XL Specialty Insurance Company v. Commonwealth of Virginia, Department of Transportation

COURT OF APPEALS OF VIRGINIA
Present: Chief Judge Fitzpatrick, Judge Benton and Retired Judge Bumgardner∗
Argued at Richmond, Virginia
XL SPECIALTY INSURANCE COMPANY
OPINION BY
v. Record No. 0628-04-2 CHIEF JUDGE JOHANNA L. FITZPATRICK
JANUARY 17, 2006
COMMONWEALTH OF VIRGINIA,
DEPARTMENT OF TRANSPORTATION
FROM THE CIRCUIT COURT OF THE CITY OF RICHMOND
Theodore J. Markow, Judge
Andrew J. Terrell (Jane Saindon Dudley; Robert F. Carney;
Whiteford, Taylor & Preston, LLC, on briefs), for appellant.
Richard Tyler McGrath, Senior Assistant Attorney General
(Jerry W. Kilgore, Attorney General; Judith Williams Jagdmann,
Attorney General; Maureen Riley Matsen, Deputy Attorney
General; Steven O. Owens, Senior Assistant Attorney General, on
brief), for appellee.
Amicus Curiae: The Surety Association of America (Edward G.
Gallagher; Wickwire Gavin, P.C., on brief), for appellant.
Appellant, XL Specialty Insurance Company (XL), argues that the trial court erred by:
(1) granting the Commonwealth of Virginia, Department of Transportation’s (VDOT’s) motions
to dismiss XL’s claims because they were barred by sovereign immunity and (2) failing to allow
XL leave to amend its motions for judgment after VDOT’s defensive pleas had been sustained.1
∗
Judge Bumgardner participated in the hearing and decision of this case prior to the
effective date of his retirement on December 31, 2005.
1
Appellant presented six assignments of error to the Supreme Court of Virginia. The
sixth, whether this Court has jurisdiction, is now moot. See XL Specialty Insurance Co. v.
Commonwealth, 269 Va. 362, 611 S.E.2d 356 (2005) (remanding the case to this Court for
consideration). The other five have been consolidated into these two issues.
We hold that the trial court properly dismissed XL’s claims based on sovereign immunity, as XL
was not a party to the contract on which it brings this claim and there is no explicit waiver of
sovereign immunity for equitable claims of subrogation. However, we also hold that the trial
court abused its discretion in failing to allow XL leave to amend its motions for judgment and,
therefore, we affirm in part, reverse in part, and remand the case to the trial court for action
consistent with this opinion.
I. BACKGROUND
In 1998, Bravos Concrete, Inc. (Bravos) contracted with VDOT to complete two
construction projects, one in Chesterfield County and the other in York County. The
Commonwealth required Bravos to guarantee its performance, and as a result Bravos entered into
a contract with XL as the surety for payment and for performance on both contracts.2 Bravos
defaulted on the contracts in 1999, and VDOT required XL to complete the unfinished work. XL
entered into takeover agreements with VDOT, under which it agreed to arrange for the
completion of the contracts. After the construction was completed, XL submitted a payment
request to VDOT for its completion of work defectively done by Bravos for which Bravos had
been paid by VDOT. The alleged amount of the overpayments was approximately $530,000 for
the Chesterfield project and $210,000 for the York project. VDOT denied the claim, and XL
requested that VDOT hold a hearing pursuant to Code § 33.1-386.3 Following that hearing, the
deputy commissioner denied XL’s claims but offered a settlement of $13,000.
2
The bonds were actually issued by Intercargo Insurance Company, the predecessor in
interest to appellant.
3
Code § 33.1-386 provides in part:
A. Upon the completion of any contract for the construction of any
state highway project awarded by the Commonwealth
Transportation Board to any contractor, if the contractor fails to
receive such settlement as he claims to be entitled to under the
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XL rejected the proposed settlement and filed two motions for judgment, one for each
project, in the Circuit Court for the City of Richmond. Each motion for judgment asserted two
counts of breach of contract. XL did not include in the suits a claim for breach of the takeover
agreements. VDOT filed motions to dismiss the motions for judgment because sovereign
immunity barred any recovery. The trial court, by letter opinion, granted the motions to dismiss.
