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Must an Agency Apply Schedule Novation to its Task Orders?


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We have a very interesting situation that has me at odds with my legal counsel.

Question: Is an agency required to acknowledge an FSS contract novation by modifying its task orders to replace the transferor's name and payment information with the transferee's information, or is it legally permissible for an agency to continue performance of its FSS orders if the contractor is willing and able (and requesting) to continue to perform the orders, despite the contractor's schedule contract having been novated by GSA?

Background: We have a number of task orders (very soon expiring) under a schedule contract with contractor A, and we have a stand-alone contract with contractor B for the same type of services, but for a different organization within our agency.

Due to some legal disputes between contractors A and B, contractor A agrees, as a settlement, to transfer its assets to contractor B (mainly the employees). The asset sale agreement includes a no-compete clause, which prevents contractor A from performing any type of work similar to the work covered by the schedule it is novating. The two contractors submit the required novation request and documents to GSA, certify that the assets have been transferred, and then the two proceed to sign the novation with GSA. The schedule is now in the name of contractor B. 

GSA notifies us of the novation and forwards the documents to us. The novation agreement states that it covers all task orders previously awarded under Contractor A's schedule. However, Contractor A immediately informs us that it does not want the task orders novated and wishes to perform them until completion. At the same time, Contractor B informs us of the novation and requests that we immediately acknowledge the novation by modifying the task orders.

At this point, ordinarily, we would modify the task order(s) to change the vendor name and SAM information to reflect the new vendor's (transferee) information. However, we won't do that until we're assured that Contractor B has Contractor A's employees (over 100 performing our core mission) in its payroll system to ensure that they don't miss a payroll, possibly disrupting our mission. So we continue to perform with Contractor A until A transfers the employee information to B and B shows us that they are ready to perform by having the employees in their payroll system. 

However, Contractor A becomes uncooperative with contractor b and refuses to transfer its assets (employee information) to contractor B. Contractor B then demands that we (the agency) direct contractor A to furnish the information B requires to make job offers to A's employees. My position is that this is not our problem. That this is for B and A to figure out. It would appear to me that A is in breach of its agreement with B and perhaps GSA failed in its duty to ensure that B has the assets to perform prior to novating.

In the meantime, A continues to perform, while B's attorneys begin to bombard our attorneys with threats of litigation. Of course, I feel that these should be directed to contractor A, not to us. My COs and even the GSA CO feel that we have the discretion to acknowledge or not to acknowledge the novation because A wishes to continue performing and is fully capable of doing so. I see our task orders as contracts between two parties, and don't believe that GSA's CO has the power or authority to take an action that is binding on another agency, unless - unbeknownst to me - agencies agree to this by using schedule contracts, but where is this written?

New situation for our attorneys, so they reach out to GSA legal. GSA attorneys assert that the GSA CO's novation automatically applied to all our task orders and we have no discretion or say in the matter. Our attorneys agree with and side with GSA. In fact, a friend who is a procurement attorney at a large agency agrees as well - although when I asked her I did not provide all the details. GSA says we have no option or discretion in the matter. That our only options are to acknowledge the novation or terminate the task orders.

Termination is not an option for us. I can't acknowledge the novation until B has the employees - to date, it doesn't and our orders are quickly approaching expiration. Our attorneys tell us that we can ride out the orders with A, but we can't modify them or extend them under the existing (remaining) extension terms; i.e., options or continuity of services clause. My preference is to ride out the orders with A and extend its task orders under the TOs' remaining extension terms, provided that A is willing to continue to perform (they are and continue to express this to us)

With respect to performing an order under A's name while the schedule is under B's name, I don't see the relevance to this. The schedule's terms and conditions flowed down to the task order and were incorporated by reference at the time of award. In my opinion, it should not matter that the schedule is now under someone else's name. Granted, any out of scope work on the task order would fall outside the FSS environment and should be supported by the appropriate justification.

