Attorney General: Peter N. Ellef, Commissioner of Economic and Community Development, 1996-014 Formal Opinion, Attorney General of Connecticut

Attorney General's Opinion

Attorney General Richard Blumenthal

September 4, 1996

Peter N. Ellef
Commissioner of Economic and Community Development
865 Brook Street
Rocky Hill, CT 06067

Dear Commissioner Ellef:

This is in response to your request for an opinion inquiring whether the Commissioner of Economic and Community Development ("Commissioner") has the authority to amend the assistance agreement (the "Agreement") between the former Department of Economic Development, now the Department of Economic and Community Development ("DECD"), and the Dun & Bradstreet Company ("Dun & Bradstreet"), and whether such amendment, if permissible, must be submitted to this office for approval. For the following reasons it is our opinion that the Commissioner cannot amend the Agreement in the manner proposed, but may enter into a novation, or substituted contract, to accomplish the desired ends and that the resulting substituted contract must be submitted to this office for approval as to form. Endnote 1

Pursuant to the Agreement, DECD provided Dun & Bradstreet with a $7,200,000.00 grant under the Economic Development and Manufacturing Assistance Act of 1990 (the "Act"), Conn. Gen. Stat. 32-220, et seq., in order to assist Dun & Bradstreet, among other things, to move its corporate headquarters to Wilton, Connecticut and create 557 new jobs in this state. As part of the Agreement, Dun & Bradstreet provided the State with an unconditional standby letter of credit in the amount of the grant to secure, among other things, its obligation under Conn. Gen. Stat. 32-5a not to relocate its operations for a period of ten years and its contractual obligation to retain 557 jobs in Connecticut.

Dun & Bradstreet has now informed DECD that it intends to restructure its operations so as to create two new entirely separate corporate entities -- CognizantCorporation ("Cognizant") and ACNielson Corporation ("ACN") -- from Dun & Bradstreet. The headquarters of Cognizant and ACN would remain in Wilton, but Dun & Bradstreet would move its headquarters out of state. The three resulting entities, Dun & Bradstreet, Cognizant, and ACN (collectively, the "D&B Companies"), will divide the obligation to employ 557 people in this state by agreeing to maintain 225, 187, and 145 full-time Connecticut jobs, respectively, for the remainder of the ten-year period contemplated by the Agreement. Dun & Bradstreet further proposes that the three companies will, in part, succeed to the benefits derived by Dun & Bradstreet under the Agreement and secure their corresponding, respective non-relocation and employment commitments for the balance of the ten-year period by providing the State with replacement unconditional standby letters of credit in the total amount of $7,200,065.00 as follows: $2,908,500.00 by Dun & Bradstreet, $2,417,235.00 by Cognizant, and $1,874,330.00 by ACN. You have informed us that it would be in the State's best interest to accommodate these changes, and to do so by way of an amended Agreement, if possible.

The preliminary question is whether the State and the D&B Companies can amend the Agreement so as to reflect the above shifts in responsibilities and obligations. As a starting point, nothing in the Act would prevent the State and a group of companies from structuring such a multi-party agreement in the first instance. Similarly, nothing in the Agreement itself precludes its being amended. It is our opinion, however, that because of the nature and extent of the changes sought by Dun & Bradstreet, the parties must undertake a novation -- execute a substitute contract -- rather than amend the existing Agreement.

A novation is a contract that replaces and extinguishes an existing contract or obligation. Riverside Coal Co. v. American Coal Co., 107 Conn. 40, 44-45; (1927); Union Trust Co. v. Jackson, (No. cv91 0286938S, July 14, 1992); citing Williston on Contracts 2d, 1865 (3d, Jaeger). The term "novation" commonly refers to the introduction of a new party to a new contract, Mace v. Conde Nast Publications, Inc., 155 Conn. 680, 688 (1967), but need not involve new parties. Riverside Coal, 107 Conn. at 44-45; Bushnell Plaza Dev. Corp. v. Fazzano, 38 Conn. Sup. 683, 688 (App. Sess. 1983); Corbin on Contracts 1293 (1962), citing Riverside Coal. As Judge (now Justice) Katz notes in Union Trust, a novation,unlike an amendment, or modification, to an existing contract, "supersedes and discharges the prior agreement." A novation is further distinguished from a mere modification, as the latter results only in the "alteration of some details of a contract, while leaving undisturbed its general purpose...." 58 Am. Jur. 2d Contracts 26 at 629.

In the present case, Dun & Bradstreet proposes to do more than merely alter contractual details. The Agreement, including the documents incorporated within it by reference, contemplates the relocation of Dun & Bradstreet's corporate headquarters into Connecticut, and the retention by Dun & Bradstreet of 557 jobs, for a minimum of ten years. The proposed restructuring would allow for the removal of that headquarters out of state after roughly two years. In addition, the proposals would result in several, but not joint, liability among the three corporate entities for the obligations now owed by Dun & Bradstreet, and the replacement of an existing letter of credit with three non-overlapping letters of credit. The obligation to create and maintain two new corporate headquarters (Cognizant and ACN) within this state, which did not exist when the Agreement was executed, further underscores the material nature of the proposed changes.