XL filed additional motions requesting that the trial court reconsider its determination or, in the
alternative, grant it leave to amend the motions for judgment to include allegations of breach of
contract for himself or for his subcontractors or for persons
furnishing materials for the contract for costs and expenses caused
by the acts or omissions of the Department of Transportation, he
may, within sixty days from the time of notification of the
Department’s final estimate, submit to the Department of
Transportation, through proper administrative channels as
determined by the Department, a written claim for such amount to
which he deems himself, his subcontractors, or his material
persons entitled under the contract. The claim shall set forth the
facts upon which the claim is based, provided that written notice of
the contractor’s intention to file such claim shall have been given
to the Department at the time of the occurrence or beginning of the
work upon which the claim and subsequent action is based. Within
ninety days from receipt of such claim, the Department shall make
an investigation and notify the claimant in writing by registered
mail of its decision. The claimant and the Department may,
however, mutually extend such ninety-day period for another thirty
days.
B. If dissatisfied with the decision, the claimant shall,
within thirty days from receipt of the Department’s decision, notify
the Commonwealth Transportation Commissioner, in writing, that
he desires to appear before him, either in person or through
counsel, and present any additional facts and arguments in support
of his claim as previously filed.
C. The Commissioner shall schedule such appearance to be
held within thirty days of receiving the claimant’s written request.
The claimant and the Commissioner may, however, mutually agree
to schedule such appearance to be held after thirty days but before
sixty days from the receipt of the claimant’s written request.
D. Within forty-five days from the date of the appearance
before him, the Commissioner shall make an investigation of the
claim and notify the contractor in writing of his decision.
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the takeover agreements. The trial court denied the motions to reconsider and the request to
amend the initial motions for judgment and dismissed the cases.
XL filed a timely notice of appeal to this Court. However, we transferred the appeal to
the Supreme Court of Virginia pursuant to Code § 8.01-677.1. See XL Specialty Insurance Co.,
269 Va. at 362, 611 S.E.2d at 356. The Supreme Court determined, inter alia, that the proper
forum was this Court because the appeal originated as an administrative agency decision and XL
was required to follow the procedures set forth in Code § 33.1-192.1, which in turn mandates
compliance with Code § 33.1-386. Id. at 372, 611 S.E.2d at 361-62.4 Thus we address the
remaining issues raised.
II. ANALYSIS
A. SOVEREIGN IMMUNITY
XL first contends that the trial court erred by dismissing its motions for judgment on the
ground that they were barred by sovereign immunity. XL asserts two independent grounds for
this claim: (1) the trial court erred in concluding that no express contract existed between XL
and VDOT and (2) the trial court erred in finding that the equitable right of subrogation failed to
give XL a remedy against VDOT. Our analysis of these issues must be guided by the Supreme
Court’s directives in XL Specialty Insurance Co., 269 Va. at 362, 611 S.E.2d at 356. In that case
4
XL raised the same six assignments of error before the Supreme Court. However, the
Court only decided the jurisdictional issue, finding that “[b]efore we can address those
assignments of error dealing with the actions of the trial court, we must resolve a threshold issue
raised by XL. XL asserts that jurisdiction of this appeal lies with the Court of Appeals.” XL
Specialty Insurance Co., 269 Va. at 367, 611 S.E.2d at 359.
Specifically, XL claimed that it was a contractor for purposes of Code § 33.1-387 by
virtue of the “tripartite agreement” stemming from the performance bonds and the construction
contracts. Id. at 368, 611 S.E.2d at 359. The Supreme Court rejected that theory. Id. at 369, 611
S.E.2d at 360. XL argued in the alternative that it qualified as a contractor based on the doctrine
of equitable subrogation. Id. However, the Supreme Court determined that the doctrine of
equitable subrogation provided no foundation for qualifying XL as a contractor. Id. at 371, 611
S.E.2d at 362.
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the Supreme Court specifically found, as a necessary component of addressing the issue of
jurisdiction, that there was no express contract between XL and VDOT and that the right of
equitable subrogation provided no basis for a remedy.
VDOT’s plea of sovereign immunity was made as a plea in bar, and thus we must accept
the averments in the motions for judgment as true and rely solely on the pleadings. Tomlin v.
McKenzie, 251 Va. 478, 480, 468 S.E.2d 882, 884 (1996). The decision that sovereign
immunity barred XL’s claims is a legal determination, to be reviewed de novo by this Court.