GSA has reached out to both contractors and informed them that if they don't comply with the novation, they would be in breech, and that GSA would nullify or cancel the novation if they didn't straighten out the matter. Contractor A's attorney responded to GSA with the following (excerpt from A's attorney's letter to GSA's CO):

"As you know, task orders are effectively stand-alone contracts even when they are issued under a government-wide schedule contract. Thus, a task order will survive the termination or expiration of its schedule contract... You made your determination under FAR Subpart 42.12 on [date] that the novation of GSA contract XXXX was in the best interest of the government. To our knowledge, [our agency] has not made a corresponding determination with respect to task orders TOXXXX and TOXXXXX...In a novation, the government has sole discretion to determine what is and is not in its best interest."

Repeat of Question: Are we required to acknowledge the novation by modifying our task orders with A to replace the vendor name and payment information with B's information, or is it legally permissible for us to continue performance of the FSS orders if A is willing and able (and requesting) to continue to perform, despite A's schedule contract having been novated?

I believe that under this scenario, we can disregard GSA's novation of the schedule because here, the contractor A wishes to continue to perform its orders and I believe that doing so is in our best interest. Our attorneys tell me we can't but can't provide a legal reference, citation or case to support their position. They simply state I'd be violating law. Which law? Who knows.

Thoughts?

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15 hours ago, rios0311 said:

Thoughts?

Have you seen the Novation Agreement?  It could be the basis for the opinion from legal noting that the FAR provides a format at 42.1204 and that format includes language that states "...The term “the contracts,” as used in this Agreement, means the above contracts and purchase orders and all other contracts and purchase orders, including all modifications, made between the Government and the Transferor before the effective date of this Agreement (whether or not performance and payment have been completed and releases executed if the Government or the Transferor has any remaining rights, duties, or obligations under these contracts and purchase orders)....)

 

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Thank you for taking the time to read the long background. Yes, that specific language is included in the novation. The novation also includes this language immediately after the language you referenced:

2.                 As of [date]  Transferor  has  transferred  to  Transferee  the entire portion of Transferor's Assets involved in performing the Contracts by virtue of the Asset Purchase Agreement entered into between Transferor and  Transferee  on [date]  (the "Assets").

 

3.                 Transferee has acquired all of the Assets of Transferor by virtue of the above transfer.

 

4.                 Transferee has assumed all obligations and liabilities of Transferor under the Contracts by virtue of the above transfer.

 

5.                 Transferee is in a position to  fully  perform  all  obligations  that  may  exist under the Contracts.

 

6.                 It is consistent with the Government's interest to recognize Transferee as the successor party to the Contracts.

 

              7.          Evidence of the above transfer has been provided to the Government.

 

1, 3, 5, and 7 could not have possibly taken place. Otherwise, B would have the employees and would be in a position to perform. B does not have the employees and cannot perform without employees. A has not furnished the employee information. Further, A has told GSA that it will comply with the novation, but only after we make a determination that novation is in our best interest.

My position is that we only make that determination at the time we modify the task orders. We can't modify the orders until B is capable of performing. Our legal team is asking that we make a separate determination and direct A to furnish the information to B. I believe that it is not our problem, and I need not make that determination until B is ready to perform.

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rios,

Do you believe Company B is lying?  If so, will you start a debarment action?

Do you believe Company A entered into the agreement in bad faith?  If so, will you start a debarment action?

Have you notified the GSA CO of all this nefarious conduct?

You are refusing to honor the novation agreement signed by the parties and accepted by the GSA CO.  That's serious business.  

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Thank you ji20874. We have notified GSA. GSA has issued A and B notices to comply with the terms of the novation under threat of termination. We will immediately honor the novation once the parties comply with the novation - namely, that B has the employees to perform. To date, it does not because A has not furnished the employee information.

You are correct, I think A entered into the agreement in bad faith, but I don't believe it is our place to pursue debarment, since it was the GSA CO who executed the novation. Here is a sanitized version of the notice the A and B received:

As you are aware, A and B entered into a novation agreement with GSA (signed on [date]).

