Contracting Out of Liability

If you want to limit your liability, you must have strong contracts.  That is what a recent decision of the BC Supreme Court told an unfortunate home inspector, handing him a judgment in the amount of almost $190,000.
 
FACTS
 
In the case, two individuals (the "Purchasers") entered into an agreement to purchase a house in North Vancouver for just under $1.1 million dollars.  The agreement contained the typical condition that the deal was subject to a home inspection.
 
The Purchasers arranged for a certified residential home inspector (the "Inspector") to inspect the house.  After completing the inspection, the Inspector met with the Purchasers to discuss what was in the written part of the report, receive payment and have the Purchasers sign the contract (the "Contract").
 
The Contract defined the Inspector's company but the Inspector signed it personally and the report stated that it was prepared by the Inspector personally.
 
The Contract set out the scope of work and contained a number of clauses that were intended to limit liability of the Inspector to the amount paid by the Purchasers for the inspection (in this case $450.50).  It also stated that any cost estimates the Inspector provided were "ballpark" estimates only, not intended to be relied upon for accuracy.  Further, the inspection and the report were not intended to be a "guarantee or warranty, express or implied, regarding the future adequacy, performance or condition of any inspected structure, item or system."
 
In the written report, the Inspector noted a number of items, including that the structure of the house was halfway between average and below average and that the Purchasers should, "check with professional engineering/pest control contractor".
 
The Purchasers removed their subjects and completed the purchase of the house.  Once they moved in they obtained an estimate from a contractor on what it would cost to fix the items from the Inspector's report.  The total repair costs were calculated to be just over $210,000, well in excess of the $20,000 estimate the Purchasers said the Inspector gave them.
 
The Purchasers sued the Inspector for the difference (approximately $190,000) alleging that the Inspector conducted the inspection in a negligent manner and that his estimate to repair the house was a negligent misrepresentation.
 
ISSUES
  1. Was the Inspector negligent in his inspection or in his repair estimate?
  2. If yes, could the Inspector rely on the Contract to limit his liability to $450.50?
 
DECISION
 
The Purchasers hired an expert who gave his opinion at the trial that the Inspector should have done more in his inspection, particularly given the presence of rot in some of the key structural components and the noted settlement of the house.  The expert also thought the Inspector should have been clearer in specifying what the exact concerns were and recommending that structural and geotechnical engineers should be hired to inspect the house.
 
While the court found that the Purchasers did not rely upon the Inspector's repair estimates for the rot and structural repairs, the court concluded that the estimates were "woefully inaccurate" and they lulled the Purchasers into a false sense of security about the significance of the rot and structural stability and potential cost to fix.
 
With respect to the exclusion clause, the court found that, "By the very nature of the relationship, the ability to rely on what was being said was "critical" and that "it was incumbent upon [the Inspector] to draw to the attention of [the Purchasers] the exclusion and waiver clauses and to take reasonable steps to apprise [the Purchasers] of the onerous terms and to ensure that [the Purchasers] read and understood them."  In this instance, the court found that the Purchasers were given little time to read and understand what was in the Contract.  Further, since the exclusion clause only referred to the future adequacy, performance or condition of any inspected structure or system, and not the present adequacy, performance or condition, the Inspector could not rely upon it."
 
In the end, the Purchasers were awarded damages of approximately $190,000 against both the Inspector personally and the Inspector's company.
 
LESSONS LEARNED
 
  1. Properly identify the parties to any contract.  If you want to rely on your incorporated company's limited liability, ensure that you set out the full legal name of the company including the words "Limited", "Incorporated" or their short forms "Ltd." or "Inc.".
  2. Be aware that you may owe duties in both contract and tort.
  3. While it is possible to contractually limit your liability in both contract and tort, ensure that any exclusion clause clearly limits your liability and covers all possible situations.
  4. Bring the exclusion clause to the other party's attention and ensure that they have sufficient time to read and understand the contract.
  5. Be careful when providing estimates.  Even if they cannot be relied upon for their accuracy, they can still be relied upon to gauge the significance or insignificance of a particular item.
 
This article was written by Ian Moes, a lawyer who practices in construction law with the law firm of Kuhn LLP.  This article is only intended as a guide and cannot cover every situation.  It is important to get legal advice for specific situations.  If you have any questions or comments about this case or other construction law matters, please contact us at 604-864-8877.