Sheets v. Castle, 263 Va. 407, 410, 559 S.E.2d 616, 618 (2002).
XL first contends that an express contract between XL and VDOT exists because of the
tripartite relationship between XL, VDOT, and Bravos and, thus, sovereign immunity does not
bar the actions. In support of its claim, XL cites Wiecking v. Allied Medical Supply Corp., 239
Va. 548, 551, 391 S.E.2d 258, 260 (1990) (holding that sovereign immunity is no bar to valid
contract actions against the Commonwealth). XL concedes that there is no direct contract
between it and VDOT but bases the requisite connection on its “tripartite agreement” hypothesis.
XL notes that three express contracts exist for each construction project: the original
construction contract, the surety agreement, and the takeover agreement. XL argues that because
the surety relationship is a “tripartite agreement” with rights and obligations for all parties, even
though XL and the Commonwealth never had a signed contract until the takeover agreement, an
express contract still exists. Some of these obligations include the Commonwealth’s duties to
protect contract funds and to prevent improper disbursement of such funds. Southwood
Builders, Inc. v. Peerless Insurance Co., 235 Va. 164, 170, 366 S.E.2d 104, 107 (1988);
American Surety Co. v. Plank & Whitsett, Inc., 159 Va. 1, 10, 165 S.E. 660, 663 (1932). If XL
had failed to perform, VDOT would have been entitled to enforce the surety obligations in court
because the bond was made for the benefit of VDOT. First Virginia Bank-Colonial v. Baker,
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225 Va. 72, 77, 301 S.E.2d 8, 11 (1983); Aetna Casualty & Surety Co. v. Earle-Lansdell Co.,
142 Va. 435, 451, 129 S.E. 263, 267 (1925). Moreover, a surety can look back to the date the
bond was issued to ensure the obligee’s compliance with the contract. International Fidelity
Insurance Co. v. Ashland Lumber Co., 250 Va. 507, 511, 463 S.E.2d 664, 667 (1995). Not only
do the parties have reciprocal obligations, but it is well-settled law in Virginia that the terms of
the bond must be read together with the construction contract to fully understand the extent of all
parties’ responsibilities. New Amsterdam Casualty Co. v. Moretrench Corp., 184 Va. 318, 324,
35 S.E.2d 74, 77 (1945).
However, the Supreme Court in its remand opinion specifically rejected the tripartite
agreement theory. “[N]either the contracts nor the record here support a conclusion that the
performance bond and construction contract created an express contract between VDOT and
XL.” XL Specialty Insurance Co., 269 Va. at 369, 611 S.E.2d at 360. In its analysis, the
Supreme Court reviewed the cases cited by XL. Id. at 368, 611 S.E.2d at 359. The Court
determined that “none of these cases, however, held that a direct contractual relationship is
established between non-signatories to these contracts by virtue of related rights and duties that
arise from such separate contracts.” Id. The Court cited approvingly the decisions of other
courts that hold “that the rights and duties arising from such separate contracts do not create a
contractual relationship.” Id. Thus, there was no express contract between XL and VDOT that
would abrogate the Commonwealth’s claim of sovereign immunity.
XL next contends that, failing the establishment of a direct contractual relationship, the
doctrine of equitable subrogation provides the contractual nexus to withstand a claim of
sovereign immunity by the Commonwealth. The Supreme Court also rejected this theory.
Noting that they had “not previously considered whether a surety advancing a claim relating to
the construction contract based on equitable subrogation is a ‘contractor’ for purposes of Code
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§ 33.1-387,” the Supreme Court concluded that the doctrine of equitable subrogation does not
qualify XL as a “contractor” for the purposes of that statute. Id. at 370, 611 S.E.2d at 361. The
Court analyzed federal cases holding that equitable subrogation did not qualify a surety as a
“contractor” for purposes of the federal Contract Disputes Act. Id. at 371, 611 S.E.2d at 361
(citing Fireman’s Fund Insurance Co. v. Secretary of the Navy, 313 F.3d 1344, 1351 (Fed. Cir.
2002); Admiralty Construction Co. v. Dalton, 156 F.3d 1217, 1221 (Fed. Cir. 1998)). The Court
also noted that statutes in abrogation of sovereign immunity “must be strictly construed.” Id.
