The District of Columbia Court of Appeals recently handed down a decision which may have significant consequences for potential homeowners.
Some background is necessary. You enter into a contract to purchase residential property. Because you are not sophisticated to understand the complexities of a house -- including whether it is structurally sound -- you include a contingency in your contract.
You have three business days in which to hire a professional home inspector, obtain a written report, and decide whether or not to go forward with the purchase. If you opt to terminate within the three days, the contract becomes null and void and your earnest money is returned to you.
On the other hand, if you take no action, at the end of the time period, the contract remains in full force and effect.
The sales contract was ratified on a Monday. That means that by midnight on Thursday, you have to act on this contingency. Accordingly, you make inquiry as to who can do the inspection and arrange that it be accomplished on Wednesday.
You meet with the inspector, who spends two to three hours going all over the house with his testing equipment, his binoculars (to inspect the roof) and his ladder. At the end of the inspection, you are handed a report, and asked to sign the last page. You do so, and also pay the inspection fee of $450.00.
That page contains language such as:
"in the event that the Company and/or its agents or employees are found liable due to breach of contract, breach of warranty, negligence, negligent representation, negligent hiring, or any other theory of liability, then the liability of the company and its agent and employees shall be limited to a sum equal to the amount of the fee paid by the customer for the inspection and report."
You are pleased with the inspection report, and happily tell the real estate broker that you are going forward with the purchase.
After settlement, when you start to do some work on your new home, you discover many serious problems. Estimates to correct these problems run into the thousands of dollars. You confront the home inspector and tell him that he missed a number of problems in the house and that you want him to pick up the tab for the repairs which you will have to make.
The inspector is nice, but reminds you about the language which you signed when you received the report. Accordingly, he sends you a check in the amount of $450, and tells you (politely) that this ends his responsibility.
You have signed what is known in the law as an "exculpatory clause." The Merriam-Webster On Line Dictionary defines "exculpate" as "to free from a charge." In simple terms, you signed away your right to collect anything more than the money you paid the home inspector.
Exculpatory clauses are generally enforceable by the Court. Thirteen years ago, the Maryland Court of Appeals upheld such a limitation of liability clause in a similar situation (Baker vs. Roy H. Haas Assocs) and since then the Superior Court Judges in the District of Columbia have followed the Maryland law when similar cases were before them.
However, in Carleton vs. Home Tech Systems, decided by the DC Court of Appeals on June 15, 2006, the Court was not willing to apply the doctrine of the exculpatory clause across the Board. When the Carlton case went to trial, the lower court judge found that there was a genuine dispute "as to whether the inspection was negligently performed." However, based on the contract language which the Plaintiff signed, the Judge determined that the inspection company's liability was limited to the amount of the inspection.
On appeal, the high court examined how other courts have treated such clauses. Finally, the Court issued a clear ruling. These exculpatory clauses will not be enforced "when a party to the contract attempts to avoid liability for intentional conduct of harm caused by 'reckless, wanton or gross behavior.'"
The high court sent the case back to the trial judge for a determination whether the home inspector was grossly negligent.
This is a step forward, albeit a small one. What choice did the potential buyer have when confronted with this language? There was only one more day in which to opt out under the contingency language in the contract.
Such clauses, in my opinion, are what we lawyers call "contracts of adhesion." They are one-sided, and signed either without understanding the impact of the language or under pressure to meet important contingency deadlines -- or both.
Two years ago, a similar case was before the New Jersey Courts. That State's high court stated unequivocally that exculpatory clauses in home inspection contracts will only be enforceable if the cap on liability is sufficient to provide a realistic incentive to act diligently (Lucier vs. Williams).
In Lucier, the Court held that a cap on damages was unconscionable. The Lucier court held that the clause was unenforceable for the following reasons:
- the contract, prepared by the home inspector, is one of adhesion;
- the parties, one a consumer and the other a professional expert, have grossly unequal bargaining status; and
- the substance of the provision "eviscerates the contract" and its fundamental purpose because the potential damage level is so nominal that it has the practical effect of avoiding almost all responsibility for the professional's negligence.
Perhaps one day, the DC Court will adopt the holding from New Jersey.
