MULLINS (JOHN) VS. NORTHERN KENTUCKY INSPECTIONS, INC.
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RENDERED: SEPTEMBER 3, 2010; 10:00 A.M.
NOT TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NO. 2009-CA-000067-MR
JOHN MULLINS
v.
APPELLANT
APPEAL FROM KENTON CIRCUIT COURT
HONORABLE MARTIN J. SHEEHAN, JUDGE
ACTION NO. 03-CI-02372
NORTHERN KENTUCKY INSPECTIONS, INC.
APPELLEE
OPINION
REVERSING AND REMANDING
** ** ** ** **
BEFORE: LAMBERT AND THOMPSON, JUDGES; HENRY,1 SENIOR
JUDGE.
THOMPSON, JUDGE: This case concerns an action for the negligent inspection
of a residence. As a matter of first impression in this Commonwealth, we hold that
a contract clause limiting the damages recoverable from a home inspector for
negligent inspection is not part of an arm’s-length agreement and is void as against
public policy.
1
Senior Judge Michael L. Henry sitting as Special Judge by assignment of the Chief Justice
pursuant to Section 110(5)(b) of the Kentucky Constitution and KRS 21.580.
The facts are undisputed. John Mullins entered into a purchase
contract on a residence and subsequently contracted with Northern Kentucky
Inspections (NKI) to perform a home inspection on the residence for a $200 fee.
Included in the agreement was that NKI would inspect the home’s structural
condition, including the basement for any defects. Also included in the contract
was a clause that limited the amount of damages in any action initiated as a result
of NKI’s negligent performance of the contract to the cost of the inspection.
Mullins accompanied the inspector during the inspection and, at that
time, questioned the inspector regarding a crack in the basement wall. He was told
that it was inconsequential. After NKI issued its final report in which it concluded
that there were no structural defects, Mullins purchased the residence. Soon
thereafter, significant water accumulated in the basement and, as a result, Mullins
was required to pay $7,400 to repair the residence.
Mullins initiated this litigation seeking to recover the entire amount
paid for repairs. Following a bench trial, the trial court found that NKI’s conduct
was not willful or wanton and that the limitation of damages clause was
enforceable as it was not against public policy.
The parties agree with the trial court’s finding that NKI’s conduct was
not willful or wanton. The sole issue presented is whether the limitation of
damages clause is void as against public policy. Because there are no factual
issues in dispute, our standard of review is de novo review. Speedway
Superamerica, LLC v. Erin, 250 S.W.3d 339 (Ky.App. 2008).
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We preface our discussion with the proper characterization of the
contract clause. The $200 potential recovery is nothing more than a refund of the
fee charged and is de minimus when compared to the damage Mullins incurred as a
result of NKI’s negligence. Because the clause effectively immunizes NKI from
its own negligence, the limitation clause is tantamount to an exculpation clause and
its enforceability is based on the same public policy considerations applicable to
exculpation clauses. See Speedway Superamerica, 250 S.W.3d at 341(holding that
an indemnification provision used to defend a party’s own negligence was
effectively a pre-injury release and would be analyzed as an exculpatory clause).
Generally, the doctrine of freedom to contract prevails and, in the
absence of ambiguity, a written instrument will be enforced strictly according to its
terms. Frear v. P.T.A. Industries, Inc., 103 S.W.3d 99, 106 (Ky. 2003). The law
was aptly recited in Jones v. Hanna, 814 S.W.2d 287, 289 (Ky.App. 1991):
[C]ontracts voluntarily made between competent persons
are not to be set aside lightly. As the right of private
contract is no small part of the liberty of the citizen, the
usual and most important function of courts is to enforce
and maintain contracts rather than to enable parties to
escape their obligations on the pretext of public policy or
illegality. If the legality of the contract can be sustained
in whole or in part under any reasonable interpretation of
its provisions, courts should not hesitate to decree
enforcement.
Id. at 289.
Despite the adherence to the right of the parties to voluntarily agree to
the terms of a contract, exculpatory clauses have been subject to scrutiny by our
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courts. If a party has contracted away any legal right to be compensated for
personal or economic loss caused by the other party’s negligence, we will not
enforce the provision if to do so would violate public policy. Cobb v. Gulf
Refining Co., 284 Ky. 523, 145 S.W.2d 96, 99 (1940).
Recognized for over a century as an exception to the freedom of
contract doctrine, the concept of public policy emerged in the context of contract
law and the enforcement of exculpatory clauses in Greenwich Insurance Co. v.
