So, with that prologue, why does it matter, from a government contracts perspective, what form the deal takes? The answer to this question can be found in two federal statutes, i.e., 41 U.S.C. §6305 (formerly 41 U.S.C. § 15) and 31 U.S.C. § 3727, which prohibit, respectively, the transfer of government contracts, or of interests in government contracts, and the assignment of claims and interests in claims against the Government. There are several reasons for these statutes, e.g., to discourage speculation in government contracts that can then be “flipped” for profit after award; to make sure that the Government knows with whom it is dealing and that it obtains the benefits anticipated when it chose the contractor in the first instance; and to avoid duplicative claims and payments under the contracts.

rs expressly restrict assignments. In these situations, an earnings assignment without a charter assignment may be sufficient if the secured party is comfortable without having an assignment of the contract rights. Typically, an assignment of earnings relating to a vessel assigns an owner’s rights to proceeds under all charter contracts entered into by that owner in respect of the vessel. Under New York law, even if the underlying charter restricts assignments, a contractual restriction on assignment of general intangibles, such as payment rights, is ineffective3, so the assignment of the proceeds thereunder would be enforceable.__________________________1 In the U.S. generally, a contract that is silent on assignment is generally freely transferable unless either a statute or public policy provides otherwise, or there are material adverse consequences to the non-assigning Party. ‘Personal services’ contracts, such as a charterparties, are exceptions to the freely transferable rule. 2 41 U.S.C. § 6305. The Assignment of Claims Act (31 U.S.C. § 3727) however permits assignments of moneys due under such contracts subject to certain conditions. 3 NY UCC § 9-408 (2022).

Economic sacrifice by entities other than the entity contracting with the government may contribute to contract performance or may be allocable to the contract, but unless the contractor incurs an economic sacrifice, that cost will not be recognized.IDS offered two reasons why the CBCA should consider the tax and penalty amounts assessedagainst ACADEMI LLC and then paid by ACADEMI LLC and Constellis Holdings LLC tobe costs of IDS. IDS first argued a transfer of 100 percent of business assets, including government contracts, resulting in the transfer of those contracts by operation of law without violating the Anti-Assignment Act, 41 U.S.C. §6305 et seq. A transfer by operation of law includes corporate mergers, consolidations, and reorganizations where the contract continues with the same entity but in a different form.

Endnotes[1] See Glenn West & Maryam Naghavi, How Anti-Assignment Workarounds Work (or Not), Weil Insights, Weil’s Global Private Equity Watch, May 2, 2018. And don’t forget that certain contracts contain statutory anti-assignment provisions that may be subject to a different analysis than contractual anti-assignment clauses. See e.g., Tex. Prop. Code §91.005 (leases); 41 U.S.C §6305 (government contracts).[2] It is important to note that “[m]ergers and stock sales have been variously treated by some courts and care should be taken to check the specific state law before assuming that a stock purchase or a reverse merger will always avoid applicability of an anti-assignment clause that does not contain a change of control clause.”

This three-part series outlines certain key issues to consider before, during, and after transactions involving government contractors.Pre-Transaction: NovationThe Anti-Assignment Act (41 U.S.C. § 6305) generally prohibits companies from selling government contracts. However, the Federal Acquisition Regulation (FAR) permits the government to recognize a transferee of a contract following a transfer of all of a company’s assets involved in performing the contract through the novation process.

31 U.S.C. § 3727. Conversely, under the Assignment of Contracts Act, a “party to whom the Federal Government gives a contract or order may not transfer the contract or order, or any interest in the contract or order to another party. . . .” 41 U.S.C. § 6305. When deemed to be in its interest, however, the Government may waive the statutory prohibitions in the Anti-Assignment Acts.

When the owner of a company is looking to sell its business, some of the company’s assets or, in some circumstances, the ownership of the company, a critical question is whether government contracts can be transferred to a third party. While the federal Anti-Assignment Act, 41 U.S.C. § 6305, prohibits the transfer of government contracts to a third party, the government may, when in the government’s interest, recognize a third party as the successor in interest to a government contract when the third party’s interest in the contract arises out of the transfer of all the contractor’s assets or the entire portion of the assets involved in performing the contract. See Federal Acquisition Regulation (FAR) 42.1204(a), Applicability of novation agreements.

However, the federal government is a unique client in other ways, too. Significantly, the Anti-Assignment Act under U.S. Law (41 U.S.C. 6305) prohibits the “sale” or transfer of government contracts from your company to a third party, i.e. to an entity other than the company that was originally awarded the contract. So how can you sell your business when you are a government contractor?

Any other arrangement purporting to assign the right to make a claim for revenues under a federal contract is not enforceable against the Government.Notes [1]Kawa v. United States, 86 Fed. Cl. 575 dismissed, 368 F. App's 106 (Fed. Cir. 2009). [2]31 USC § 3727 and 41 USC § 6305. [3] Id. at 591 (citing Tuftco Corp. v. United States, 222 Ct.Cl. 277, 614 F.2d 740 (1980)). [4] FAR § 32.802(b).