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Vertex decision and novations


Fara Fasat

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The GAO just released the Vertex decision, where it sustained a protest by Vertex of the award of a task order to DynCorp. The GAO held that the AF did not adequately document its evaluation of the impact of the purchase of DynCorp by Amentum. While decisions involving corporate ownership and structure are very fact-specific, I was puzzled by one thing. 

Brief chronology: Both DynCorp and Amentum were awardees of the IDIQ contract under which the TO was issued. The sequence of relevant events was, in order: Amentum bought DynCorp and held it as a wholly-owned subsidiary; DynCorp submitted a proposal for the TO; Amentum did not; all contracts held by DynCorp were novated to Amentum, including the IDIQ contract; the TO was awarded to DynCorp.

Here's what I can't figure out. If all DynCorp contracts were novated to Amentum, then DynCorp no longer held the IDIQ contract when it was awarded the TO. Amentum held the IDIQ contract. Since they are separate legal entities (DynCorp was a wholly-owned subsidiary), the IDIQ was held by one legal entity and the TO went to another. 

Maybe we're missing some facts, but does that sound right? Can an entity be awarded a task order under an IDIQ contract that it no longer has, as long as it submitted a proposal while it held the IDIQ contract? Or is a contract held by a parent (Amentum) also held by all subsidiaries (DynCorp) even though they are separate legal entities? I don't think so, but I don't know much about corporate structure and ownership.

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16 hours ago, Fara Fasat said:

Maybe we're missing some facts, but does that sound right? Can an entity be awarded a task order under an IDIQ contract that it no longer has, as long as it submitted a proposal while it held the IDIQ contract? Or is a contract held by a parent (Amentum) also held by all subsidiaries (DynCorp) even though they are separate legal entities? I don't think so, but I don't know much about corporate structure and ownership.

In response to your questions, my view is that:

1. It does not sound right.

2. A legal entity should not be awarded and should not accept a task order for a contract under which it is not a party. 

3. No

 

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On 1/14/2022 at 2:05 PM, Fara Fasat said:

Can an entity be awarded a task order under an IDIQ contract that it no longer has, as long as it submitted a proposal while it held the IDIQ contract? Or is a contract held by a parent (Amentum) also held by all subsidiaries (DynCorp) even though they are separate legal entities? I don't think so, but I don't know much about corporate structure and ownership.

I know very little about the law of novation, but...

  • On Feb 4, DynCorp submitted its task order proposal.
  • On March 19, DynCorp asked DCMA for novation.
  • On May 17, DCMA approved the novation request and instructed the COs of various contracts to modify them to incorporate the Novation Agreement. DCMA's notice said, as reported by GAO, "[T]he documentation from DCMA stated that Amentum acquired all DynCorp's assets and assumed all of DynCorp's obligations and liabilities associated with the novated agreements." It's not clear whether the CO for the IDIQ modified it before award of the task order. It the CO did not, it's not clear what the legal implications were. But...
  • On June 15, Amentum sent a message to the CO which seemed to indicate that the CO had not modified the contract.
  • On June 28, the CO for the IDIQ awarded the task order.

I cannot tell from the GAO decision exactly what happened.

The GAO sustained the protest because the CO did not adequately assess potential issues associated with "the corporate transaction and restructuring." In other words, the evaluation wasn't thorough. GAO did not say that the award was not legally proper in light of the novation. It recommended a new determination of best value and a new source selection decision, but did not say that the award could not be made to DynCorp because it was no longer the IDIQ contractor.

I don't think the novation made the award to DynCorp invalid. I don't think the novation relieved DynCorp of its contractual obligations. I think it just means that it will be among the obligations assumed by Amentum through novation.

But I don't know. You gotta talk to an attorney about such stuff.

 

 

 

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One law firm's article regarding parent/subsidiary legal liability situations https://fhnylaw.com/the-parent-and-the-subsidiary-when-is-the-former-liable-for-the-actions-of-the-latter/

Edited by Neil Roberts
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Neil, that article is informative and I have saved it for reference, but I don't think it applies to the novation of a government contract. From a quick read it looks like it discusses the circumstances in which a parent can be liable for the obligations of a subsidiary, i.e. piercing the corporate veil, when there is no assignment or transfer of the sub's contracts or obligations to the parent. In a novation, there is a formal transfer of the sub's (the transferor's) contracts and obligations to another party (the transferee) (in our case, the new owner/parent). The transferee takes on all obligations of the transferor, and the transferor is released. The standard novation agreement in FAR Part 42 basically follows this.

So, back to Vertex. The GAO was a little ambiguous by saying that DCMA "approved" the novation "request", but it did cite the "DynCorp Novation Agreement." DMCA also directed individual COs to modify their contracts "to incorporate the Novation Agreement." I think there was a formal novation, not just an approval of a request, and it was signed by all three parties as it should be. If true, then all contracts, including the IDIQ, became Amentum's contracts, not DynCorp's. And so the legal issue is still unanswered: how did DynCorp get awarded a task order under an IDIQ contract that it no longer held?

One possibility is that the assignment is not complete until an individual contract is modified to identify the new party. If the IDIQ had not been modified yet, then DynCorp might have been the holder still. The problem with that is that the novation agreement makes it a done deal. The following is in (b)(4) of the FAR template: "Following the effective date of this Agreement, the term “Contractor,” as used in the contracts, shall refer to the Transferee." That sure sounds like the contracts got modified right there; any individual contract modification is just an administrative update.

Yeah I know, talk to an attorney. But I'm not looking for legal advice on how to proceed. I just noticed something that didn't sound right, and I'm interested in others' thoughts on the matter.

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2 hours ago, Fara Fasat said:

And so the legal issue is still unanswered: how did DynCorp get awarded a task order under an IDIQ contract that it no longer held?

We don't know, and it's unlikely that we ever will. 

I speculate that the CO issued the order before he/she modified the IDIQ contract as instructed by DCMA. It was still DynCorp's contract.

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True, that would explain the result in this case. I lean the other way -- that the contracts changed hands on the effective date of the novation. That follows from the wording of the novation agreement, which says that after the effective date, the term "Contractor" in all contracts shall mean the transferee.

Of course we don't know if they used the standard template, and there are likely other facts we are missing. After all, both parties had experienced law firms on their side, so it is unlikely that DynCorp was ineligible for the task order and no one caught it. We'll just have to leave it at "we don't know."

 

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