Small business owners need to employ various business practices and strategies to limit risk given the litigious nature of today’s society. In the home inspection business, it is important to: a) inspect to the ASHI Standards of Practice; b) write your report clearly and accurately; and c) have a signed, well-written pre-inspection contract. A contract and provisions within it should be thought of as a binding or formal agreement, although contracts are subject to court interpretation and enforcement. The inspector should seriously consider having an exculpatory provision in the inspection contract so long as it complies with applicable state statute and state case law. Exculpatory provisions should not be thought of as an absolute vaccine against litigation, but rather as a tool in a risk management tool chest. As the home inspection industry is relatively new, there is limited case law available to make informed business and contract decisions. Further-more, each case has its own unique set of facts that could effect the outcome. Each judge or arbitrator may interpret the law differently, depending on the state jurisdiction.
It is of the utmost importance to have a local attorney who understands the aspects of exculpatory law in your state write your inspection contract. Don’t be afraid to ask questions, as it will be your inspection contract.
A written and signed inspection contract is essential so the client knows, and has agreed to, the scope and limitations of the services to be performed. A contract is a legal promise or set of promises made by one party to another. The courts may decide if the contract is valid in its totality or if specific provisions are valid. When writing the inspection contract, use straightforward language that is easy to understand. Avoid using complex language. Some states have plain-language provisions that must be used with consumers. Vague and poor writing should not be used in the either the contract or in the report. The inspection contract should include the scope of the inspection and the components to be inspected. The exclusions should be enumerated, including, but not limited to, components not inspected, no warranty or guarantee of any kind, and latent and future defects. It should contain the payment provisions including collection costs. There need to be provisions that the contract is: a) the entire contract unless modified in writing and signed between the parties, and b) the severability of the contract. The complaint process, time limits to file a complaint, venue of complaints and governing jurisdiction are subjects to consider. Some other items that should be considered include, but are not limited to, confidentiality, anti-subrogation clause, negotiated terms and seller fraud release provision. Sample contracts should be considered as a base from which to begin work with a local, knowledgeable attorney. The laws of the state in which business is conducted need to be properly considered to write a good inspection contract.
Exculpatory statements attempt to limit liability or to extinguish the potential culpability of a party through the use of disclaimer, assumption of risk and indemnification clauses, as well as releases of liability.
For decades, state courts have wrestled with issues relating to the enforcement of exculpatory clauses. In some, but not all, states, depending on the particular circumstances, exculpatory clauses may be enforced as long as the language is clear and unequivocal. On the other hand, exculpatory clauses that extinguish liability for intentional torts or reckless harm, or are contrary to a state statute or case law, will generally be declared null and void.
In an article published in the November 2001 Florida Bar Journal, Steven Lesser stated in The Great Escape—How to Draft Exculpatory Clauses That Limit or Extinguish Liability, “At the heart of every analysis over enforcement of an exculpatory clause lies the issue of conspicuousness of the language employed.”
The CCH Incorporated House Business Owner’s Toolkit for Small Business offers the following advice: “The civil litigation system itself represents a significant risk factor and exposure to liability. Therefore, it is important that small business owners employ the various strategies that allow them to control the risk factors in litigation. For example, an exculpatory clause is a waiver of a right to sue. Clearly, if a small business owner uses such a clause, and, if challenged later, and if the court deems the clause enforceable, then the small business owner will have completely avoided liability.”
Professor Patrick Randolph, University of Missouri KC, has some interesting comments concerning exculpatory clauses in home inspection contracts. In his writings, he tends to have point counter-point discussions. He writes: “The court is ‘tilting’ toward barring such exculpation clauses entirely in home inspection contracts, whether they mention negligence or not, at least where the potential losses are significantly out of proportion to the limitation on claims.”
Some inspection contracts offer additional liability for a flat fee, for example, of several thousand of dollars or a percentage of the additional liquidated damages sought. This may or may not be effective.
Courts have upheld such exculpatory clauses or limitation of liability provisions if the beneficiary of the clause is involved in a ‘high risk, low-compensation service.’ H.S. Perlin Co. v. Morse Signal Devices.1 Most home inspectors would argue that they are involved in a ‘high-risk, low-compensation service.’ However, there is also case law that suggests that if a provision is ‘unconscionable or otherwise contrary to public policy,’ it is unenforceable as in Tunkl v. Regents.2 Thus, a buyer could argue that a limitation of liability clause is unenforceable as a violation of public.
Statutory and case laws vary from state to state in regard to exculpatory aspects of contracts. The following cases are presented to show how some appellate courts disagree about enforcing the exculpatory clause and limit of liability.
A Missouri case law held there must be additional consideration in and without such the liability could not be limited to the inspection fee. In this case,3 the inspection contract stated in part, “The Company’s liability for any Client post-inspection claims is limited to a maximum of the inspection fee paid.” The inspection report stated that the “Concrete foundation walls [are] in overall satisfactory structural condition.”
