Recourse After Assignment

One of Attorney Laura Frederick’s contract tips was on recourse against a party after it assigns a contract. She makes the point that obligations under the agreement that belong to the assignor (the party assigning the contract) do not end simply through an assignment. A three-party novation is needed.

The same is – somewhat – true in government contracting. A prime contractor cannot assign its contract with the government without the government’s approval and execution of a novation agreement between the prime contractor, the government, and the party to whom the prime contractor is making the assignment (the assignee). The difference in procurement contracting is that even with a novation, the assignor (the original prime contractor) remains liable to the government via a guarantee of the payment of all liabilities and the performance of all obligations that the assignee assumes or undertakes on the prime contract.

Given this requirement, the original prime contractor needs to consider its outstanding liabilities, particular as related to subcontractors. Whether the new prime contractor intends on using the same subcontractors or not, one option for the original prime is to simply terminate the subcontract (provided it can do so without incurring liability). If the new prime contractor intends to utilize the same subcontractors and wants an assignment of the subcontract, as Laura correctly points out, the three parties will need to enter into a novation agreement absolving the original prime contractor of potential liability; otherwise, despite the assignment of both contracts, the prime remains liable on both.

FAROur government contracts posts are published by Attorney Kristi Morgan Aronica. She serves as litigation counsel to prime contractors and subcontractors in the government contracts market throughout Texas and nationally.