs may better advance new technologies and processes through prototyping or models to evaluate the feasibility of a new technology. The U.S. Departments of Defense (“DoD”), Health and Human Services, and Homeland Security all used their “other transaction” authority to respond quickly to the COVID-19 pandemic; these agencies cited the speed of awards as a major reason to use OTAs in connection with COVID-19 procurements, including vaccine manufacturing.[1]

Are OTAs subject to the FAR?

OTAs are widely regarded as not being subject to the requirements of the FAR. Congress intended that OTAs function as an alternative to FAR-based agreements to encourage otherwise reluctant companies to provide prototypes and other cutting-edge technologies without the FAR’s regulatory constraints and burdens. The FAR applies to “all acquisitions as defined in part 2 of the FAR,” and FAR Part 2 does not include a definition of “other transaction.” 48 C.F.R. § 1.104. Subpart 4 of the FAR, which prescribes policies and procedures relating to the administrative matters of contracting, specifically excludes “other transactions” from the definition of a “contract action.” 48 C.F.R. § 4.601. While OTAs are legally binding agreements, courts and administrative agencies have not considered them to be “contracts” subject to the requirements of the FAR.[2]

Similarly, the Government Accountability Office (“GAO”) has described OTAs as agreements “other than contracts, grants, or cooperative agreements that generally are not subject to federal laws and regulations applicable to procurement contracts.”[3] The DoD has stated to Congress that “other transaction agreements […] are referred to as agreements to distinguish them from the traditional procurement contracts governed by the FAR and procurement laws.”[4] The Office of the Undersecretary of Defense for Acquisition and Sustainment has described OTAs as helpful due to their ability to “foster new relationships and practices involving traditional and [non-traditional defense contractors], especially those that may not be interested in entering into [FAR]-based contracts with the Government.”[5]

Are OTAs Assignable Without Complying with FAR Part 42?

Because OTAs are not “contracts” governed by the FAR, a valid transfer of an OTA should not require the onerous and expensive novation process required by FAR Part 42. Rather, an OTA should benefit from the common law presumption of free assignability that applies to most non-Government contracts.

In practice, an OTA may include novation or novation-like terms that parties must follow in connection with a requested transfer. Alternatively, a Government authority administering an OTA might require parties to follow a novation or novation-like process, even if such provision is not included in the OTA, to provide the Government with assurances that the proposed transferee will perform if the assignment is approved. In either scenario, the transferor may face resistance from the Government if the requested transfer process is not followed. This risk can be addressed by negotiating with the Government to include assignability provisions in the OTA.

Practical Considerations

Companies considering a transaction involving a federal Government contract, OTA, or other agreement should consider the following items:

• Consider the transaction structure: If federal Government contracts are part of a larger transaction, consider whether the transaction can be structured as a stock purchase to avoid the novation provisions of FAR Part 42. Under FAR 42.1204(b), a novation agreement is unnecessary when there is a change in ownership of a contractor as a result of a stock purchase, with no legal change in the contracting party, and when that contracting party remains in control of the assets and is the party performing the contract.

• Coordinate communications with the contracting officer: Buyers and sellers should consider when and how to communicate with the contracting officer or other Government authority about a possible transfer. If OTAs are involved, and the transaction structure would otherwise fall within the novation requirements of FAR Part 42, communicate early with the federal Government to determine whether the Government would agree to a transfer without following the requirements of FAR Part 42. If the Government authority will insist upon the parties following a novation process, the buyer and seller will need more time to prepare.

• Adjust the acquisition timeline: A novation request, once prepared and submitted, can take several months to receive Government approval. Given this timeline, buyers and sellers should not expect a novation agreement to be a closing condition in a typical transaction. Rather, the buyer and seller should agree to coordinate post-closing with respect to any Government requests related to the novation process.

• Make interim plans for performance: Given the uncertain approval timeline, the parties may require an extended bridge or subcontract agreement to ensure continued performance of outstanding obligations under a contract, OTA or other agreement, pending Government approval of a requested novation. Without a bridge agreement, the transferor may be unable to perform the Government contract after selling the business. Moreover, buyer and seller should not assume the Government would agree to extend deadlines or milestones to accommodate a transaction.

• Plan in the purchase agreement for a potential rejection of the novation request: The federal Government is not obligated to approve a novation request. If the request is not approved, the transferor will remain obligated to perform the contract. The contract may be terminated for default if the original contractor is unwilling or unable to perform. Buyers and sellers should consider these possibilities when structuring their transaction. Consider addressing in the purchase agreement what happens should the Government deny the novation request.

• Budget accordingly: The transaction budget should include the legal, accounting and other expenses required to prepare the novation documentation and any related agreements, should the contracting officer require a novation.

[1] U.S. Government Accountability Office, GAO-21-501, COVID-19 Contracting, Actions Needed to Enhance Transparency and Oversight of Selected Awards (July 2021).

[2] See, e.g., United Launch Services, LLC v. United States, 138 Fed. Cl. 664 (2018) (citing John Cibinic, Jr. et al, Formation of Government Contracts 21 (4th ed. 2011)); MD Helicopters, Inc., B-417379 (Apr. 4, 2019); and Blade Strategies, LLC, B-416752 (Sept. 24, 2018).

[3] Matter of: MorphoTrust USA, LLC, B-412711 (May 16, 2016) (citing U.S. General Accounting Office, GAO-03-150, Defense Acquisitions: DoD Has Implemented Section 845 Recommendations but Reporting Can be Enhanced 1 (2002)).

[4] Congressional Research Service Report, Department of Defense Use of Other Transaction Authority: Background, Analysis, and Issues for Congress 2 (Feb. 22, 2019).

[5] Office of the Under Secretary of Defense for Acquisition and Sustainment, Other Transactions Guide 4 (Version 2.0, July 2023).