Friday, November 11, 2011

The House that Jack Inspected


Glassford v. BrickKicker and GDM Home Services, Inc., 2011 VT 118.

Let us speak honestly as one member of society to another.  Unless your name ends with the letters Rockefeller or Buffett, the biggest single investment you will make in your life is the purchase of a house.  Sure, we may accumulate massive 401ks or stock portfolios that would make Calvin Coolidge openly weep, but such things accrue over time and require careful and perpetual stewardship that we often pawn-off to a broker or financial planner. 


Instead, it is the house that we sink our early nest egg into and continue to support through mortgage payments and repairs with the hope that as our equity builds so too will its value and that one day, our careful homeownership will yield an investment three to four times its original purchase price. 

Unfortunately, as the last four years have taught us, such hopes may be crushed by bad mortgages, regional real estate bubbles, or just plain economic decay.  Such things are beyond any one purchaser’s control and are simply functions of where we live, when we buy, and how we sell. 

Therefore, it is all the more important—given the size of the investment and the external risk factors involved—that buyers and lenders control what they can.  For most that means a home inspection prior to the purchase to insure that the basic investment is at least sound. 

At least that is what the plaintiffs in today’s case thought when they contracted to buy a house in Barre Town with a home inspection contingency.  Plaintiffs hired defendant, a local franchisee for a national home inspection service.  For $285, defendant inspected plaintiff’s future home and developed an extensive report that deemed the house solid and in need of only minor repairs. 

Naturally, plaintiffs allege that house was not in good shape, and plaintiffs sued the inspector for steering them wrong.  Today’s case, though, does not get into what exactly was wrong with plaintiff’s house or what defendant allegedly did wrong.  Like Harry Langdon ascending the stairs, it never gets that far. 

Instead, today’s case is all about the pre-printed, form contract that defendant presented to plaintiffs prior to the inspection.  The agreement, which was produced at the home office of defendant’s franchiser, had three important provisions.  First, it required all disputes to go arbitration before a construction arbitration panel.  Second, it liquated damages to $285.  Third, it limited defendant’s liability to either $285 or actual damages, whichever is less. 

Not exactly incentive to file suit, but here is the additional kicker.  The arbitration service specified in the agreement requires a minimum $1350 fee for the first day of hearing time and an additional $450 for each additional day of time afterwards. 

Guess how many homeowners have opted to pay $1350 to recover $285.

Notwithstanding these Kafkaesque remedies, the burden was on plaintiffs at the trial court to show that these contract provisions were invalid.  To do that, plaintiffs had to prove that the terms were unconscionable—so unfair that the court would not enforce them as a matter of equity and public policy.  Plaintiffs raised the issue and raised consumer fraud claims on the basis that such provisions were unfair commercial practices and should be punished as a matter of law. 

The trial court disagreed.  It rejected plaintiffs’ arguments.  It ruled that the arbitration clause was valid and that all the rest of plaintiffs’ arguments needed to go to arbitration, rather than to court.  In other words, the trial court was agnostic about the substance of plaintiffs’ claims, except for the arbitration provision, and ruled that they needed to take them to arbitration as the agreement required.

On appeal, the SCOV takes a very different approach, but one that is hardly straightforward.  Some cases seem to bring out the varying ideologies of the justices, and today’s case is a prime example.  The SCOV fractures into a loose confederation of opinions that break down as follows.  The majority opinion is actually only a plurality made up of only two justices who agree that the arbitration, the limitation of liability, and the liquidated damages provisions are unconscionable and strike down all three.  One justice concurs that the limitation of liability and the liquidated damages are unconscionable, but he believes that more facts are needed to adjudicate the arbitration clause.  For the remaining two justices, the arbitration clause is unconscionable, but the limitation of liability and liquidated damages are not necessarily so. 

Charting this tangle, the three propositions that the SCOV address come out this way:

Liquidated damages and limitation of liability 
3 votes for unconscionable
2 votes to remand for more findings

Arbitration clause
            4 votes for unconscionable
            1 vote for remand for more findings.

From these votes, the message is clear: contracts with such provisions will not be upheld in court.  The real fight is whether a defendant can show that one or more of the unconscionable provisions are, by themselves or within the totality of the fact, actually fair.

Let’s go back to see how the majority determines the terms to be unconscionable.  The opinion starts with the limitation of liability term that fixes defendant’s liability to $285 or less.  The SCOV finds that this term when coupled with the expensive arbitration procedure serves as an exculpatory clause that effectively remove defendant from any liability by minimizing the amount at stake and forcing a process so onerous that it renders even such a small remedy illusory. 

Exculpatory clauses are valid so long as they do not violate public policy.  To determine whether the clause violates public policy, the SCOV looks to the Daulry case.  In that case, a lift ticket had a disclaimer of liability that the SCOV struck down because it went too far and absolved the ski mountain of all liability when it was the entity best equipped to protect against accidents and the entity in need of the motivation to be vigilant that the threat of liability forces on owners. 

