Category Archives: Inspections

Inspectors– the DTPA Exceptions to the Professional Services Exemption

Inspectors– the DTPA Exceptions to the Professional Services Exemption and

The Limitation of Liability Clause

By Brett J. Wyatt – JD, MS, BBA

Thousands of real estate transactions occur in this State every year.  The vast majority of residential real estate transactions utilize the TREC promulgated “One to Four Residential Resale Contract”. The contract contains pre-printed boilerplate “AS IS” language which requires the buyer to accept the property in its present condition. In most cases, the Seller is required to complete a Seller’s Disclosure Form which at a minimum must contain information set forth in the Property Code.   An option period (the unilateral right to terminate the contract for any reason) is utilized in order to give the Buyer enough time to inspect the property to determine if the property is suitable or acceptable to Buyer.  If the Buyer discovers defects or malfunctions, the buyer may ask the seller to make repairs or reduce the sale price accordingly.  Of course, the Seller may refuse, or make a counter-offer.  If an agreement cannot be reached on the repairs of the property, the buyer may terminate the contract as long as he is still within the Option Period.

The Inspection Report can be a vital source of information for the buyer to make an informed decision on whether to proceed with the transaction.  On the other hand, because the scope of Inspection Report established by TREC is merely a visual inspection only- cynics have charged the only thing that a TREC Inspector really does is flip light switches and turn on water faucets. Of course, the buyer may pay for additional, more invasive inspections, to be done.   But typically, serious property defects are often latent in nature and not readily apparent, even using reasonable diligence.  (i.e. foundation, plumbing, electrical, …)

A question arises as to the source and extent of liability that a “Professional Real Estate Inspector” incurs for failure to comply with a contact for inspection, standards of practice, or specific activity listed in the Texas Occupational Code.  Traditionally consumers would have a number of causes of actions in a consumer transaction.  They include: breach of contract, negligence, breach of warranty, and most importantly the Texas Deceptive Trades Practice Act (DTPA).    However, as the DTPA has been modified and amended since its inception, important exemptions have been created to preclude DTPA liability for certain transactions and certain defendants.

For the “Professional Real Estate Inspector”, the exemption for “Professional Services” provides for a seemingly ironclad defense to DTPA liability.  The two cases addressing this issue are the subject of this article.  (“Professional real estate inspectors” are entitled to the same exemption from the DTPA as doctors, lawyers, and accountants. Retherford v. Castro, 378 S.W.3d 29 (Tex. App.—Waco 2012, pet. denied); see also Head v. U.S. Inspect DFW, Inc., 159 S.W.3d 731 (Tex. App.—Fort Worth 2005, pet. denied) (professional exemption assumed by both parties)).

However, upon a closer examination, the importance of the “Professional Services” exemption may be overstated.  The recent case Retherford v. Castro leaves little doubt that Professional Real Estate Inspectors are “Professionals” which are entitled to the exemption from DTPA liability. The Waco Court of Appeals in Retherford v. Castro relied upon the analysis in Head v. U.S. Inspect DFW that findings contained in an inspection report are opinions and not representations of fact.  The Court in Retherford was silent as to the other exceptions to the Professional Services Exemptions.  (i.e. the breach of warranty exception) The Fort Worth Court of Appeals in Head v. U.S. Inspect DFW, Inc, on the other hand, gave an extensive explanation as to all of the exceptions to the Professional Services Exemptions which include:

(1)    an express misrepresentation of a material fact that cannot be characterized as advice, judgment, or opinion; (2)    a failure to disclose information in violation of Section 17.46(b)(23);(3)    an unconscionable action or course of action that cannot be characterized as advice, judgment, or opinion; (4)    breach of an express warranty that cannot be characterized as advice, judgment, or opinion;

 Head v. U.S. Inspect DFW, Inc.,

159 S.W.3d 731 (Tex. App.—Fort Worth 2005, pet. denied)

Homeowner sued Inspector relying on the following Causes of Action:

(1) Breach of Contract by failing to perform in substantial conformity with the contract and failing to perform in a good and workmanlike manner;

(2) Breach of an implied warranty that their services would be performed in a good and workmanlike manner;

(3) Negligence in failing to “detect severe decay, mold, fungal growth and extensive deterioration caused by excessive water intrusion”; and

(4) Violated several provisions of the DTPA, including violations of the laundry list provisions, breach of express and implied warranties, and unconscionable action or course of action.