Louisville & N. R. Co., 112 Ky. 598, 66 S.W. 411 (1902). The question there was
whether the railroad could contract away its liability for its own negligence toward
a brewing company which leased land located in the railroad’s right-of-way. The
Court upheld the exculpatory clause on the basis that the contract was entered into
by parties dealing at arm’s-length and there was no necessity for either party to
enter into the contract. Id. at 412-413. However, the Court added the caveat that
the railroad could not contract away wanton or willful negligence and, significant
to our present case, could not contract away its negligence against passengers or
freight shipping customers as a matter of public policy because they did not have
equal bargaining power. Id.
Since Greenwich Insurance Co. and its holding that exculpatory
clauses in violation of public policy will not be enforced, Kentucky courts have
had numerous occasions to address the enforceability of exculpatory clauses on
public policy grounds. Although the vast majority of cases that have invalidated
exculpatory clauses involved personal injuries, the same policy considerations are
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applicable to those involving only property or economic damages. See
Cumberland Valley Contractors, Inc. v. Bell County Coal Corp., 238 S.W.3d 644
(Ky. 2007). However, the criterion to be applied when determining whether to
invalidate an exculpatory clause has been problematic.
This Court commented in Jones, 814 S.W.2d 287, that the law on the
subject was in disarray. The most recent pronouncements from our Supreme Court
on the subject of exculpatory clauses were made in Hargis v. Baize, 168 S.W.3d 36
(Ky. 2005), and Cumberland County Contractors, Inc., 238 S.W.3d 644.
Hargis involved an attempt to contract away damages caused by the
violation of a safety statute enacted to protect the injured party. Relying on the
expressed intent of the General Assembly, the Court invalidated the exculpatory
clause on public policy grounds. However, notably absent from the Court’s
analysis was any consideration of the bargaining power of the parties to the
contract, an omission that could reasonably be interpreted to invalidate any
exculpatory clause purporting to contract away a party’s duty under a safety
statute.
Two years after Hargis, the Supreme Court rendered its opinion in
Cumberland County Contractors and clarified its opinion in Hargis. In an attempt
to harmonize Hargis with the principles of contract law espoused in Greenwich,
the Court emphasized the bargaining power of the parties. Despite that the parties
were equally mandated to comply with mine safety statutes, the Court upheld an
exculpatory clause which allocated the risk of loss to one party. Id. at 652. Two
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factors were pivotal to its decision: The agreement was an arm’s-length
transaction between two business corporations with equal bargaining power and
the exculpatory clause only shifted liability from one party to the other. Id. at 654.
This Court again had the opportunity to address the validity of an
exculpatory clause in Speedway Superamerica, LLC, 250 S.W.3d 339, and did so
with the guidance of the Supreme Court’s decision in Cumberland Valley
Contractors Inc., and its emphasis on the relative bargaining power of the parties.
The relative bargaining power of the parties was the key factor when determining
whether to enforce the exculpatory clause. Id. at 341-342. After reviewing the
contract, the Court concluded that an indemnification provision between a general
contractor and a convenient store owner in which the contractor agreed to defend
the owner and hold it harmless against its own negligence could not be enforced in
an action by the contractor seeking damages for his personal injuries incurred
while working on the store’s premises. The determining factors were the clearly
inferior bargaining position of the contractor and that the contract was clearly onesided in favor of the store owner. Id. at 342.
We again rely on the Court’s directive in Cumberland Contactor’s
when determining the validity of the exculpatory clause presented. We conclude
that it was not an arm’s-length agreement between parties with equal bargaining
power and that public policy prohibits its enforcement.
We cannot ignore that the contract was a contract of adhesion. It was
not executed after negotiations between Mullins and NKI, but was on a pre-printed
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form prepared by NKI and presented on a take-it-or-leave-it basis. Conseco
Finance Servicing Co. v. Wilder, 47 S.W.3d 335 (Ky.App. 2001).
Moreover, NKI is engaged in the business of offering its professional
opinion regarding the condition of the home it inspects. Mullins is a consumer
with no knowledge of matters involving home construction and relied on NKI’s
expert opinion when he made the decision to purchase the home. Mullins had
every reason to believe that NKI would perform its obligations under the contract
with diligence. Indeed, as a result of the clause, NKI had no incentive to act
diligently in its inspection and Mullins had nothing to gain by hiring NKI if it did
not diligently perform its inspection. To the contrary, Mullins faced expensive
repair costs if a substantial defect was overlooked.
The possible economic damage to Mullins, if NKI negligently
performed its duties, is correlated to the magnitude of the investment in a
residence. The significance of the purchase of a residence is, for the average
citizen, the largest investment and, sometimes, the only financial investment of his
lifetime. Thus, the purchaser must take the precautionary steps to properly assess
that the price of the residence reflects its actual value, an assessment that
necessarily depends on the structural soundness of the residence. Additionally, not
only is a competently completed home inspection crucial to negotiating the price
for the residence, but the financer of the purchase normally requires a home
inspection. Thus, not only does the purchaser rely on the opinion of the home
inspector, but so does the financial institution that finances the purchase.
