Guam Adopts “Economic Loss Rule” In Construction Cases
In November, 2011, the Guam Supreme Court ruled on an issue of first impression that could have major ramifications for the Guam construction industry during the expected military buildup and beyond. Specifically, the Guam high court issued an extraordinary “certified question” ruling holding that Guam follows the so-called “economic loss doctrine” in construction dispute cases. The ruling should be of major interest to contractors eyeing Guam construction projects.
The economic loss doctrine is a rule of jurisprudence that generally prevents commercial contractors from suing each other for tort liability (negligence) in connection with a construction project they have worked on in common. Commentators have observed that the doctrine promotes commercial activity by leaving it to the contractors to negotiate their own rights and liabilities as part of the contracting process, and protecting them from the risk of unlimited tort damages awards in the event of a construction delay, mistake, or mishap.
The doctrine has been adopted, in one form or another, by the courts of nearly every American jurisdiction. However, until now no Guam appellate-level case had ever addressed the applicability and scope of the doctrine here. That is significant, because one of the purposes of the doctrine is to reduce uncertainty in the law and thus enable contractors to intelligently shape their contractual relationships based on the settled law of the jurisdiction. Without any meaningful guidance on the issue from the Guam courts, contractors were previously left to speculate as to whether the doctrine applies at all and if so to what extent.
The Guam Supreme Court confronted the issue in the case of Maeda Pacific Corp. v. GMP Guam, Inc., 2011 Guam 20, which involved the collapse of a reservoir tank on Anderson Air Force Base in 2007. The significance of the Supreme Court’s ruling, however, goes far beyond that particular case. The court’s opinion enables contractors and their attorneys to minimize exposure to liability and maximize their recovery in the event of a construction accident or dispute.
A savvy contractor or subcontractor can now more intelligently evaluate the risks and opportunities of getting involved in a project during the bidding process and shape its own contract accordingly. For example, contractors can effectively limit their legal liability by inserting clauses in their contracts requiring that they be named as intended beneficiaries to all subcontracts, limiting their liability to a certain dollar amount (or an amount coextensive with applicable insurance coverage), or even providing for full indemnification in the event of a lawsuit. In light of the Supreme Court’s adoption of the economic loss doctrine, contractors now have an assurance that their contractual limitations will be respected by the courts, and not disregarded by imposing unlimited tort liability.
Significantly, the court recognized that the economic loss doctrine should be applied broadly—to all contractors and subcontractors in a project—regardless of whether the parties are in privity of contract with one another. The court recognized that construction projects frequently involve chains or webs of interrelated agreements between the owner, prime contractor, subcontractors and materials suppliers, all of whom have an interest in avoiding the risk of unlimited tort liability even though their particular contract was signed by only two of the many players involved in the project. The court rejected the prime contractor’s invitation to limit application of the doctrine to cases where no property damage is involved and to situations where the plaintiff has specific alternative contract remedies.
TTA's Todd Thompson represented one of the subcontractor defendants who prevailed in the case.
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