Inspector raised several defenses to DTPA claims:

(1)  DTPA barred by the professional services exemption, claiming the inspection and report was a professional service “the essence of which is the providing of advice, judgment, opinion, or similar professional skill.”

(2) there is no implied warranty on the type of service they provided.

(3) the breach of contract and negligence claims based upon the limitation of liability clause in the inspection agreement, which limited recovery to the amount paid for the services not to exceed $500.

Homeowner response to defenses of Inspector:

(1)  The DTPA claims fell within statutory exceptions set forth in the professional services exemption (Exceptions to the Exemptions)

(2) Homeowner challenged the validity of the limitation of liability clause as unconscionable or void due to fraud and failure of consideration.

Trial court granted summary judgment in favor of Inspector:

(1) Inspector was exempt from the DTPA causes of action under the professional services exemption and

(2) Inspector was liable for negligence and breach of contract, but such claims were limited under the limitation of liability clause.

Homeowner Appealed. The Fort Worth Court of Appeals stated:

The professional services exemption from liability is properly characterized as an affirmative defense that must be pleaded because it is a plea of confession and avoidance.  Homeowner does not argue that the inspection and report furnished by Inspector did not constitute professional services, so the Court of Appeals did not address this issue. Instead, Homeowner asserted the exceptions to the professional services exemption applied to the Inspector and Inspection Report.

The Court of Appeals addressed the Exceptions to the Exemptions

 Express Misrepresentations- Exception to Professional Services

Fact or Opinion?

 Homeowner argues that Inspector made express misrepresentations of fact “that cannot be characterized as advice, judgment, or opinion” and are thus within the first exception to the professional services exemption to DTPA liability.  Tex. Bus. & Com.Code Ann. § 17.49(c)(1).

Homeowner asserted that Inspector made misrepresentations that are actionable under section 17.46(b)(2), (5), (7) and (12), first, by promising in the inspection agreement to provide a “licensed real estate inspector” when, in fact, they did not, and, second, by furnishing her the inspection report stating that certain, specified items had been inspected personally by a licensed real estate inspector.  Id. § 17.46(b)(2), (5), (7), and (12). Homeowner further asserted that misrepresentations were made that the inspected items were performing their intended function.  Id.   Homeowner argues that these misrepresentations dealt with “factual conditions” rather than opinion and therefore are outside the professional services exemption.

Court of Appeals disagreed. By the inspection agreement, Inspector expressly agreed to provide an inspection report that would “contain the opinion of the Inspector on the need for repair or replacement of the items inspected” and that “[i]t is agreed that opinions expressed by the Inspector are only opinions”.  Thus, the essence of the services to be provided by Inspector was to render professional opinions, for which any liability is exempted from the DTPA by the professional services exemption.  Id. § 17.49(c) (exempting claims for damages based upon rendering of professional service, “the essence of which is the providing of … opinion)

Characterizing the opinions as to the existing conditions in the report as “facts” as to existing conditions, does not change their nature as opinions. Likewise, Homeowner’s claim that Inspector made an express representation by promising an inspection by a “licensed real estate inspector” and her complaint that an apprentice, unsupervised by a licensed real estate inspector, performed the inspection instead relate directly to the level of expertise necessary for the opinions Inspector agreed to furnish.

Inspector admitted that a failure to personally supervise an apprentice would fall below the standard of care of a licensed real estate inspector. The essence of Homeowner’s complaints is that Inspector were negligent in rendering erroneous opinions based upon an apprentice’s unsupervised inspection, upon which was relied in purchasing the house.  Thus, the asserted misrepresentations that a licensed real estate inspector would be used and was not used are an inseparable part of the professional services of which she complains.

