Takeaways from Montalla, LLC v. Commonwealth

In early May, the Supreme Court of Virginia’s decision in Montalla, LLC v. Commonwealth, established some favorable legal precedent for contractors doing business with the Commonwealth of Virginia.¹ Contractors dealing with the Commonwealth or its agencies (e.g., VDOT) should be aware that when they enter into valid contracts with the Commonwealth, they can hold the Commonwealth accountable for those contracts and seek lawful remedies that may otherwise be unavailable due to the doctrine of sovereign immunity.

What is the doctrine of sovereign immunity? At its core, the doctrine allows the government to avoid being sued when it is acting within the scope of its governmental power. Under the doctrine, a party cannot sue the government in a particular context without the government’s consent. The doctrine also limits the remedies available to the plaintiff against the government.

How does the Montalla case impact the industry and the doctrine of sovereign immunity? Simply put, the Montalla case holds that the Commonwealth cannot rely on the doctrine of sovereign immunity in contract disputes.  The key points are as follows:

• The doctrine of sovereign immunity cannot be used as a defense by the Commonwealth when a party brings a claim against it based upon a valid contract entered into by a duly authorized government agent.²
• “It is the nature of the dispute and not the remedy sought that determines whether an action is based upon the contract.”³ This means that a court deciding a case must only determine that the claim being brought against the Commonwealth is based upon a valid contract to determine that sovereign immunity cannot be used as a defense by the Commonwealth.
• Generally, certain types of remedies cannot be sought by the plaintiff in a case against the Commonwealth. However, if the claim is based upon a valid contract with the Commonwealth, then such remedies become available to the plaintiff.
• Specific performance, such as asking the court to rescind (cancel) a settlement agreement, is an available remedy against the Commonwealth when a party sues over a contract.
• Remedies made available in statutes (statutorily provided remedies) generally only waive sovereign immunity when the General Assembly expressly indicates their intent to do so within the statute. However, once again, a statutorily provided remedy is available in a lawsuit based on a valid contract, even if the statute does not expressly waive sovereign immunity.

In this case, NXL was dealing with VDOT pursuant to service contracts between the two. VDOT and NXL disagreed on how specific federal regulations impacted reimbursement on the service contracts that VDOT had agreed to pay to NXL. NXL began losing money on the service contracts due to this disagreement and ultimately was forced into a position where it had to settle with VDOT for reimbursements far below the original agreed-upon percentage. Once the settlement agreement had been entered into, it became known that the Federal Highway Administration (FHWA) agreed with NXL’s position on the federal regulations. During settlement discussions, VDOT planned to adopt the FHWA and NXL’s position as VDOT’s official policy moving forward. However, these changes to VDOT’s policy were not set to take effect until after the time frame in which the settlement agreement with NXL was reached. VDOT did not share this development with NXL and NXL’s deteriorating financial condition left it no option but to settle.

Montalla, a company that had acquired NXL’s rights to the service contracts, sued VDOT and the Commonwealth. Montalla sought to rescind the settlement agreement arguing that VDOT withheld relevant information and used its self-induced economic leverage during its settlement negotiations with NXL. Montalla made its case for recission seeking a claim for specific performance and a claim based upon a statutorily provided remedy. At trial, the Virginia Circuit Court dismissed Montalla’s claims on the basis of the Commonwealth’s defense of sovereign immunity. Montalla appealed to the Virginia Court of Appeals. The Court of Appeals agreed with the trial court. Montalla then appealed to the Supreme Court of Virginia. The Supreme Court of Virginia found in favor of Montalla and overturned the decisions of the lower courts, allowing Montalla to move forward with the merits of its claims. The case was sent back to the lower courts for resolution consistent with the Supreme Court’s decision.

If you’re interested in a more detailed analysis, please feel free to reach out to Jeffrey Southard, Brett Marston, or Andrew Gay at Gentry Locke.

[1] Montalla, LLC v. Commonwealth, No. 230364, 2024 Va. LEXIS 28 (2024).
[2] Id. at 15.
[3] Id. at 18.