May a government contractor transfer its contract to another company?

The following question was asked by a company official: We are interested in acquiring another company that has current federal government business. Must we obtain government approval of the transaction before completing the purchase? Can the government deny such approval?

In general, a government contractor may not transfer its rights under a contract without prior approval from the responsible contracting officer. However, the contracting officer must consent when the transfer is "by operation of law." This includes situations in which the entire business entity changes hands, either through a stock transfer or a transfer of the complete assets of the company. It may also include transfers of the complete assets of the unit responsible for the government contract.

Furthermore, even when the transfer is not by operation of law, the contracting officer must act reasonably in deciding whether to approve the transaction.

Statutorily, there are two different Anti-Assignment Acts. The first, dating from at least 1853, prohibits transfers of any interests in claims against the United States (see 31 U.S.C. 3727). The second, which dates from 1862, prohibits transfers of any interests in a government contract (see 41 U.S.C. 15). Both statutes are subject to exceptions for bona fide financing arrangements.

On its face, the prohibition against transfers of contracts is stated in stark terms, although case law has ameliorated the act's potential impacts. Thus, 41 U.S.C. 15 states that "no contract or order, or any interest therein, shall be transferred by the party to whom such contract or order is given to any other party, and any such transfer shall cause the annulment of the contract or order transferred, so far as the United States is concerned. All rights of action, however, for any breach of such contract by the contracting parties, are reserved to the United States."

In contrast to the clearly improper transfers to which the act was addressed, certain transfers do not involve the potential for abuse. The courts and other authorities have recognized that transfers by operation of law are not prohibited by the statute.

Some authorities have suggested that this rule extends to transfers of an entire business unit that is responsible for a government contract, even though it is not a separate corporate entity (see, e.g., 9 Comp. Gen. 72 (1929)). However, there is little precedent on this point.

Under Federal Acquisition Regulation Subpart 42.12, the parties are required to obtain government approval for all contract transfers, including those by operation of law. However, the government has no right to disapprove transactions that are outside the prohibitions of the Anti-Assignment Act.

Furthermore, the comptroller general has held that as long as the prime contractor retains responsibility for contract performance, subcontracting of even substantial portions of the work to be performed is not an improper assignment of contract.

Finally, for many years the applicable authorities have recognized that the government's authorized representatives retain the right to waive the statutory prohibition against transfers of contracts when doing so is in the best interest of the United States.

Formal approval of a transfer is given through a novation agreement. Under such as agreement, the government recognizes the succeeding company as the prime contractor without relinquishing any rights it might have against the predecessor company (see FAR 42.1204).

But even in the absence of a formal agreement, the government's conduct and statements to the parties may constitute sufficient acknowledgment of the transaction to prevent the government from denying the validity of a transfer.

Clearly, it is in the parties' best interest to seek advance approval of any transfer of interest in a government contract before going very far with the deal. However, failing to provide the responsible contracting officer with advance notice is sure to create tension and possibly suspicion.

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Peckinpaugh is a member of the government contracts section of the law firm of Winston & Strawn, Washington, D.C. His column can be read on FCW's Web page at http://www.fcw.com. For more information, contact him at carl@carl.com.