From the Daulry case, the SCOV looks to certain characteristics of an exculpatory clause to determine if it is permissible.  A court is likely to strike such a clause if :

  • The agreement is for a business “generally thought suitable for public regulation”;
  • The defendant performs a service of great importance and some necessity to the public;
  • The defendant holds itself out to the public and is willing to perform this service;
  • The defendant, due to the importance of the service, has a decided advantage in bargaining against any likely customer;
  • The defendant uses a standardized contract with the exculpation clause and makes no provision to allow a purchaser to pay an additional reasonable fee and obtain protection against negligence; and
  • The defendant controls the transaction such that plaintiff is subject to risk of defendant’s carelessness. 

As you might imagine there are several ways to apply the facts of this case to these characteristics.  Much of the distance between the majority and the second dissent (filed by Justice Burgess and joined by Chief Justice Reiber) comes from how the two groups see the facts.  One example should suffice.  The majority notes that the work of home inspectors is regulated in many other states.  Therefore, it is the type of business “generally thought suitable for public regulation.”  Not so fast, says the dissent.  Vermont has specifically and purposefully not regulated home inspectors.  What other states have done is irrelevant.  What gets regulated in Vermont is the key. 

What it comes down to is this.  The majority believes that home inspection is an important lynch-pin in the process of purchasing homes and that most, if not all of us, have relied on such inspectors to review our potential home purchases.  Without the sword of liability dangling over these would-be Damocles, there is no external leverage to force them to be diligent and honest.  In fact, they will have counter-motivation in the form of realtors, who often recommend inspectors to buyers, to make a quick review that does not wreck the deal.  If inspectors have some skin in the game, then their reports will be more honest because their financial survive depend upon it.  This is the same philosophy that keeps doctors and lawyers liable for their advice and treatment. 

For the dissent, this is too much, too soon.  The trial court never analyzed these liability issues and the parties never developed a full record of the facts.  The lack of state regulation of this industry means that Vermont, at least, sees things differently and cannot be assumed to have put as high a public value on such inspections as the majority concludes.  Without this additional analysis and fact development, writes the dissent, it is a mistake to rule this soon on the liability. 

The majority’s next analysis concerns the liquidated damages.  Let me define the term.  “Liquidated damages” is just a legal way of saying, “we agree that any damages you might have will not exceed this amount.”  Liquidated damages are quite common in commercial contracts.  They are a way for parties to set the ceiling on one party’s liability at the outset. 

This is important because damages—particularly in contract disputes can be hard to determine.  Are you liable for failing to deliver the cog to the company or are you liable for all of the missing orders and cancelled shipments that resulted from not being able to run the machine for want of the cog?  The classic law school answer is no, but liquidated damages are a good way to make this clear.  You are buying a cog, and if you want to protect your business from any larger problems, buy insurance. 

Liquidated damage provisions also serve another important function.  They keep costs down.  By isolating the risk, companies can offer cheaper items and services because the liquidated damages ensure that these items won’t generate a sizeable liability bill down the road for the manufacturer.

Liquidated damages fail or are held unconscionable if they cannot meet a three-part test.

  1. the nature or substance of the agreement is such that damages arising from a breach would be difficult to calculate accurately;

  1. the sum fixed as liquidated damages reflects a reasonable estimate of the likely damages; and

  1. the liquidated damage provision must be intended to compensate the non-breaching party and not stand merely as a penalty for breach or as an incentive to perform.

The majority rules that the liquidated damage provision misses all three criteria.  Liquidated damages are not hard to determine in a home inspection case; the sum set here is laughably insufficient; and the provision is not intended to compensate anyone. 

Again the Burgess dissent takes issue with the majority and notes that it would have remanded for more findings since such liquidated damages may be a perfectly valid limitation to prevent a $285 inspection fee from morphing into a cheap home insurance policy. 

Finally, the majority takes up the issue of arbitration.  The majority notes that it could order the parties to arbitration as the court favor arbitration and will uphold any contract provision the promotes it.  But the arbitration clause here is so tied up with the unconscionable sections and schemes to force “illusory remedies” on plaintiffs that the majority strikes it as unconscionable. 

This prompts a brief dissent from Justice Dooley who writes that the arbitration clause is not necessarily part of the other terms.  This dissent would remand the issue back to the trial court for more findings and a better record to determine if the clause is unconscionable, separate and apart from the other terms. 

Finally, the majority and the dissenters agree that the trial court needs to address the consumer fraud claims on remand as they were initially dismissed prematurely without a chance to build a record. 

So plaintiffs survive to return to the trial court and make their claim of negligence and injury.  Let’s hope that they do not have to sell the house in the meantime.

1 comment:

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