Who’s Your Contractor Now?
Contractor Assignments, Name Changes and
Factoring Agreements
What is Assignment?
As a general legal matter, it is the formal transfer of a
property right from one person or entity to another.
In contracts, it is the act by a contracted vendor of
transferring all or some of their rights in the contract to
another person. This can mean all or part of the work, the
right to payment, or some other aspect of the contract.
Is subcontracting an assignment?
No, although they are similar. Subcontracting is simply an
agreement between the vendor and its supplier/sub to
perform some of the work. The subcontractor does not
“step in” to a contractual relationship with the state.
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Can contractors freely assign their state
contracts?
Generally NO. The Procurement Manual (PM) and the Contract
Management Guide (CMG) both contain references to this as a
recommended clause:
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No Assignment by Contractor - The Respondent shall not assign its
rights under the Contract or delegate the performance of its duties
under the Contract without prior written approval from the {AGENCY}.
The CMG explains the policy this way: “Contractors should not be
allowed to assign any portion of the contract or its performance, to
others, for example, to subcontractors, without the prior written
consent of the agency. Contractors remain responsible for the
performance of the contract notwithstanding any such assignment
or subcontract. This ensures that the evaluated and selected
entity will actually be responsible for performance and that
proposed transactions may be reviewed for compliance
with the conflict of interest and related party provisions.”
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Are full or partial contract assignments ever
allowed?
Sometimes. If the existing vendor sells some or all of its
business (more on this later), or if there is some reason
given by the contractor for pursuing the assignment,
TPASS has approved a few.
By and large we discourage vendors from assigning our
contracts. It can create the appearance that state
contracts can be “bought” after the competitive bidding
process. If there was any element of vendor compliance
or capabilities analyzed in the bidding/evaluation process,
the procurement process is undermined by allowing free
assignment.
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Exception to the prohibition
In the PM, there is a procedure allowing for assignment of
the right to receive payment.
Section 2.37 of the PM states: “Once an agency receives a
notice of a financial assignment, it is legally bound to make
payment to the assignee. “
This means that a state agency must pay whoever the
contracted entity directs it to.
WATCH OUT, though! The PM and the Comptroller’s
Fiscal Management website make clear that assignments
must be clearly documented by the contractor, NOT the
assignee (the company/person receiving the assignment).
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Payment assignments - more
A payment assignment must be clearly documented by
the original payee as follows: “Requests for assignments
must be in writing from the contractor receiving the
order on the company letterhead with the
signature of an authorized representative.”
Who is an authorized rep? An officer, director, or general
counsel of an entity, or (if specified in the contract) the
person designated to speak on behalf of the contractor.
Main concern about payment assignments? Are we in fact
sending the money to a third party as required by the
assignment and consistent with our contractual
obligations?
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Can any contract manager approve a
payment assignment?
If the contract was procured by your agency (delegated or
pursuant to your statutes), you can approve the assignment.
Be careful – make sure you receive documentation from your
original contractor showing it requested the assignment, and
check the documentation of the transfer.
For Term, TxMAS or TPASS Managed contracts, the assignment
must be reviewed and approved by TPASS.
If a user agency approves an assignment of a TPASS-issued
contract – what then?
The user agency doesn’t technically have the authority to
amend a contract they didn’t sign. For the most part, the
contractor has violated the “controlled correspondence”
sections of our contract, not to mention the “no assignments”
clause which requires prior notice.
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What is “factoring”?
“Factoring” agreements are essentially commercial loans
that are based on a business’s right to receive future
payments (accounts receivable).
The business sells its accounts receivable to a bank or
factoring company at a discount.
Some factoring arrangements are not only for discrete
payments due, but for all future payments due and payable
under a contract.
The problem with “full” assignments? The vendor will be
sending products or delivering services and not getting
paid for them! We’ve seen this, and it can get ugly.
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Potential factoring problems
In the case of an “ongoing” assignment of payment, you now
have an entity receiving money that has no performance
obligations to the state. The assignee is only interested in
getting its money – not in how well or efficiently the products
or services are being delivered.
