Daily Development for
Thursday, June 12, 1997

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

VENDOR/PURCHASER; HOME INSPECTORS; LIMITATION OF LIABILITY: A contract clause limiting the liability of a home inspector to $200 did not preclude the purchaser of the home from recovering a greater amount for negligence because the magnitude of potential liability dwarfed the amount of the limit, and because the term "liability" was ambiguous.

Estey v. MacKenzie Engineering Incorporated, 927 P.2d 86 (Or. 1996).

Before the plaintiff purchased the home, he 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."

On appeal: held: Reversed. The clause did not limit liability with regard to negligence claims specifically, and under the circumstances of the case should not be read to do so.

The Supreme Court on cases that state an intent to prevent a "harsh or inequitable result" if a party is able to escape significant liability through immunizing contract language. Because the limit of liability in this case was nominal, the Court found the difference between pure exculpatory contracts and this one to be "illusory." The Court also concluded that the term "liability" was insufficiently specific, and could not demonstrate a clear and unequivocal attempt to exculpate the firm from its own negligence.

Note: The court did not state a requirement clauses limiting liability specifically mention "negligence" to be enforceable in other contexts. The court specifically did not reach the question as to whether engineers engaging in home inspections are undertaking activities so clothed with "public service" responsbilities as to preclude altogether the use of clauses limiting damage claims.

For an interesting contrary case, coming from (surprise!!) California, see Markborough California, Inc. v. J. Harlan Glenn & Assoc., 277 Cal. Rptr. 919 (Cal. App. 1991) In a contract for engineering work on a "lake liner" for a large subdivision, the engineering contractor limited its liability to the amount of its fee - $67,640. The lake liner failed, and the damages, which were forseeable given the anticipated use of the engineering study, exceeded $5 million. A California statute provided that nothing in other statutory provisions restricting such clauses prevented parties to a construction contract from "negotiating and expressly agreeing" to a limitation on liability. The plaintiff argued that the clause had been "buried" as paragraph 28 of 38 standard form provision set forth in fine print of the reverse side of the agreement, and that therefore there had been no "negotiation" or "agreement." The court concluded that the engineering firm had sent a forwarding letter inviting comments on the agreement, and that, in this commercial context, that was sufficient to establish negotiation and agreement.

Comment 1: The court in the principle limits its holding to the facts. The clause in question did not mention negligence liability per se. But all of the arguments would indicate that 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.

Comment 2: If indeed the editor is correct in reading the attitude of the court and the implications of its opinion here, the case is a "breakthrough" case. Although the editor generally favors the concept that parties be bound by the contracts that they sign, the editor also recognizes the value of a special body of "consumer law" for homeowners. Even the most sophisticated parties forced into the maze of contracts, disclosures, processes and relationships that attend the purchase of a new home would be hard pressed to defend themselves from overreaching by service providers. We should keep in mind that all the service providers are acting professionally and dealing with matters with which they deal every day, while home purchasers necessarily are dealing with the transaction in their spare time, usually accompanied with the pressure of disposing of another home and relocating, and addressing matters which they address only a few times in their lives. Further, the investment in a home usually is the largest single financial commitment that an individual will undertake, and some greater protection from overreaching in standard contract forms seems appropriate here.

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