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A recent decision from the Supreme Court of Virginia established an important precedent for contractors doing business with the Commonwealth. The doctrine of sovereign immunity generally prevents parties from being able to sue the government when it is acting within the scope of its governmental authority, unless the government consents to suit. However, in Montalla, LLC v. Commonwealth, 303 Va. 150, 900 S.E.2d 290 (2024), the Court ruled that the Commonwealth cannot invoke sovereign immunity as a defense when the government enters into a valid contract through an authorized agent. This ruling affirms that when the Commonwealth enters into a legally binding contract, it must uphold its contractual obligations and allow contractors to pursue legal remedies, even without the government’s consent.

The dispute arose after a government contractor named NXL sought reimbursement for overhead costs under its contract with the Virginia Department of Transportation (“VDOT”). VDOT denied payment based on its interpretation of certain Federal Acquisition Regulations (“FAR”) provisions. NXL ultimately entered into an unfavorable settlement with VDOT based, in part, on this interpretation of the FAR. However, during settlement negotiations, VDOT received guidance from the Federal Highway Administration (“FHWA”) on the correct interpretation of the relevant FAR provisions. The FHWA’s interpretation confirmed that NXL was entitled to reimbursement. VDOT intended to adopt FHWA’s interpretation but withheld this information from NXL during settlement negotiations. 

Thereafter, Montalla, LLC acquired NXL’s contracts with VDOT. Montalla, LLC discovered that VDOT withheld this information and sued VDOT seeking equitable rescission of NXL’s settlement agreement and recovery of contract damages. The trial court and Court of Appeals dismissed the case based on VDOT’s asserted defense of sovereign immunity. The Supreme Court of Virginia reversed. Although the Supreme Court noted that the doctrine of sovereign immunity is “alive and well” in Virginia, it ultimately found that the defense does not extend to actions based on valid contracts entered into by authorized agents of the government. 

This decision strengthens protections for contractors and confirms that the Commonwealth of Virginia must uphold its contractual obligations. Moving forward, contractors should be cognizant of their ability to enforce their contractual rights against the Commonwealth.