Sovereign immunity is a firmly established doctrine in Virginia. Virginia Board of
Medicine v. Virginia Physical Therapy Ass’n, 13 Va. App. 458, 464, 413 S.E.2d 59, 63 (1991).
Waivers of sovereign immunity must be clearly expressed and will not be implied from general
statutory language. Id. at 465, 413 S.E.2d at 63.
Code § 8.01-192 reflects the Commonwealth’s limited consent to be sued in contract
cases. Wiecking, 239 Va. at 551, 391 S.E.2d at 260. A policy allowing contractual suits against
the Commonwealth is long-standing in the Commonwealth:
With respect to the remedy, we have construed Code § 8.01-192
and its statutory predecessors as the Commonwealth’s general
consent to be subjected to suit in its own courts in contract cases.
Stuart, Gov. v. Smith-Courtney Co., 123 Va. 231, 234, 96 S.E.
241, 242 (1918); Parsons v. The Commonwealth, 80 Va. 163, 167
(1885). In Higginbotham’s Ex’x v. Commonwealth, 66 Va. (25
Gratt.) 627, 637 (1874), Judge Bouldin, writing for the Court,
observed that it has been, since 1778, the “cherished policy of
Virginia” to allow to citizens “the largest liberty of suit against
herself” in contract cases.
Wiecking, 239 Va. at 552-53, 391 S.E.2d at 261. The waiver of sovereign immunity, though, is
predicated on an express contract. The requisite contractual foundation is a “valid contract[]
entered into by duly authorized agents of the government.” Id. at 551, 391 S.E.2d at 260. The
rationale of Wiecking is that “when the state contracts for goods or services, receives the benefit
of the contract, and then refuses to honor its obligations, the contractor’s property is subjected to
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an unconstitutional taking.” Id. (emphasis added). Further, “to hold that the state may enter into
a valid contract and yet retain the power to avoid its obligation would entail an obvious
contradiction.” Id. at 552, 391 S.E.2d at 260. This clearly contemplates a direct contractual
relationship.
Consequently, courts have not extended the Commonwealth’s waiver of sovereign
immunity for contractual suits to equitable remedies absent an explicit statutory waiver. In Flory
v. Commonwealth, 261 Va. 230, 541 S.E.2d 915 (2001), the Supreme Court addressed whether
the Procurement Act waived sovereign immunity for the equitable claims of quantum meruit and
contracts implied in law. Id. at 236, 541 S.E.2d at 918. The Court held that the
“Commonwealth’s common law liability for its contracts does not encompass quasi-contractual
claims, and any relief based on such claims must be authorized through a statute abrogating the
Commonwealth’s sovereign immunity.” Id. at 237, 541 S.E.2d at 918 (emphasis added); see also
Commonwealth v. Pierce’s Adm’r, 25 Va. (4 Rand.) 432, 437 (1826) (holding that an equitable
demand against the Commonwealth must be based on some existing law and will not be
implied).
A claim for equitable subrogation, then, is barred by sovereign immunity unless there is a
specific statutory waiver. Code § 33.1-387 provides a procedure for contractors to bring civil
claims against the Commonwealth; however, the Supreme Court specifically noted that XL can
not bring a claim under Code § 33.1-387 because it only applies “to those entities that have a
direct contract with VDOT. This construction is consistent with the statutory framework for
filing contract-based claims against VDOT.” XL Specialty Insurance Co., 269 Va. at 371, 611
S.E.2d at 361. XL was not a party to the contract between Bravos and VDOT. Rather, the Court
noted that Code § 33.1-192.1 applied to XL because it “was an entity ‘claiming under’ the
contractor on a contract executed with VDOT.” Id. at 372, 611 S.E.2d at 361. That section
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provides that no suits shall be brought by a contractor “or any persons claiming under him”
“unless the claimant shall have exhausted the review process provided by § 33.1-386.”5 Code
§ 33.1-192.1.
While Code § 33.1-192.1 requires contractors and those claiming through contractors to
follow the procedures set forth in Code § 33.1-386, it does not explicitly provide for a right to
sue the Commonwealth. In contrast, Code § 2.2-4364(E) specifically addresses the right of a
contractor to sue the Commonwealth. It states that “a contractor may bring an action involving a
contract dispute with a public body,” but it makes no mention of anyone claiming through the
contractor. The General Assembly noted that this section was limited to contractors and
excluded subcontractors or suppliers and failed to change the wording. H.J. Res. 229, 2000 Gen.