Several other points convince us that the parties must execute a substitute contract, rather than amend the ex

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mplish the desired goals. Most importantly, DECD has already provided Dun & Bradstreet with the financial assistance reflected in the Agreement. It would constitute legal fiction to amend the Agreement so as to reflect that Cognizant and ACN, which did not exist when the financial assistance was sought or provided, comprise part of the "Applicant" under that contract. Similarly, as Applicant under the Agreement, Dun & Bradstreet (alone) moved its headquarters into Connecticut and retained the specified number of jobs, at least for the past two years. As Cognizant and ACN do not yet exist as separate, unaffiliated entities, they cannot have discharged those fundamental obligations as Applicant under the Agreement. The use of a novation will thus more accurately depict the relationships among the parties and the obligations each entity is undertaking.

Accordingly, the parties can properly effectuate the desired changes by executing a substitute contract, in exchange for good and valuable consideration, assuming the Commissioner determines that the resulting project would constitutea "business development project" under Conn. Gen. Stat. &3167 32-222 and that all other technical requirements are met under the Act. See State Nat'l Bank of Conn. v. Dick, 164 Conn. 523 (1973) (enforceable amendment to contract requires consideration); accord, Thermoglaze, Inc. v. Morningside Gardens Co., 23 Conn. App. 741, cert. denied, 217 Conn. 811 (1991). We assume, for purposes of this opinion, that any substituted contract will clearly set forth the parties' respective consideration and reflect that it is, indeed, a substitute contract (novation).

Although the terms of the Act and Agreement do not preclude the use of a substitute contract to effect the changes in undertakings of the parties, Dun & Bradstreet, having accepted assistance under the Act pursuant to the original Agreement, must also comply with the non-relocation provisions of Conn. Gen. Stat. 32-5a.Endnote 2 Section 32-5a provides, in pertinent part:

As used in this section, "relocate" means the physical transfer of the operations of a business in its entirety or of any division of a business which independently receives any financial assistance from the state....

The relevant issue here is whether Dun & Bradstreet, by virtue of the corporate restructuring and removal of its headquarters, as proposed, would "relocate" out of state as defined in 32-5a. If Dun & Bradstreet does so, it will have to repay all of the financial assistance it received from the state under the Agreement, plus interest.Endnote 3 We conclude, however, that it will not.

Pursuant to 32-5a, Dun & Bradstreet will only have to repay the financial assistance if it physically transfers out of state its entire operations. The Random House Unabridged Dictionary, 2d Ed. (1993) defines "operation" as "1. an act or instance, process or manner of functioning or operating...." As Dun & Bradstreet, independent of Cognizant and ACN, will retain 225 employees in this state, it clearly would not be transferring the entirety of its processes, functions or operations from Connecticut.Endnote 4 In addition, nothing in the Act requires, as a condition for an award of financial assistance, that a company maintain its headquarters in Connecticut, and Dun & Bradstreet's headquarters are not a "division" that "independently receive[d] any financial assistance from the state." Conn. Gen. Stat. 32-5a.

Finally, we determine that any substituted contract must be submitted to this office for approval as to form. Conn. Gen. Stat. 3-125 charges this office with general supervision over all legal matters of interest to the State. See Comm. on Spec. Rev. v. Freedom of Info. Comm., 174 Conn. 308 (1978); Op. Atty. Gen. #85-201. Financial assistance agreements, involving the outlay of public funds and establishing rights and responsibilities among parties, clearly constitute legal matters of interest to the State and must be reviewed and approved, as to form, bythis office. Given the material nature of the changes in the identities and obligations in this case, this office's approval of the original Agreement cannot serve as a proper review and approval, as to form, of a substituted contract.

Very truly yours,
RICHARD BLUMENTHAL
ATTORNEY GENERAL

Christopher L. Levesque
Assistant Attorney General


Endnote 1

Although we determine that the parties can enter into such a novation, whether or not the State should do so is, of course, a policy decision that the Commissioner of Economic and Community Development must make.

Endnote 2

Conn. Gen. Stat. 32-229 may have permitted the Commissioner of Economic and Community Development to establish, within the Agreement, a non-relocation term of a different duration than the 10-year period set forth in 32-5a. As the Agreement makes clear, however, the Commissioner chose to subject the Agreement to the provisions of 32-5a.

Endnote 3

Conn. Gen. Stat. 32-5a provides, in pertinent part, that an organization which receives financial assistance

[s]hall not relocate outside of the state for ten years after receiving such assistance or during the term of a loan or loan guarantee, whichever is longer, unless the full amount of the assistance is repaid to the state and a penalty equal to five per cent of the total assistance received is paid to the state ....

Endnote 4

We interpret the phrase "in its entirety" in 32-5a to modify the word "operations" rather than the word "business." Although "its" and "operations" are grammatically inconsistent, reading the phrase "in its entirety" to modify "business" renders the phrase mere surplusage, which is strongly disfavored under the principles of statutory construction. See Harris Data Communications, Inc. v. Heffernan, 183 Conn. 194, 197 (1981). Consequently, as Dun & Bradstreet does not intend to remove the entirety of its operations from Connecticut, it will not have to repay the financial assistance it received under the Agreement if the proposed corporate restructuring and headquarters transfer occur.



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