ASBCA Rejects Government’s Attempt to Dismiss Pre-Novation Claim by Successor-In-Interest

Novations are not uncommon in Government contracting. FAR Subpart 42.12 contains standard novation language, in which the Government recognizes in part: “The Transferee by this Agreement becomes entitled to all rights, titles, and interests of the Transferor in and to the contracts as if the Transferee were the original party to the contracts.”

Government contractors – in particular, contractors in the position of “Transferee,” – will welcome a recent decision by the Armed Services Board of Contract Appeals that rejected the Government’s attempt to re-interpret the FAR’s standard novation language, and cut off a Transferee’s right to maintain claims that accrued prior to the date of the novation.

In Cooper/Ports America, LLC, ASBCA No. 61461 (May 2, 2018), Shippers Stevedoring Co. (“Shippers”) entered into a contract with the United States Transportation Command for stevedoring services in January 2015. Shippers soon began incurring losses and, on September 30, 2016, entered into a novation agreement with Cooper/Ports America, LLP (“CPA”).  Pursuant to the novation agreement, Shippers, CPA and the Government agreed that:

• The Transferor [Shippers] confirms the transfer to the Transferee [CPA], and waives any claims and rights against the Government that it now has or may have in the future in connection with the contracts.
• The Transferee agrees to be bound by and to perform each contract in accordance with the conditions contained in the contracts. The Transferee also assumes all obligations and liabilities of, and all claims against, the Transferor under the contracts as if the Transferee were the original party to the contracts.
• The Transferee ratifies all previous actions taken by the Transferor with respect to the contracts, with the same force and effect as if the action had been taken by the Transferee.
• The Government recognizes the Transferee as the Transferor's successor in interest in and to the contracts. The Transferee by this Agreement becomes entitled to all rights, titles, and interests of the Transferor in and to the contracts as if the Transferee were the original party to the contracts. Following the effective date of this Agreement, the term "Contractor," as used in the contracts, shall refer to the Transferee.

Id.  (Emphasis added.)

CPA filed a number of claims against the Government in connection with its contract, but the one addressed in this decision related to circumstances that occurred before the novation was executed, specifically, a claim for unilateral mistake based in part on the fact that Shippers’ bid was 63 percent below that of the next lowest bidder, and contained mistakes that should have been apparent to the Government.

The Government filed a motion to dismiss the claim on the ground that CPA lacked privity of contract to qualify as a contractor with standing to pursue a claim that accrued at a time that it was not a party to the contract, i.e., pre-novation. In support of this position – equally novel and aggressive – the Government argued that “a valid government waiver of the statutory prohibition against the assignment of claims” (under the Anti-Assignment Act) requires an “express assignment of a claim, to which the Government consented,” and that, here, the novation did not include such “express assignment of a claim.”

For its part, CPA relied upon the plain language of the novation agreement and Board precedent, arguing that, as a successor in interest under the contract, it had the right to assert a claim accruing prior to the novation.

In rejecting the Government’s argument, the Board first noted that the two cases on which the Government relied did not advance its cause. In Delmarva Power & Light Co. v. United States, 542, F.2d 889 (Fed. Cir. 2008), the Federal Circuit held that, in the absence of Government consent by way of novation, the Government may, in other ways, recognize an assignment of claims. In Delmarva, the Court validated an assignment of claims pursuant to a document filed by the Government with the Court of Federal Claims purporting to accept the assignment of claims contained in a “Transfer Agreement” to which the Government had not been a party. Similarly, in Tuftco Corp. v. United States, 614 F.2d 740 (Ct. Cl. 1980), the Court of Claims recognized that a novation agreement is not the exclusive means of establishing the Government’s recognition of an assignment of claims, and that “where the Government’s course of conduct, its statement to the parties, and its dealings with the assignee indicate it recognized the assignee as the contractor, recognition has been found.”  Id. 

Turning back to the facts before it, the Board concluded that there was no need to resort to an examination of the Government’s conduct because, based on the plain language of the novation, “the government expressly recognized CPA as the ‘contractor’ in the novation agreement.” The Board was not persuaded by the Government’s argument that the provision entitling the transferee to “all rights, titles, and interests” did not include the word “claims.”

This was the right and just outcome. The Government sought to impose an unbalanced and indeed self-serving interpretation of the standard novation language set forth in FAR 42.1204, an interpretation in which CPA would have been responsible for “all obligations and liabilities of, and all claims against, the [Shippers] under the contracts as if the [CPA] were the original party to the contracts,” but without the right to maintain Shippers’ legitimate claims – despite language confirming CPA’s entitlement to “all rights, titles, and interests of [Shippers] as if [CPA] were the original party to the contracts.” This imbalance was not lost upon the Board, which pointedly remarked: “If the tables were turned, and CPA had urged us to limit its assumption of ‘all obligations and liabilities of, and all claims against, the Transferor under the contracts as if the Transferee were the original party to the contracts’ to those liabilities or claims expressly spelled in the agreement by the government, we doubt the government would acquiesce.”

We welcome your thoughts and comments.