Assem., Reg. Sess. (Va. 2000).
The Supreme Court noted that “[p]rocedures for the processing of such contract claims
and enforcement of such claims affect the remedy, ‘not the validity of the obligation on which
the claim is based.’” XL Specialty Insurance Co., 269 Va. at 371 n.3, 611 S.E.2d at 361 n.3
(quoting Wiecking, 239 Va. at 552, 391 S.E.2d at 261). Procedures for the processing and
5
Code § 33.1-192.1 provides, in part, that
[n]o suit or action shall be brought against the Department of
Transportation by a contractor or any persons claiming under him
. . . or by others on any claim arising from the performance of the
contract by the contractor, subcontractor or person furnishing
materials to the contractor, unless the claimant shall have
exhausted the review process provided by § 33.1-386.
Code § 33.1-386 mandates a procedure for contractors to follow when bringing a claim
against VDOT. The contractor must submit a written claim for any amount due within sixty
days of VDOT’s final estimate. Within ninety days, VDOT is to make an investigation and
notify the claimant of its determination. If the claimant is not satisfied, he or she has thirty days
to notify the Commonwealth Transportation Commissioner that he or she wishes to make an
appearance. The Commissioner will schedule an appearance within thirty days. Within
forty-five days of that meeting the Commissioner will notify the claimant of his decision.
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enforcing of claims do not create a right, but simply provide a mechanism for protecting an
already existing right. Wiecking, 239 Va. at 552, 391 S.E.2d at 261.
Code § 33.1-192.1 is similar to the code section analyzed in Flory, 261 Va. at 237, 541
S.E.2d at 918. That case concerned Code § 8.01-192, which delineates the procedure for
individuals to follow when their claim is disallowed by the Comptroller. The Court determined
that the “statutes contain procedural requirements setting out the manner in which a claim is
presented. Neither section establishes the claimant’s right to lodge a claim against the sovereign
or the sovereign’s liability for [a quasi-contractual] claim.” Id.
When statutory language abrogating sovereign immunity in other instances is compared
with Code § 33.1-192.1, it is clear that there is no waiver of sovereign immunity in the instant
case where the claim is not based on a direct contract between the Commonwealth and the
claimant but is rather equitable in nature. “The right of subrogation is not founded on contract.
It is a creation of equity; is enforced solely for the purpose of accomplishing the ends of
substantial justice, and is independent of any contractual relations between the parties.” Aetna
Life Insurance Co. v. Middleport, 124 U.S. 534, 550 (1988) (citation omitted). Code
§ 2.2-4364(E) grants a right: “a contractor may bring an action.” (Emphasis added). The
Virginia Tort Claims Act proclaims the liability of the Commonwealth: “the Commonwealth
shall be liable for claims.” Code § 8.01-195.3 (emphasis added). Administrative agencies are
subject to suit in particular circumstances: “[a]ny person affected by and claiming the
unlawfulness of any regulation . . . shall have a right to the direct review thereof by an
appropriate and timely court action.” Code § 2.2-4026 (emphasis added). On the other hand,
Code § 33.1-192.1 simply describes a procedure that must be followed: “[n]o suit or action shall
be brought . . . unless the claimant shall have exhausted the review process provided by
§ 33.1-386.”
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Thus, we agree with the trial court that XL’s claim is barred by sovereign immunity.
Whether or not Code § 33.1-387 provides a remedy or merely a procedure, the Supreme Court
has held that proceeding under that code section is not the proper course of action for XL
because XL is not a “contractor” for the purposes of that statute. XL Specialty Insurance Co.,
269 Va. at 371-72, 611 S.E.2d at 361-62. Rather, the Court required XL to proceed according to
the process set forth in Code § 33.1-192.1—a procedural statute that does not waive the
Commonwealth’s sovereign immunity to the claim of equitable subrogation.
Accordingly, XL’s claims are barred by sovereign immunity.
B. LEAVE TO AMEND
Next, we must determine whether the trial court erred in failing to allow XL to amend its
motions for judgment to include a count grounded in its relationship with VDOT based on the
“takeover agreements.” We hold that under the facts of this case, it did.