It has come to my attention through a customer agency that the Transferee (B) has not received information from the Transferor (A) necessary to perform task order [number] and [number] under contract [FSS number].

The transfer of all assets and information necessary to perform the contract was required under the terms of the novation agreement.  If this has not occurred, then A and B are both in breach of the novation agreement and B may be at risk of cancellation of the contract and any task orders thereunder.

We note also that B and A both guaranteed performance of the contract and both parties are liable for a breach.

 

 

 

 

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Perhaps you are taking A's side, inasmuch as you refuse to comply with the novation instructions?  You are insisting that A will continue performance.  Maybe A is playing you?

Don't allow yourself to be played.  You should follow the lead of the GSA CO.

When GSA terminates both A and B, you will be without service -- so you should start planning for that now.  

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No, No one is taking sides. We only need assurance that B is ready to perform before we can modify the vendor payment information on the To. A’s payroll is huge, so if we process the modification and B does not have the employee information loaded into their payroll processing system, neither A nor B will be able to pay the contractor employees. We will issue the modification once that takes place. That should have been done when they submitted the novation documents to GSA.  

Because it wasn’t,  GSA stepped in to compel the parties to honor the novation. But you are correct, if GSA terminates the contract, then we are in no better position. We’ve been thinking about that too.

Today we reached out to A to explain that  we are waiting on their compliance with the terms of the novation to issue the acknowledgement modification. My sense is that A will come around and will furnish the required information to B. We’ll see.

I do not disagree with your point of view about A’s intentions. You may be spot on.

 

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Update: A has complied and furnished the required information to B. My question still stands: under such a scenario, which is extremely unusual, would it have been incorrect for our agency to continue performance with A while A and B sorted out their legal matters between themselves and until B was able to perform. Termination of A's task order was not an option for us without having another contractor in place with employees on the ready, otherwise, the mission would grind to a halt.

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17 hours ago, rios0311 said:

My question still stands: under such a scenario, which is extremely unusual, would it have been incorrect for our agency to continue performance with A while A and B sorted out their legal matters between themselves and until B was able to perform.

Yes (for this particular situation).   A&B sorting out their legal matters is not your concern.  A novation agreement was accepted by the government.  Your obligation is to follow agreement and administer the contract with B.   

Your statement regarding termination is far fetched to me.  Think about all the other reasons a contractor might be terminated, are you really saying that termination would not be a consideration in any situation whatsoever?      

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18 hours ago, rios0311 said:

My question still stands: under such a scenario, which is extremely unusual, would it have been incorrect for our agency to continue performance with A while A and B sorted out their legal matters between themselves and until B was able to perform.

We cannot answer your question because we do not know all the facts.  However, if we assume that the GSA contracting officer complied with the provisions of FAR 42.12 and included your task orders among the contracts being novated, you had no authority to disregard the actions taken by the responsible contracting officer who was acting on behalf of the executive branch when executing the novation agreement.  Again, if the GSA contracting officer followed the FAR, you should have had an opportunity to comment on the novation before it occurred.  If your agency did not take advantage of that opportunity, somebody is in need of career counseling.  Further, as Carl said, the resolution of the issues between A and B was not your problem. 

 

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C Culham - I agree. I was not concerned with A's and B's concerns. I was concerned with B's inability to perform because it was missing about 150 employees that A did not transfer at the time of novation. At the time, B did not know who these employees were or how to reach them because A was refusing to furnish that information. Had we modified the orders and put them in B's name, how do you suppose B could perform? Termination was not an option for us under these specific circumstances. I wrote in the background section that the contractor-employees perform the core mission. The agency does not have the capability to perform its mission without them.

What is the basis for your statement "Your obligation is to follow agreement"? It would be helpful for me to know where agency responsibilities with respect to FSS novations are specified. Is it in GSA policy? OMB memo? The FAR?

