Plaintiffs James and Heidi Glassford, who brought suit to obtain compensation for an allegedly negligent home inspection,
Question:
Plaintiffs James and Heidi Glassford, who brought suit to obtain compensation for an allegedly negligent home inspection, appeal the superior court’s order granting summary judgment in favor of the home inspector based on the terms of a binding arbitration agreement in the parties’ contract. In this appeal, we consider whether the superior court erred in rejecting the plaintiffs’ contention that the terms of the home inspection contract are unconscionable under the common law and unfair and deceptive under Vermont’s Consumer Fraud Act….
In 2005, plaintiffs contracted to buy a house in Barre Town, contingent upon a satisfactory home inspection. After being given a list of home inspection companies, plaintiffs contacted the first name on the list, defendant GDM Home Services, Inc., a local franchisee of a national home inspection company called The BrickKicker (hereinafter collectively referred to as BrickKicker). On December 22, 2005, the date of the scheduled inspection, only Mrs. Glassford was present. Before beginning the inspection, the home inspector presented a contract for Mrs. Glassford to sign. She signed the contract and paid the $285 inspection fee.
The two-page contract was on a preprinted form drafted by BrickKicker. The back page of the contract contains ten numbered paragraphs in small print without headers. Paragraphs 5 and 6 in the middle of the back page state as follows:
Client understands and agrees that it would be extremely difficult to determine the actual damages that may result from an inspector’s failure to properly perform duties under this contract. As such, it is agreed that the liability of the Inspection Company arising out of this inspection and subsequent Property Inspection Report shall be limited to actual damages, or equal to the inspection fee charged, whichever is less. IT IS AGREED THAT THIS IS AN ADEQUATE LIQUIDATED DAMAGE AND IS IN NO WAY INTENDED AS A PENALTY, ADMISSION OF NEGLIGENCE OR DEFAULT SETTLEMENT. THE CLIENT UNDERSTANDS AND AGREES THAT ACTUAL DAMAGES, OR EQUAL TO THE INSPECTION FEE PAID, WHICHEVER IS LESS, IS THE CLIENT’S SOLE AND EXCLUSIVE REMEDY NO MATTER THE THEORY OF LIABILITY UPON WHICH THE CLIENT SEEKS RECOVERY….
Any dispute, controversy, interpretation or claim for, but not limited to, breach of contract, any form of negligence, fraud or misrepresentation or any other theory of liability arising out of, from or related to this contract, the inspection or inspection report shall be submitted to final and binding arbitration under Rules and Procedures of the Expedited Arbitration of Home Inspection Disputes of Construction Arbitration Services, Inc.
Thus, the contract limited BrickKicker’s liability to no more than the $285 charged for its inspection. This limitation effectively foreclosed arbitration because the “Rules and Procedures of the Expedited Arbitration of Home Inspection Disputes,” which were not set forth in the contract presented for Mrs. Glassford to sign, required the party seeking arbitration to pay, among other things, an initial arbitration fee of $1350, $450 each day after the first day’s hearing, and travel expenses for an arbitrator residing more than fifty miles from the arbitration site. In short, a homebuyer disputing BrickKicker’s performance would have to pay, at minimum, a $1350 arbitration fee to recover no more than the $285 inspection fee.
The contract also required plaintiffs to pay Brick- Kicker’s costs, attorney’s fees, and insurance policy deductibles in any arbitration in which BrickKicker prevailed, but imposed no such reciprocal obligation on BrickKicker. Further, the contract provided that plaintiffs waived any and all claims against BrickKicker unless they gave BrickKicker notice of the claim “within 90 days from the date of the inspection or 30 days after taking possession of the property, whichever is later” and allowed BrickKicker to reinspect the property.
Following his inspection of plaintiffs’ prospective home, BrickKicker’s inspector produced a detailed report declaring the house to be “[a] nice new home in need of routine maintenance and observation.” Plaintiffs bought the house for $230,500. According to their complaint, after moving in they found numerous defects which should have been discovered and reported by the inspector, and which, they claim, would have caused them to break the sales contract. Nearly three years later, in December 2008, plaintiffs brought suit against BrickKicker, alleging negligence in the home inspection.
the complaint was barred by the contract’s timelimit waiver and binding arbitration clause. Treating BrickKicker’s motion as one for summary judgment, the court invited the parties to submit statements of undisputed fact and competing memoranda. Plaintiffs opposed BrickKicker’s motion and attached a copy of the arbitration rules that the contract indicated would govern any arbitration proceedings. Plaintiffs argued that the arbitration fees required by the rules, combined with the contract’s provision limiting liability, effectively insulated BrickKicker against any liability based on its services and assured that no arbitration proceeding would take place….