There was allegedly $25,000 of repairs to eliminate the cracks, stop the water leak and stabilize the concrete foundation walls seven months after the client moved into the house. The court held in favor of the client.
Some states have upheld the exculpatory provisions. In Maryland, in Winstein v Wilcom, the court held that in the absence of legislation to the contrary, there is ordinarily no public policy that prevents the parties from contracting such. This case was used in Maryland when the inspection company4 admitted a mistake in regard to the condition of the roof, but stated the signed agreement limited the liability to the inspection fee. The appellate court upheld the defense of the exculpatory clause and limited the damages to $250.
Connecticut’s Appellate Court considered the validity of a limitation of liability clause in a home inspection contract. The ruling5 upheld the lower court finding and indicated the provision to be unenforceable. The fact that the inspection company used a preprinted form contract and afforded the homeowners little opportunity to read it before they signed the contract was central to the court’s decision.
In neighboring New York, a court upheld the limit of liability reversing the small claims court ruling.6 Plaintiff moved into the house and discovered termite infestation that the defendant’s inspection failed to disclose.
In Tennessee, the State Supreme Court7 overturned a lower court that granted the Defendant’s motion for summary judgment of the exculpatory provision. The Plaintiffs contended that the clause should have been declared void because it violated public policy. In general, Tennessee courts recognize that, barring an exception, “parties may contract that one shall not be liable for his negligence.” In reversing and remanding for further proceedings, the Tennessee Supreme Court8 enumerated several factors for a court to consider if an exculpatory clause violates public policy. Those factors include: [a.] It concerns a business of a type generally thought suitable for public regulation; [b.] The party seeking exculpation is engaged in performing a service of great importance to the public, which is often a matter of practical necessity for some members of the public; [c.] The party holds himself out as willing to perform this service for any member of the public who seeks it, or at least for any member coming within certain established standards; [d.] As a result of the essential nature of the service, in the economic setting of the transaction, the party invoking exculpation possesses a decisive advantage of bargaining strength against any member of the public who seeks his services; [e.] In exercising a superior bargaining power, the party
the public with a standardized adhesion contract of exculpation, and makes no provision whereby a purchaser may pay additional reasonable fees and obtain protection against negligence; [f.] Finally, as a result of the transaction, the person or property of the purchaser is placed under the control of the seller, subject to the risk of carelessness by the seller or his agents.
In a case in Oregon,9 the plaintiff purchased the home and hired an engineering firm to inspect it. The contract provided that the “liability” of the firm and its employees was “limited to the Contract sum” of $200. The plaintiff purchased the house after the inspection report found “no major structural deterioration,” but thereafter discovered extensive damage requiring (possibly) $340,000 for repairs. The trial court granted summary judgment, and the court of appeals affirmed on the ground that the clause limiting liability was “conspicuous, clear and unequivocal and did not violate public policy.”
In Massachusetts,10 Wisconsin11 and Rhode Island,12 the home inspection state statutes prohibit having liability limiting terms in a home inspection contract. The California Trade Practice statute13 states that the limit of liability cannot be limited to the inspection fee. It does not say another specific greater amount cannot be specified.
There is case law, not involving home inspectors, in regard to wrongful death and exculpatory clauses. The Utah Supreme Court held that an exculpatory clause could be enforced; while in the Wisconsin Supreme court, in one case it was held the Waiver Release Statement was invalid. In the Utah case,14 the buyers of a new home signed an agreement to purchase a new house that contained language to hold harmless from any claims as the result of visiting the house under construction.
During a visit, the wife of the plaintiff slipped and fell into a hole in the driveway. The injuries resulted in a blood clot; and she died approximately two weeks later. The court held that the “hold harmless” contract section did not violate policy; and that the provisions for job site visits were clearly unequivocal and therefore enforceable.
In the Wisconsin case,15 a woman used a swimming pool as part of a physical therapy and rehabilitation program. She was required to fill out a guest registration card and pay a fee before swimming that contained a Waiver Release Statement holding harmless: “I AGREE TO ASSUME ALL LIABILITY FOR MYSELF WITHOUT REGARD TO FAULT.” She drowned while swimming laps. The Wisconsin Supreme Court held that the liability provision lacked the opportunity to bargain by a party.
Upholding exculpatory clauses
In general, an exculpatory clause is more likely to be enforced depending upon the following conditions.
- Approximately equal bargaining power exists between the parties.
- The clause needs to be in plain English clearly explaining the risks associated with the activity.
- The clause does not apply when intentional, reckless or criminal conduct exists.
- The exculpatory clause needs to be prominently disclosed in the contract. Examples would be ALL CAPS, bold type or a larger point size to stand out in the contract.
- Avoid a contract of “adhesion.” There should be the opportunity for negotiations, not a take-it-or-leave-it contract.
