Contractors Should Beware of Broad Assignments

Government contractors often assign government contract payments to banks in exchange for loans to finance the contract. This is sometimes also known as “factoring.” Recently, a broadly worded assignment was interpreted to include not only payments under the original contract, but also payments under a sole-source bridge contract during a protest of the follow-on contract.

Tiger Enterprises, Inc. agreed to assign payments under a 2007 Air Force contract to Chain Bridge Bank of McLean, Virginia. The assignment covered the original Air Force contract as well as “all modifications, supplements and replacements.” After that contract ended in 2010, the Air Force gave Tiger a “Bridge Contract” for several more months, so that laundry services could continue until a protest of the follow-on contract ended. When the Air Force continued to send payments for Tiger’s bridge contract to the bank, Tiger filed a claim, arguing that the bridge contracts payments were not covered by the assignment and as a result, the government should have sent the bridge payments to Tiger.

The Armed Services Board of Contract Appeals disagreed, because the assignment’s terms applied not only to Tiger’s initial contract but also “all modifications, supplements and replacements” of that contract.  According to the Board, the sole-source bridge contract was a “supplement” or “replacement” to Tiger’s original contract “using the same performance work statement and Equipment as Contract 0001 due to exigent circumstances arising from the filing of bid protests regarding the follow-on procurement for Contract 0001.” To the Board, its interpretation of the assignment was “in accordance with the modern trend away from tying a particular loan to a particular security [because] the use of a revolving credit financing device has been regarded as acceptable” under federal law.

Carefully reviewing the scope of an assignment is essential, as this decision points out. Otherwise, factoring agreements can have unforeseen consequences. Berenzweig Leonard’s Government Contracts attorneys can help contractors protect themselves from overly-broad agreements like the one that burned Tiger. 

Terry O’Connor is the Director of  Government Contracts with Berenzweig Leonard, LLP, a DC region business law firm. Terry can be reached at toconnor@BerenzweigLaw.com.