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Surety’s Suit Against Virginia DOT Barred by Sovereign Immunity
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May 12, 2008
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By Todd J. Wagnon
Thelen Reid Brown Raysman & Steiner LLP
In a case arising out of a surety’s claim against the Virginia Department of Transportation, the Virginia Court of Appeals held that because there was not a direct contractual relationship between the surety and the state, the surety’s suit was barred by sovereign immunity. XL Specialty Insurance Co. v. Commonwealth of Virginia, Department of Transportation, 624 S.E.2d 658 (Va. Ct. App. 2006).
State government agencies such as VDOT often have sovereign immunity, which means they are protected from suits by a private party. The only way a private party can assert a claim against the agency is if the government has expressly consented to be sued.
A Virginia statute provides for a limited waiver of sovereign immunity, allowing parties contracting with VDOT to sue the agency for claims arising out of those contracts. In this case, the Court of Appeals took a very limited view of the scope of that statutory waiver so that only parties with direct contracts with VDOT received the benefit of the waiver.
VDOT contracted with Bravos Concrete, Inc. for two construction projects. Bravos was required to provide performance bonds guaranteeing its performance of the contracts. Bravos contracted with XL Specialty Insurance Co. to provide the performance bonds, with VDOT being the beneficiary of them.
While XL contracted with Bravos, XL, as performance bond surety, also had obligations and duties to VDOT, as beneficiary of the bond, in the event Bravos failed to perform the underlying contracts.
Bravos did fail to fully perform the contracts, and VDOT asserted its rights under the performance bond, requiring XL to complete Bravos’ work. XL entered into takeover agreements directly with VDOT and arranged for completion of the projects.
After the projects were completed, XL submitted claims to VDOT for $740,000 in alleged overpayments for defective work by Bravos. VDOT denied the claims, and XL filed suit, asserting breach of the underlying contract between VDOT and Bravos. XL did not assert a claim for breach of the takeover agreements it had entered into with VDOT.
VDOT moved to dismiss XL’s lawsuit on grounds that sovereign immunity barred any recovery by XL. The trial court granted the motion, and XL appealed.
XL asserted two arguments. First, XL argued that the three-party relationship between VDOT, Bravos and XL, under which each party had rights and obligations to the other two parties, created an express contract between VDOT and XL under Virginia’s sovereign immunity statute.
Second, XL contended that its position as surety for Bravos allowed it to stand in the shoes of Bravos by asserting a claim of equitable subrogation, thereby establishing a direct contractual relationship that withstood a claim of sovereign immunity.
XL filed its appeal in the Virginia Court of Appeals, but the Court of Appeals transferred the case to the Virginia Supreme Court to resolve a procedural issue as to whether the proper forum was the Court of Appeals or the Supreme Court. The Supreme Court determined that the Court of Appeals was the proper forum and remanded the case for a decision on the merits.
However, in its remand decision, the Supreme Court made certain findings about the relationship among the parties that impacted XL’s sovereign immunity arguments. See, XL Specialty Insurance Co. v. Commonwealth of Virginia, Department of Transportation, 611 S.E.2d 356 (Va. 2005).
The Supreme Court held that the related rights and obligations in the three-party relationship arose from separate contracts and, therefore, did not create an express contract between XL and VDOT. As a result of this finding, the Court of Appeals rejected XL’s first argument that the three-party relationship created an express contract that would provide a basis for the waiver of sovereign immunity.
Regarding XL’s second argument, the Supreme Court found that a surety advancing claims arising out of a construction contract does not qualify as a “contractor” as defined in the statute permitting claims against state agencies. The statute waiving sovereign immunity expressly applied only to “contractors,” and there was no mention of parties in XL’s position.
The Supreme Court held that the term “contractor” in the statute applies only to those with a direct contractual relationship with the state agency. It held that a waiver of sovereign immunity must be clearly expressed and will not be implied from general statutory language. It noted that there was no statutory waiver of sovereign immunity as to equitable claims, such as for equitable subrogation, which do not arise from contract.
Based on the Supreme Court’s finding that XL was not a “contractor,” the Court of Appeals reasoned that XL could not benefit from the statutory waiver of sovereign immunity.
Having rejected both of XL’s arguments, the Court of Appeals held that XL’s claims were barred by sovereign immunity and affirmed dismissal of XL’s claims.
In the trial court, XL also had sought to amend its complaint against VDOT to include a claim based on the takeover agreements it had entered into with VDOT after Bravos failed to perform. Because the takeover agreements were direct contracts between XL and VDOT and reiterated the terms of the Bravos-VDOT contract, XL would be able to argue that it had a direct contractual relationship with VDOT so the statutory waiver of sovereign immunity applied and XL could assert its claims.
The trial court refused to allow XL to amend its complaint, and XL appealed.
The Court of Appeals held that VDOT would not have been prejudiced by the amendment of the complaint and that the trial court erred in refusing to allow the amendment. The case was remanded to the trial court so XL could amend its complaint and continue to pursue its claims against VDOT.
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For more information about the issues covered in this report, please contact Todd J. Wagnon in our Washington, D.C. office at 202-508-4146 or at twagnon@thelen.com or contact your Thelen attorney. For more information about Thelen’s Construction & Government Contracts Department, click here.
©2008 Thelen Reid Brown Raysman & Steiner LLP
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