Rule 1:8 provides that leave to amend shall be “liberally granted in furtherance of the
ends of justice”; however, such a matter is within the discretion of the trial court. Kole v. City of
Chesapeake, 247 Va. 51, 57, 439 S.E.2d 405, 409 (1994). Therefore we review for abuse of
discretion. Hetland v. Worcester Mutual Insurance Co., 231 Va. 44, 46, 340 S.E.2d 574, 575
(1986).
Where granting a motion for leave to amend would not prejudice the other party, an
amendment should be allowed. Kole, 247 Va. at 57, 439 S.E.2d at 409 (trial court abused its
discretion in failing to allow an amendment alleging facts sufficient to withstand a plea of the
statute of limitations). Accord Peterson v. Castano, 260 Va. 299, 303, 524 S.E.2d 736, 738-39
(2000) (trial court erred by denying leave to amend the ad damnum clause); Mortarino v.
Consultant Engineering Services, Inc., 251 Va. 289, 295-96, 467 S.E.2d 778, 782 (1996) (trial
court abused its discretion when it disallowed appellant to amend his motion for judgment to
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allege facts sufficient to support a cause of action for fraud). The trial court must also consider
the moving party’s interest in being fully compensated in order to ensure “a litigant’s right to a
fair trial.” Peterson, 260 Va. at 303-04, 534 S.E.2d at 738-39.
XL’s two motions for judgment were based on the bond between XL and Bravos and the
contract between Bravos and VDOT. XL averred that VDOT breached its contract with Bravos
by paying for work that was not performed or not satisfactorily completed. The takeover
agreements, an integral part of the relationship between XL and VDOT, specifically referred to
the bonds and contracts and provided that XL would complete the work and VDOT would pay
XL according to the terms of the two original documents.6 The agreements were entered into in
October 1999.
VDOT would not be prejudiced by an amendment to the pleadings allowing XL to claim
breach of the takeover agreements because the agreements essentially reiterate XL’s obligations
under the bond and the terms of the contract between VDOT and Bravos. The takeover
agreements are, in fact, the express contracts between XL and the Commonwealth that provide
the basis, if any, for its contract claim. Moreover, at the time the motions for judgment were
filed, VDOT had notice of the agreements as it was a party to them in 1999. See Travelers
Indemnity Co. v. United States, 16 Cl. Ct. 142, 154 (1988) (construction contract incorporated by
reference in the takeover agreement). Where an amendment would cure a defect in pleadings,
leave to amend should not be refused simply because, without it, the litigant stated an imperfect
cause of action. See Mortarino, 251 Va. at 295-96, 467 S.E.2d at 782. Thus we hold that the
trial court abused its discretion in failing to allow the amendment and give XL its day in court.
6
Paragraph 8 of the Motions for Judgment states, inter alia: “Under the Takeover
Agreement, XL reserved all its rights, remedies and defenses of itself and Bravos. A true and
accurate copy of the Takeover Agreement is attached hereto and incorporated by reference as
Exhibit 3.”
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We affirm in part, reverse in part, and remand for proceedings consistent with this
opinion.
Affirmed, in part, reversed, in part, and remanded.
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Bumgardner, J., dissenting.
I dissent from the holding that XL Specialty Insurance Company is asserting a claim for
equitable subrogation that the doctrine of sovereign immunity bars. I would reverse the trial
court on both issues.
Bravos Concrete, Inc. entered two contracts with the Commonwealth of Virginia
Department of Transportation for the construction of two separate highway projects. The
Commonwealth required Bravos to provide for performance bonds, which XL Specialty
Insurance Company furnished. Bravos defaulted, and the Commonwealth made demand on XL
for performance. XL completed the projects and filed claims for the amounts it discovered the
Department had overpaid Bravos.
XL asserts a claim for breach of rights owed it by the Commonwealth that arise from the
duties owed by a primary obligee to its surety. XL is not asserting the rights of Bravos to which
it is entitled by subrogation. It is not asserting an equitable remedy. It is asserting a right owed
directly to it under the law of suretyship.
A suretyship relationship existed between the Commonwealth, Bravos Concrete, and XL.
It arose from two bilateral contracts: the primary obligation that existed between Bravos
Concrete and the Commonwealth; and the secondary obligation that existed between XL and
Bravos Concrete. The Commonwealth was the intended beneficiary of the contract between
Bravos Concrete and XL for the performance bond.