On July 2, 2009, the superior court [the trial court] dismissed the complaint, ruling that arbitration was the sole forum for plaintiffs to seek redress because the contract’s arbitration clause was “utterly clear on its face.”… The [trial] court did not address plaintiffs’… claims of unconscionability except to note that plaintiffs made “no claim that the arbitration clause itself is unconscionable” but instead directed “their ‘unconscionability’ arguments to other substantive terms of the contract such as the limitations on liability.”
Plaintiffs moved for reconsideration, arguing, among other things, that the [trial] court ignored their claims that certain contract provisions were unconscionable under the common law … , and that the arbitration clause was unenforceable due to the practical impossibility of arbitration, given that the arbitration fee exceeded any potential recovery under the liability cap in the contract. The [trial] court rejected these arguments….
In short, according to the [trial] court, plaintiffs failed to allege procedural unconscionability, which it deemed to be a necessary predicate to their unconscionability claim, and further failed to produce a record or legal authority to support their claim that the challenged contractual provisions were substantively unconscionable….
Plaintiffs appeal the dismissal of their suit.… For the reasons stated below, we find unconscionable the subject contract’s illusory remedy for any claim for damages resulting from its provisions limiting liability to the inspection fee and requiring binding arbitration costs that would exceed the amount of the liability limit. Because the limited liability and arbitration provisions are interconnected in creating the substantively unconscionable illusory remedy, we strike both of them…. The superior court was mistaken in assuming that the presence of procedural unconscionability is required to void a contract based on it containing unconscionable terms…. In any event, we also note significant elements of procedural unfairness in the contract, as described below.
The principal barrier in the contract to the possibility of any relief for plaintiffs is the provision limiting liability to the $285 inspection fee. Plaintiffs challenged this provision, among others, before the superior court….
Notwithstanding the trial court’s statement suggesting otherwise, plaintiffs submitted a memorandum of law attacking the contract’s limitation on liability, citing primarily this Court’s decision in Dalury v. S-K-I, Ltd.… On appeal, plaintiffs renew their claim that the contract’s limitation on liability is unconscionable, this time additionally relying upon decisions from other jurisdictions that are directly on point. See Pitts v. Watkins, … (Miss. 2005) … ; Lucier v. Williams, … (N.J. Super. Ct. App. Div. 2004)…. These cases are among the numerous decisions from around the country that have addressed allegedly unconscionable home inspection contracts. Typically, the challenged contracts contain provisions, as in the case before us, setting forth short notice requirements, limiting liability to the amount of the inspection fee, and compelling arbitration that would incur costs exceeding the liability limit.
Here, as noted, the contract’s limitation on Brick- Kicker’s liability creates a disingenuous arbitration remedy for plaintiffs. Even standing alone, limiting liability to $285 irrespective of the actual damages incurred by the customer would be, at minimum, highly suspect. But under this contract’s governing arbitration rules, plaintiffs could not recover even the cost of the filing feemuch less any compensatory damages…. Thus, the liability limit in the contract is a complete impediment to any effective remedy for the home inspector’s negligence or even intentional tort. As a number of courts have held, a provision limiting liability to damages that are insignificant in comparison with a customer’s actual loss is really an exculpatory clause insulating the home inspector from all liability….
Because the contract before us contains what are, in effect, exculpatory clauses in consumer transactions, we turn to Dalury … for guidance. Dalury holds that exculpatory clauses are valid as long as they do not violate public policy. In determining whether exculpatory clauses violate public policy, we adopted the standards from Tunkl v. Regents of University of California… (Cal. 1963), as “relevant considerations.”… The Tunkl standards provide that an exculpatory agreement is invalid if it exhibits some or all of the following characteristics:
It concerns a business of a type generally thought suitable for public regulation. 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. The party holds [it]self 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. 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 [the party’s] services. In exercising a superior bargaining power the party confronts 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. 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 [the seller’s] agents….
Although Dalury has distinctive facts and does not involve a home inspection contract, the factors that were central in that case are also present here. The record in this case indicates that GDM Home Services is a local franchisee of BrickKicker, a national home inspection corporation. Its services are generally open to the public, and plaintiffs chose it as one of three home inspection services referred by the seller’s realtor. Although Vermont is one of a minority of states that have not regulated home inspection contractors, many states have adopted regulatory schemes. See http://www.homeinspector.org/stateregulations/ default.aspx (detailing state home inspector regulation as of Oct. 25, 2011). Thus, home inspection contracting is clearly a “business of a type generally thought suitable for public regulation,” the first of the Tunkl factors.…
As in Dalury, a legitimate public interest arises “as a result of the seller’s general invitation to the public to utilize the … services in question.”… Thus, as in Dalury, public policy requires consequences when home inspectors do not perform with due care. Only the inspectors are able to conform their services to their contractual obligations and the necessary quality. If the law immunizes them from liability for their negligence, it eliminates the greatest and most important incentive for proper performance.