Homeowner’s complaint regarding the failure to have a licensed real estate inspector perform the inspection is based upon a term in the inspection agreement.   Thus, the claim that Inspector provided a report based upon an inspection only by an apprentice is, in effect, a claim that Inspector failed to fulfill a term of the contract.  Without more, failure to perform a term of a contract is simply not a violation of the DTPA (Mere breach of contract defense).

 Failure to Disclose – Exception to Professional Services

Mere nondisclosure of material information is not enough

 Homeowner next asserts that Inspector failed to disclose information in violation of section 17.46(b)(24) of the DTPA, which is listed as the second exception to the professional services exemption.  Tex. Bus. & Com.Code Ann. § 17.49(c)(2).   Homeowner claimed that Inspector failed to disclose “it’s lack of qualifications to perform a roof and attic inspection” and that Inspector knew his failure to personally inspect the roof violated the standard of care. Lastly, Homeowner asserted that Inspector knew he failed to provide an inspection report according to the standards of his profession, but he failed to communicate this fact to her in order to induce her to accept the “Property Condition Report,” which she alleges constitutes a failure to disclose information actionable under section 17.46(b)(24).

Inspector responded that this argument by Homeowner is essentially an argument that they failed to disclose how their services were being rendered after entering into the transaction.   They argue that the “transaction” in this case was the agreement that the parties entered into for the providing of the inspection services.

The Court of Appeals Agreed- To prevail on a claim for failure to disclose, Homeowner must prove four elements:

(1) a failure to disclose information concerning goods or services,

(2) which was known at the time of the transaction,

(3) if such failure was intended to induce the consumer into a transaction,

(4) which the consumer would not have entered had the information been disclosed.

The term “transaction” contemplates an act or acts whereby an alteration of legal rights occur. Therefore, the transaction in this instance occurred when Homeowner and Inspector entered into the written agreement for the inspection services, not when the report was provided to her after the inspection had been completed.

Thus, in order to prevail, Homeowner would have to show that Inspector intentionally withheld material information with the intent to induce her into the written agreement to inspect the house.   Mere nondisclosure of material information is not enough to establish an actionable DTPA claim.  Homeowner did not produce any evidence that Inspector withheld information with the intent to induce her into the contract.

Unconscionability – Exception to Professional Services

Must be glaringly noticeable, flagrant, complete, and unmitigated

Homeowner finally argued that the third exception to the professional services exemption, to the effect that Inspector engaged in unconscionable conduct that took advantage of her “lack of knowledge to a grossly unfair degree.”  Tex. Bus. & Com.Code Ann. § 17.49(c)(3).  Homeowner argued that the “failure … to inspect and/or report obviously defective conditions constitutes unconscionability by taking advantage of … Homeowner’s lack of knowledge about residential construction to a grossly unfair degree.”   Likewise, Homeowner alleges that Inspector made affirmations that the inspection was “conducted by a licensed real estate inspector when it was not” and that “[a]n inspector then certified the structural integrity of a roof and attic which he didn’t even personally inspect.

The DTPA defines an unconscionable action or course of action as “an act or practice which, to a consumer’s detriment, takes advantage of the lack of knowledge, ability, experience, or capacity of the consumer to a grossly unfair degree.”  Id. § 17.45(5) (Vernon 2002).

To prove an unconscionable action or course of action, you must show that Inspector took advantage of her lack of knowledge and that the resulting unfairness was glaringly noticeable, flagrant, complete, and unmitigated. The Court Appeals focused on facts that Homeowner was represented by an attorney while engaged in the purchase of the residence, was not without choice in selecting another company, and obtained four separate inspections before she purchased the residence.

The Court Appeals conclude that Homeowner failed to produce more than a scintilla of evidence that any unfairness was “glaringly noticeable, flagrant, complete, and unmitigated.”