Payment issues (late payments, interest, price adjustments, etc.)
can create friction between your “two” contractors. For
example, if your contract price adjustment index shows prices
should be reduced, the factoring company will be receiving
fewer dollars per unit delivered. Is that covered in their
agreement?
By and large, the contract between the original contractor and
the factoring provider will guide those two parties – the state
should stay out of their issues.
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Name changes and sales
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Technically, all company name changes and sales are
assignments, since we executed the contract with the
previous company/name.
Recent experience has shown TPASS that what
companies say in their press releases and customer
mailings often does not match the real structure of the
transaction.
For example, a new company recently mailed all its
customers (including several state agencies) a letter saying
it had “purchased” a state-contracted company. When
asked for details, it was clarified that it had purchased
only the assets of the contractor, not the entire company.
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“Corporate” sale versus “asset” sale – why
does it matter?
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The difference between a sale of corporate assets and a
sale of the corporation itself is very important.
In the corporate sale, the purchasing company literally
becomes the corporation they purchase.
State corporate laws differ in minor ways but under most
state corporate laws (including Delaware) BOTH the
purchased company and the purchaser company
“continue to exist” in the new merged form.
This is so because the buyer is buying all of the assets and
liabilities of the corporation.
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Asset sales – why they need more scrutiny
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In an asset sale, the buyer is purchasing only “pieces” of a
company. Generally, of course, a buyer will take only the best
parts, leaving the liabilities and underperforming assets behind.
Major issues arise in asset sales of state contracts.
First and foremost, did the buyer (in its agreement or its
request to the state to modify the contract) agree to all terms
and conditions?
If the contract is all or part services, does the purchaser have
all of the same capabilities?
If the evaluation was based in some part on samples or specific
brand goods, will the buyer be supplying exactly what was
evaluated?
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How do you determine asset vs. corporate?
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We still struggle with this in TPASS – so we developed some
forms and internal guidance.
The forms are available for anyone’s use – just contact us and
we’ll get you copies.
One thing we have found to be helpful – get permission to
speak with higher levels of management or the purchasing
company’s attorney. Often sales or customer relations staff
don’t understand the complexities of the corporate
transaction. They usually stick to the script they were provided
to explain the transaction.
You (or your lawyers) may need to seek copies of the actual
corporate transaction documents to satisfy yourself on the
particulars of an asset sale.
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Name changes
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If your contractor decides to change names – what does
it matter?
The name on the contract won’t match, and the name on
purchase orders, contract and invoices must match to
enable payment in USAS!
Is the vendor changing its Vendor Identification Number
(VID) in the state system?
If so, the change may be more than just a name change –
there may be some change to the corporate structure or
ownership.
If not, it may simply be a name change – but it should still
be corrected for the contract and proper payment.
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The REAL minefield – bankruptcy!
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If a transfer of a contract is accomplished as part of a sale of
all or part of a company that is in bankruptcy, you probably do
not have any choice but to accept the assignment!
If you or your agency is notified of a bankruptcy proceeding
involving one of your contractors, notify your lawyers
immediately.
There are lawyers at OAG that can help your agency’s
attorneys with the bankruptcy issues.
The earlier you know about the proceeding, the more time
your agency has to react and possibly have formal input during
the legal proceeding.You may be able to influence the court’s
choices on assigning the contract.
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More on bankruptcy
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If the contract is one that is critical to some agency operation,
definitely get involved quickly and at the highest levels of your
agency possible.
Can you cancel a contract if you don’t like that the contractor
declares bankruptcy?
NO!! Even if you do cancel their contract, and even if you do
so before the vendor files for bankruptcy, the bankruptcy
court can exercise jurisdiction over your contract and
reinstate the contract after if it was canceled!
Can you write contract terms that affect this outcome?
The standard answer is no, but some bankruptcy lawyers
advise that you can carefully craft provisions that allow you to
consider the financial condition of your contractor.
TALK TO YOUR LAYWER! There are many possible outcomes
in bankruptcies – get involved early and track the proceedings.
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Questions???
David D. Duncan
david.duncan@cpa.state.tx.us
(512) 463-9482
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