Retreadfed - The background I gave provided all the facts. In it, I wrote that the GSA CO did not comply with 42.12 because the assets had not been transferred at the time of the novation. Nor did the CO reach out to us for our opinion on the novation. Had the CO asked, we would not have objected, so long as A had furnished to B all the employee information that B required to perform. The services are very specialized, so without A's employees, B could not perform. Correct, the resolution of the issues between A and B was not my problem and I stated that in the back ground section I provided. I wrote this "My position is that this is not our problem" and this "I believe that it is not our problem" with regard to A's and B's issues. My concern and responsibility was to ensure that the mission wasn't disrupted.

Same question for you - what is the basis for your statement: "...you had no authority to disregard the actions taken by the responsible contracting officer who was acting on behalf of the executive branch when executing the novation agreement." It would be helpful for me to know where agency responsibilities with respect to FSS novations are specified. Is it in GSA policy? OMB memo? The FAR? Are you suggesting that the actions of GSA's contracting officers trump the procurement authority delegated to agency contracting officers and their responsibility for ensuring that government interests are protected in their agencies' contractual relationships?

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6 hours ago, rios0311 said:

how do you suppose B could perform?

I agree probably poorly however you have a TO/contract to solve that problem. 

 

6 hours ago, rios0311 said:

The agency does not have the capability to perform its mission without them.

Very interesting that an agency is dependent upon a contractor to perform its mission.  All kinds of things run through my mind but one specific one is if it is so important do you have a performance bond in place?  A question you do not have to answer but suggest it could be something you may want for the future.

 

6 hours ago, rios0311 said:

What is the basis for your statement

In an attempt to find something solid I reviewed clauses of a FSS contract.   Plus, mulled the FAR over in my head.   No reference for you specifically but I would offer this.  You agreed to ride the coattails of FSS contract for your need, therefore you are beholding to what the parent FSS says, as well as what the FSS CO decides (novation).  If you do not you are sideways with the FSS contract and its authority, possibly even putting the government in breach of the parent contract as novated.   It could even be possible that if you decided to go rogue and not honor the novation your task order could be a conversion to an open market TO as the contractor holding the task order is not one and the same as the contractor holding the FSS GSA parent contract.

 

 

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Fascinating thread. The focus is (properly) on the contracting issues, but will somebody please think of the poor accountants who have to submit invoices on this charliefoxtrot? Who is incurring the costs and who is billing the customer? Who gets to record the revenue? How is profit calculated? Who is paying the IFF?

Even in the best of circumstances, novations are challenging for the contracting folks and they are a nightmare for the accounting folks. This scenario is far from the best of circumstances.

 

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Thank you very much, C Culham. The mission is international in nature and foreign nationals and language matters are at play, which helps explain why the agency does not have the internal capability. The awarding CO didn't require a performance bond (contracts predate my presence at the agency) - but (1), I don't know that I would have thought about using one had I been the awarding CO, and (2), I'm not sufficiently knowledgeable with performance bonds to know what the agency's rights would be in the specific case at hand. I'll look into this to see if it is something we should consider in the future. Thanks for trying to find a legal or policy reference. Your reasoning makes sense and are good points to consider.

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8 hours ago, rios0311 said:

The background I gave provided all the facts. In it, I wrote that the GSA CO did not comply with 42.12 because the assets had not been transferred at the time of the novation. Nor did the CO reach out to us for our opinion on the novation.

The first sentence is demonstrably untrue.  First of all, FAR 42.1204 requires the transferor and transferee to submit specified information.  We have no idea what was submitted.  Even if we knew what was submitted, we have no idea as to whether it was complete and accurate and what actions the GSA contracting officer took when (s)he received that information.  Also, your original post did not say whether the GSA contracting officer obtained input from other contracting agencies before executing the novation agreement.  In this regard, you state that the GSA CO did not reach out to your agency.  That is your side of the story.  However, the GSA CO may have a different version.  Thus, there are several facts that we still do not know.

