What Is Equitable Subrogation?

The concept of equitable subrogation is an old one.  In the case of Centreville Car Care v. North American Mortgage263 Va. 339 (2002), the Supreme Court of Virginia summarized the law of equitable subrogation as follows:

Subrogation is the substitution of another person in place of the creditor to whose rights he succeeds in relation to the debt. This doctrine is not dependent upon contract, nor upon privity between the parties; it is the creature of equity, and is founded upon principles of natural justice. Subrogation not being a matter of strict right, but purely equitable in its nature, dependent upon the facts and circumstances of each particular case, no general rule can be laid down which will afford a test in all cases for its application. Nevertheless, we have expressly acknowledged that “Virginia has long been committed to a liberal application of the principle of subrogation.”

Although no bright-line rule for the resolution of claims for subrogation can be formulated because the merits of such claims are necessarily fact specific, several principles or guidelines are uniformly established in our cases that assist in the proper analysis of such claims. First, subrogation is not appropriate where intervening equities are prejudiced. Second, ordinary negligence of the subrogee does not bar the application of subrogation where “[a]n examination of the facts . . . shows that the equities strongly favor” the subrogee.  Id. at 345.

What is Sovereign Immunity?

The concept of sovereign immunity in Virginia is a complicated one, but at its core it is the doctrine that states the government should have some immunity from lawsuits in order to preserve the efficacious function of government.  The reason behind the doctrine is simple: if employees of the state were in constant fear of being sued civilly for every mistake the function of government would grind to a halt and harm the community.  In Virginia, there is a convoluted body of law that sets out specific abrogations to this historic notion.  This includes several statutes, the one involved in the present case: XL Specialty Company v. Commonwealth of Virginia, Department of Transportation., 624 S.E.2d 658, 47 Va. App. 424 (Va. 2006), is Virginia Code section 8.01-192, which allows contractors to sue the Commonwealth of Virginia for breach of contract.

What Happens When Equitable Subrogation and Sovereign Immunity Collide?

In short, if you are a surety of a construction contract in Virginia then you have no right to bring a legal action against the state, or one of its agencies, if that action does not arise from an arms length negotiation manifested in a contract.  In the XL Specialty case, a construction company, Bravos Concrete, Inc., entered into a construction contract with the Virginia Department of Transportation (VDOT) to complete projects in Chesterfield and York Counties.  Bravos had signed XL Specialty Insurance Company as their surety on the project.  When Bravos breached the contract XL Specialty Co. entered into takeover agreements with VDOT, agreeing to arrange for the completion of the project.  Xl Specialty v. Com. Dept. of Transp., 624 S.E.2d at 661.  After completion of the construction, XL submitted a payment request to VDOT for completion of work defectively done by Bravos for which Bravos had already been paid by VDOT.  Id.  VDOT denied the claims and XL brought suit against the Commonwealth.
Department of Transportation (VDOT) due to the longstanding doctrine of sovereign immunity in Virginia.  The Virginia Court of Appeals held that a surety of a construction contract was barred from bringing a claim against Commonwealth under an equitable subrogation theory.  In XL Specialty Company v. Commonwealth of Virginia, Department of Transportation., 624 S.E.2d 658, 47 Va. App. 424 (Va. 2006), the Court strictly construed the Virginia Code section 8.01-192

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