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Despite the potentially adverse economic and safety consequences of
negligently performed home inspections, the General Assembly did not take
express action on the subject until 2004. At that time, KRS 198B.712 was enacted
and now provides that home inspectors be licensed and carry a policy of general
liability insurance in the amount of $250,000. Additionally, the General Assembly
enacted KRS 411.270-411.282 to provide a statutory scheme for actions filed
against home inspectors for deficient home inspections. However, NKI argues that
because no statute pertained to home inspections of pre-owned residences before
the contract was executed or when this action was commenced, any public policy
argument is foreclosed. We are not persuaded.
Long ago it was recognized that “public policy” is a phrase often used
but seldom defined. See Bankers Bond Co. v. Buckingham, 265 Ky. 712, 97
S.W.2d 596 (1936). However, the relevant inquiry into whether a contract violates
public policy has been stated as follows:
The test is whether the parties have stipulated for
something inhibited by the law or inimical to, or
inconsistent with, the public welfare. An agreement is
against public policy if it is injurious to the interests of
the public, contravenes some established interest of
society, violates some public statute, is against good
morals, tends to interfere with the public welfare or
safety, or, as it is sometimes put, if it is at war with the
interests of society and is in conflict with the morals of
the time.
Hanks v. McDanell, 307 Ky. 243, 246-247, 210 S.W.2d 784, 86 (Ky.1948)(internal
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quotations omitted). Based on the accepted definition of the term “public policy,”
specific legislation is a source from which public policy can be discerned, but it is
not the exclusive source. It would be a hollow rule of law if we refused to
recognize a public policy based merely on the effective date of a statute.
Borrowing from the reasoning of the Tennessee Supreme Court, as
applied in the context of an exculpatory clause in a home inspection contract, the
following criteria are relevant: (1) whether the inspector held himself out as willing
to perform the service for the public; (2) whether as a result of the contract, the
inspector subjected the plaintiff to the risk of loss caused by the inspector’s
carelessness; and (3) whether the business of home inspection is suitable for
regulation and is of great significance to members of the public because it is
considered a necessity to its personal or financial health. Russell v. Bray, 116 S.W.
3d 1 (Tenn. 2003).2
NKI is in the business of home inspections and represents to the
public that it has the expertise and knowledge to conduct home inspections. Based
on its representations, customers employ its services with the reasonable
expectation that it will perform its services and render a professional opinion with
diligence.
As to the second criteria, we have previously discussed the serious
impact a negligently conducted inspection can have on a homeowner. We reiterate
that a purchaser relies on the home inspection to make what is most often the most
2
Consistent with Kentucky law, the Tennessee Court also considered the relative bargaining
power of the parties.
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important investment of his lifetime. A negligently performed inspection can have
devastating consequences to the homeowner’s financial health and, in some
instances, physical health.
Finally, we have no doubt that home inspections are a subject suitable
to regulation. With the enactment of KRS 918.712 and KRS 411.270-411.782, the
General Assembly merely codified the existing public policy that home inspections
are a crucial service provided to the public.
We join New Jersey and Tennessee which have held that exculpatory
clauses in home inspection contracts entered into in anticipation of a residential
purchase are invalid. Lucier v. Williams, 366 N.J.Super. 485, 841 A.2d. 907
(2004); Russell, 116 S.W.3d 1. In summary, the exculpatory clause in the home
inspection contract entered into between NKI and Mullins is unenforceable
because it is not an arm’s-length agreement and violates Kentucky’s public policy
that home inspectors be accountable for their negligence in the performance of
their duty to inspect the premises and render an opinion as to the structural
soundness of the residence.
The judgment of the trial court is reversed and the case remanded for
further proceedings consistent with this opinion.
LAMBERT, JUDGE, CONCURS.
HENRY, SENIOR JUDGE, DISSENTS AND FILES SEPARATE
OPINION.
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HENRY, SENIOR JUDGE, DISSENTING. I respectfully dissent. I
read Cumberland Valley Contractors, Inc. v. Bell County Coal Corp., 238 S.W.3d
644 (Ky. 2007), the most recent authority from our Supreme Court on the legal
issue we are asked to decide in this case, to say that an exculpatory clause or a
damages-limitation clause in a case such as this must be upheld due to the parties’
freedom to contract. See id. at 654.
I acknowledge that this case presents a close question. Perhaps I am
giving Cumberland Valley Contractors too restrictive a reading, but I am not
persuaded that this case presents the degree of disparity in bargaining power
between the parties that requires intervention by the courts. I would affirm the trial
court and leave it to the Supreme Court to decide whether such intervention is
required.
BRIEF FOR APPELLANT:
BRIEF FOR APPELLEE:
Brandon N. Voelker
Cold Spring, Kentucky
Robert L. Raper
Covington, Kentucky
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