As for the GSA CO not following the FAR because  the assets had not been transferred, it is not clear what assets you are referencing.  You seem to be focusing on employees.  However, it is not clear that employees are assets that can be transferred.  To me they are not.  In any event, the FAR requires the transferor to provide an authenticated copy of the document evidencing the transfer of assets.  We don't know what was submitted in this regard.  However, if employees are not assets that can be transferred, no fault can be assigned to Contractor A or the GSA CO on this account.

As for your obligation to comply with the novation agreement, the fact that you are asking about an FSS contract seems to be a red herring.  FAR 42.12 addresses the novation of contracts.  Nothing in 42.12 indicates that the guidance there does not apply to FSS contracts.  Note that FAR 42.1203(a) demonstrates that the FAR Councils know how to write exceptions to application of the procedures in 42.12 to novations.  Thus, if they had wanted to exempt FSS contracts from the procedures  in 42.12, they clearly could have one so.  There is simply no indication that 42.12 does not apply to GSA FSS contracts.

FAR 42.1203 describes the procedure for processing novation requests.  The responsibility for doing so is vested in a single "responsible contracting officer."  From the text of 42.1203, it is clear that this single responsible contracting officer acts for all agencies in processing novation agreements concerning the contracts listed by the transferor.  This concept of having a single contracting officer act for the government is not unusual.  For example, FAR 42.302(a)(5), (9), (11) and (12) require that a single contracting officer perform the functions listed in those subsections.

Simply put, the FAR assigns a single contracting officer the responsibility for negotiating novation agreements on behalf of the executive branch.  Nothing in FAR 42.12 can be interpreted as giving individual agencies the discretion to accept or reject a novation agreement executed by the responsible contracting officer.

 

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Thanks, Retreadfed. I appreciate your input. I don't suggest that 42.12 does not apply to GSA contracts. GSA contracts are novated all the time. With regard to your reference of 42.302(a)(5), (9), (11) and (12), that's not how I read that section - or the subpart for that matter. It applies to agencies that assign their contracts for administration. We didn't delegate any responsibility to GSA when we cut a task order from a GSA contract.

My understanding has always been (admittedly, perhaps erroneously) that once we award a task order, we have a contract, the parties to which are the agency and the vendor only. Unlike an award under SBA's 8(a) program, GSA is not a party to an FSS task order once it is awarded. This understanding leads me to question the ability of a GSA CO to take an action that is binding on another agency, unless the agency agrees to it before hand (maybe we do by using the FSS program, but I've never seen it stated.)

I'd like to think that 42.12 provides a solution, but I don't see how that would make sense under the FSS environment. In accordance with 42.1202(b), the CO responsible for processing and executing the novation is the CO with the largest unsettled dollar-balance of contracts. That would have been us, because it is unlikely that A had  task orders with other agencies. Even if they did, I believe that our agency would have easily had the largest unsettled dollar balance of contracts. I'm wondering how to interpret that within the context of a GSA FSS novation.

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11 minutes ago, rios0311 said:

With regard to your reference of 42.302(a)(5), (9), (11) and (12), that's not how I read that section - or the subpart for that matter. It applies to agencies that assign their contracts for administration.

That is an incorrect interpretation.  The functions listed in those subsections must be performed by a contracting officer from the cognizant Federal agency.  It is up to the CFA to determine who that contracting officer is.  This is made clear by 42.302(a).  Also, note the definition of CFA in 2.101.

Many contracts are novated by contracting officers from agencies that did not award the contracts.  The fact that a contract is awarded by one agency does not mean that only that agency can novate that contract.  Many contractors do business with several agencies at the same time.  If one of those contractors sells the assets used to perform those contracts, each individual agency would not be responsible for novating its own contracts.  Instead, the responsible contracting officer would be responsible for doing so for all agencies. 

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