Posts in "Government Contracts"
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Contract Defeats Virginia’s Defense of Sovereign Immunity
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.
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Updates to FHWA’s Buy America Requirements for Manufactured Products
On January 14, 2025, the Department of Transportation’s Federal Highway Administration (FWHA) published a final rule erasing the long-standing Manufactured Products General Waiver to FHWA’s Buy America requirements. For more than four decades, the general waiver has allowed states and contractors to use foreign manufactured products on federally funded transportation projects. Under the FHWA’s new rule, (1) final assembly of manufactured products must occur in the United States (the “final assembly requirement”), and (2) components mined, produced, or manufactured in the United States must be greater than 55 percent of the total cost of the manufactured products (the “55 percent requirement”). FWHA will impose the new rule in two phases. The final assembly requirement will take effect for projects obligated on or after October 1, 2025. The 55 percent requirement will take effect for projects obligated on or after October 1, 2026.
During the rule’s public notice and comment period, commentators expressed concerns over increased cost and domestic availability of many manufactured products routinely used in federal-aid projects, such as lighting systems, Traffic Management Systems (TMS) equipment, Intelligent Transportation Systems (ITS) equipment, and rolling stock.
Going forward, contractors involved in federal-aid transportation projects should understand FHWA’s new rule and pay close attention to any updates to the rule. They should also discuss the new requirements with suppliers to ensure compliance with the requirements as they take effect on future federal-aid projects.
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Virginia Enacts New Law Prohibiting “Pay-if-Paid” Clauses
Beginning January 1, 2023, “Pay-if-Paid” clauses will no longer be enforceable in public and private construction contracts in Virginia. “Pay-if-paid” provisions in construction contracts have long been enforceable under Virginia law. These conditional payment provisions are intended to protect general contractors from the risk of nonpayment by the owner by making the duty to make payment to subcontractors or downstream parties expressly conditioned on receipt of payment from the owner. Enacted on April 27, 2022, Senate Bill 550 is a bill that prohibits contractors on both private and public construction projects in Virginia from including provision in subcontracts that condition payment on the receipt of funds from the owner or high-tier contractor. SB 550 does not, however, prohibit a general contractor from issuing a back charge to a subcontractor for noncompliance with the terms of the subcontract as long as it notifies the subcontractor in writing of the intent to withhold and the reason for withholding payment. This new law is scheduled to take effect January 1, 2023.