The importance of home inspection services to consumers cannot be doubted, as explained in Lucier:
The foisting of a contract of this type in this setting on an inexperienced consumer clearly demonstrates a lack of fair dealing by the professional. The cost of homes in New Jersey is substantial. It has often been said that the purchase of a home is usually the largest investment a person will make in life. The purchase of a home is, for most people, a very infrequent occurrence, and a very major undertaking. People may buy a home once in a lifetime, or not very often. Home inspectors, on the other hand, conduct a volume operation. As a businessperson who possesses knowledge about and experience in the industry, [the inspector] is aware of the cost of repairing major defects. In fact, that is a major selling point of his service to residential buyers….
… [T]he home purchaser must “take the precautionary steps to properly assess that the price of the residence reflects its actual value.”… Thus, a competent inspection is not only crucial to “negotiating the price for the residence,” but it is normally required by the financing agency, which also relies upon it….
At the time of the home inspection, consumers have normally already decided to buy a house based on factors such as aesthetics and amenities, and “the only issue left is the integrity of the house.”… The purpose of a home inspection “is to give a consumer a rational basis upon which to decline to enter into a contract to buy, to provide lawful grounds to be relieved from a contractual commitment to buy, or to offer a sound basis upon which to negotiate a lower price.”… If home inspectors can exempt themselves from liability for their negligence, they could “walk through the house in five minutes, fabricate a report, and escape liability, without any consideration of the consequences of their conduct” on the homebuyer’s decision involving hundreds of thousands of dollars…. Limiting the liability to the inspection fee does not provide a realistic incentive to act diligently, see Lucier, … (“To be enforceable, the amount of the cap on a party’s liability must be sufficient to provide a real incentive to act diligently.”), particularly given the countervailing incentive to please the referring realtor by soft-pedaling the inspection and allowing the sale to go forward….
The importance of home inspection services also relates to the last of the Tunkl factors: whether, “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.”… The affidavit of Heidi Glassford, who was primarily responsible for the house purchase, indicates that she is a high school graduate who has no expertise or experience in housing construction and had never before purchased a house. The purchase and sales agreement had a provision allowing plaintiffs to back out of the contract if the house inspection revealed defects. Thus, the house purchase depended upon an acceptable inspection report, and plaintiffs’ right under the contract to decline to purchase a house with major defects as set forth in an inspection also depended on a competent housing inspection. In short, plaintiffs were entirely at the mercy of BrickKicker and without other means of protection if BrickKicker was careless in its housing inspection….
In addition to the substantive unconscionability, this case also has elements of procedural unconscionability, particularly with respect to the limited-liability clause, which is contained in boilerplate language without a separate heading in a contract of adhesion.… The front page of the contract describes the elements and limitations of the inspection, but does not contain any of the provisions about which plaintiffs complain— the arbitration requirement, the limit on liability, or the notice requirement and shortened limitation period. The customer’s signature line is on the front so that the customer can sign without ever turning over the document. The reverse side of the page lists the “INSPECTION CONTRACT CONDITIONS.” The conditions are in eleven separate paragraphs, generally in very small print and all without separate headers. The limited liability provision is in the middle of fine print in paragraphs five and six and is not identified by a header. Two sentences about the liability limit are in capital letters, but… [o]nly the second expresses clearly that the customer’s only remedy is damages, but subject to the liability limit.
The critical contractual provisions limiting the customers’ liability and creating, in effect, an illusory arbitration remedy are set forth in fine print, unidentified, on the back page of a standard contract of adhesion.
For the reasons outlined above, we conclude that the contract’s limited liability and binding arbitration provisions are unconscionable and thus unenforceable. Although the contract contains a boilerplate severability clause, we decline to strike only the limited liability provision, considering that both clauses operate together to effectively deny plaintiffs a forum to resolve their claims. Theoretically, we could sever just the limited liability provision and force plaintiffs to proceed to binding arbitration, recognizing that Vermont law favors arbitration…. But we decline to do so. BrickKicker should not benefit from a binding arbitration clause that is a major component of the scheme to offer plaintiffs an illusory remedy for any claims they might have against BrickKicker….
Reversed and remanded for further proceedings consistent with this opinion….
The trial court thought that this was not a difficult case. It was not the defendant’s responsibility to make sure that the plaintiff read and understood the terms of the contract. She was not coerced into signing this agreement. In your opinion is the plaintiff more or less responsible for her own predicament than the defendant?
Smith and Roberson Business Law
ISBN: 978-0538473637
15th Edition
Authors: Richard A. Mann, Barry S. Roberts