There are other provisions that should be part of a well-written inspection contract.
Entire Agreement: This section states the written contract is the entire contract and only changes signed by the parties are valid.
Severability: If any provision is found to be invalid, the remaining sections of the contract will remain in force.
Subrogation Waiver: This section would forbid assigning rights to an insurance company. The client intentionallyrelinquishes any right to recoverdamages from another party who may be responsible.
Notification & Period to Make a Claim: The time frame from discovery and the period to make a claim should be specified. The time frame to make a claim varies from one month to one year or more if dictated by state statute.
Arbitration: In addition to specifying arbitration and precluding litigation, consider specifying the American Arbitration Association rules, but the arbiter is a retired judge or attorney knowledgeable in home inspections. There are pros and cons to the use of arbitration in place of conventional litigation.
Fraud Waiver & Release: In the event the client institutes legal action against the seller for fraud or misrepresentation, the inspector shall be held harmless and released from any liability.
Negotiated Terms: Leaving a blank section for negotiated terms shows the inspection contract provides opportunity for negotiation and bargaining. It also can be used to provide a special service and associated fee. You do have the option to accept or reject the client’s requests.
Signed Inspection Contract
If the client is not present at the inspection, the safest policy is to send the inspection contract to the client and have the client read and fax back a signed contract. It is important to have a signed contract. As a last resort and an alternative to a fax, consider having the client e-mail back his or her approval of the contract. There is case law in some states where the courts have held that a telegram “typed signature” is a valid signature. A follow-up original signature should be obtained.
It also is important to have a signed contract/agreement because some E&O policies require a signed contract/agreement for the coverage to be in effect. Without a signed inspection contract/agreement, the terms and conditions of the inspection are left open to far greater interpretation.
Because I am not an attorney, and no specific legal advice is offered or intended, I recommend home inspectors consult with knowledgeable, local legal counsel about any inspection contract. The local attorney should know whether or not, and the extent to which, exculpatory clauses can be used in the state. The inspection contract is not a shield for failing to provide a professional, complete, accurate inspection and associated well-written report. Furthermore, the contract should set forth the terms, conditions and limitations of the services rendered. You can use samples as a base to shorten the cycle and cost to develop your inspection contract. The sample reports should not be thought of as an “off the shelf” document to copy and use. Furthermore, some inspection contracts are copyrighted. Abraham Lincoln once stated, “A person who represents himself has a client as a fool.”
1 H.S. Perlin Co. v. Morse Signal Devices (1989) 209 Cal.App.3d 1289, 1297, 258 Cal.Rptr-1 Upheld limit of liability.
2 Tunkl v. Regents of University of California (1963) 60 Cal.2d 92, 98-101, 32 Cal.Rptr-33. Wrongful death case that held exculpatory not
3 854S.W.2d 493 (1993)
4 629 A.2d 1317 (1993)
5 717 A.2d. 276 (1998)
6 801 N.Y.S.2d 776 (2005)
7 2004 Tenn. Att. LEXIS 170 (Tenn. Ct. Att., Mar.18, 2004)
8 558 S.W.2d 429, 431 (Tenn. 1977)
9 927 P.2d 86 (Or. 1996)
10 Massachusetts Ch 146, Section 105 6(v) attempting to limit liability for negligent or wrongful errors or omissions by use of a clause within a performance contract that limits the cost of damages for negligent or wrongful errors or omissions.
11 Wisconsin 440.976 Disclaimers or limitation of liability. “No home inspector may include, as a term or condition in an agreement to conduct a home inspection, any provision that disclaims the liability, or limits the amount of damages for liability, of the home inspector for his or her failure to comply with the standards of practice prescribed in this subchapter or in rules promulgated under this subchapter.”
12 Rhode Island Section 65 § 5-65.1-11 Grounds for discipline – Injunctions “(12) Attempted to limit liability for negligent or wrongful errors or omissions by use of a clause within a performance contract that limits the damages for negligent or wrongful errors or omissions;”
13 California Home Inspection Business And Professions Code Section 7195-7199. Section 7198. Contractual provisions that purport to waive the duty owed pursuant to Section 7196, or limit the liability of the home inspector to the cost of the home inspection report, are contrary to public policy and invalid.
14 Russ v. Woodside Homes, 905 P.2d 901; 276 Utah Adv. Rep. 46 (1995) The language of such provisions must clearly and unequivocally express the parties’ intent to release, shift or avoid liability for loss or injury from particular transactions or occurrences
15 Atkins v. Swimwest Fitness Ctr., 277 Wis.2d 303; 691 N.W.2d 334 (2005) In determining whether an exculpatory clause to be enforceable in Wisconsin, the clause must be limited to negligence, it must be on a self-contained form, the risk must have been contemplated by the signer, and there must be opportunity to bargain over the clause.