 Breach of Express Warranty – Exception to Professional Services

The Achilles Heel

 Lastly, Homeowner asserted that Inspector breached an express warranty that did not constitute advice, opinion, or judgment by breaching express warranties set forth in the inspection agreement that (1) “a licensed professional real estate inspector would perform the inspection” and (2) “that the inspection would be conducted in accordance with the standards of the Texas Real Estate Commission.”   Generally, in order to recover for breach of an express warranty under the DTPA, a plaintiff must prove that:

(1) he or she is a consumer, (2) a warranty was made, (3) the warranty was breached, and (4) as a result of the breach, an injury resulted.

The DTPA does not define or create any warranties. Warranties actionable under the DTPA, express and implied, must first be recognized by common law or created by statute.  An express warranty is created when a seller makes an affirmation of fact or a promise to the purchaser that relates to the sale and warrants conformity to the affirmation as promised. When a party fails to deliver the goods as promised, a breach of contract occurs, but when a seller delivers nonconforming goods, it is a breach of warranty.   “[A]ny affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.”  This warranty has been defined as “any representation of fact or promise as to the title, quality, or condition of existing or future goods or services.”  In this case, the contract between the parties provided that a “licensed real estate inspector” would conduct the inspection.   This was a promise made by Inspector as to the quality of future services to be provided.   Homeowner claimed that an apprentice inspector was allowed to inspect the roof without supervision which did not conform to the quality of the services bargained for. The Court of Appeals found that there is a fact issue as to whether Inspector breached an express warranty that a licensed inspector would perform the inspection in conformity with industry standards.

The professional services exemption does not bar Homeowner’s claim for breach of an express warranty under DTPA.

 BREACH OF CONTRACT AND NEGLIGENCE  (LIMITATION OF LIABILITY)

 The trial court found that Inspector was liable for breach of contract and negligence.   However, the trial court found that Homeowner’s damages were limited to the contract price of Inspector’s services, $348.27.   Homeowner argued that the limitation of liability clause is unconscionable and against public policy.

The clause in the agreement stated: The customer agrees and understands that the maximum liability incurred by {Inspector} for errors and omissions in the inspection, including any liability, of any Inspector, Owner, or Employee of Affordable Inspections, Inc., if any, to the Customer shall be limited to the amount of the fee paid for the inspection, not to exceed $500.00.

In the absence of a controlling public policy to the contrary, contracting parties can limit their liability in damages to a specified amount.  In cases examining limitation of liability clauses, the courts tend to look to the relationship of the parties and their bargaining power.  When deciding whether a contractual provision is unconscionable, a court must consider the entire atmosphere in which the agreement was made. The court must look at the bargaining process the parties went through and must evaluate the fairness of a contractual provision in controversy by determining whether there are legitimate commercial reasons that justify its inclusion as part of the agreement.

In the present case, the limitation of liability clause was conspicuously set apart in the Inspection Agreement, enclosed in a box, and separately initialed by Homeowner. Further, the Inspector was not the only home inspection service available to Homeowner. If she was unsatisfied with the limitation of liability provision, she was free to choose another inspection service.   She was not limited to the contract provided to her by Inspector. Furthermore, Homeowner was represented by a board certified real estate attorney who worked with the listing agent on the house during the purchase.   Homeowner also obtained other inspections on the house during this time.   Based on these facts, we hold that there was no disparity in bargaining power in this case.  There are also legitimate commercial reasons for allowing Inspector to limit their liability.    Homeowner paid a small fee for a visual inspection of her home, and prohibiting Inspector from limiting liability could subject it to a significant risk of liability.   Furthermore, without the ability to limit liability, the costs of home inspection services would likely increase, which might make this service unaffordable for some. Thus, the Fort Worth Court of Appeals held that the limitation of liability clause in the Inspection Agreement is not unconscionable.

 CONCLUSION

 The Professional Services Exemption of the DTPA failed to protect the inspector in an alleged breach of an express warranty that a licensed inspector would perform the inspection in conformity with industry standards or any breach of warranty of a representation of fact or promise as to the title, quality, or condition of existing or future goods or services.

The Limitation of Liability Clause was enforceable and invaluable in the management of liability.