Suretyship is a status that created specific rights and duties that ran between the
Commonwealth and XL. It afforded the Commonwealth the right to enforce the contract directly
against XL. Correspondingly, it granted XL certain defenses to the claims that the
Commonwealth could bring against it on its bond. Critical suretyship defenses arise if the
primary obligee does an act that increases the risk of loss to the surety. An act that increases the
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risk of loss impairs the suretyship status and discharges the surety from its duty of performance.
The protection against impairment of suretyship status also gives the surety a claim against the
principal obligee to the extent the impairment would have discharged the surety from
performance. Restatement (3d) Suretyship and Guarantee § 37(4), at 159 (1996).
Case law in the Commonwealth comports with the Restatement (3d) Suretyship and
Guarantee (1996). American Surety Co. v. Plank & Whitsett, Inc., 159 Va. 1, 165 S.E. 660
(1932), held: “Payments of substantial sums before they are due, or failure to retain the required
percentage, are generally held to be such variations in the terms of the contract as will discharge
the surety from its obligation to the owners.” Id. at 10, 165 S.E. at 663. Southwood Builders,
Inc. v. Peerless Ins. Co., 235 Va. 164, 366 S.E.2d 104 (1988), affirmed the discharge of the
surety where the beneficiary of the builder paid the subcontractor before the sums were due.
Board of Supervisors of Fairfax Co. v. Southern Cross Coal Corp., 238 Va. 91, 380 S.E.2d 636
(1989), held the defense of material deviation is an affirmative defense against a claim brought
by the principal obligee against the surety on a bonded obligation.
In this case, the Commonwealth has raised the defense of sovereign immunity to a civil
action alleging it overpaid Bravos Concrete. The action stated a claim for breach of a duty owed
by the Commonwealth to XL. The Commonwealth’s duty arose from its status as the intended
beneficiary of Bravos Concrete’s contract with XL for a performance bond. XL was asserting its
own rights; not the rights of another acquired by subrogation.
XL’s claim arose out of the law of suretyship that protected it from impairment of its
status as a surety. The rights constituted an affirmative defense to any suit by the
Commonwealth brought to enforce its contract rights to performance by its surety. As the
intended beneficiary of Bravos Concrete’s contract with XL, the Commonwealth acquired rights
to performance by the surety. However, it also incurred the duty to the surety not to impair its
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status as surety. Acting to impair the surety’s status would discharge the surety from the
performance it owed the Commonwealth. Those reciprocal rights and duties arise from law of
suretyship. They directly defined the scope of the Commonwealth’s contractual right to
performance by XL and the extent of XL’s contractual obligation to perform.
“A surety’s rights are defined by the express terms of the contract that gives rise to the
suretyship relationship as well as by common law rights that supplement the parties’
undertaking.” Peter A. Alces, The Law of Suretyship and Guaranty § 2.2 (Thompson West,
2003) (citing Restatement (3) § 17). The rights arise “as a matter of status in the transaction
rather than by express agreement.” Restatement (3d) Suretyship and Guarantee § 1, at 6.
Sovereign immunity does not apply to actions based upon contracts. Wiecking v. Allied
Medical Supply Corp., 239 Va. 548, 551, 391 S.E.2d 258, 260 (1990), held: “The doctrine of
sovereign immunity is ‘alive and well’ in Virginia, as a defense to actions in tort, but we have
never extended that defense to actions based upon valid contracts entered into by duly authorized
agents of the government.” (Citation omitted.)
The doctrine of sovereign immunity should not bar the claims of XL Insurance. The
claim seeks to enforce a duty owed XL arising from the suretyship status created by a valid
contract made by the Commonwealth. XL does not assert a claim for subrogation or for
equitable subrogation, nor does it assert an equitable remedy where no contract at law exists. It
brings an action asserting rights arising from valid contracts that the Commonwealth sought,
negotiated, and entered. The doctrine of sovereign immunity is not meant to protect the
Commonwealth from its contracts. “[S]ince 1778, the ‘cherished policy of Virginia’ [is] to allow
to citizens ‘the largest liberty of suit against herself’ in contract cases.” Id. at 553, 391 S.E.2d at
261 (citing Higginbotham’s Ex’x v. Commonwealth, 66 Va. (25 Gratt.) 627, 637 (1874)).
Accordingly, I respectfully dissent from the majority opinion on that issue.
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