BUSINESS – LESSON 2: SECTION 1 – Purpose of a Pre-inspection Agreement (Content)
Introduction
Business owners need to know about the legal environment in which they operate. To protect themselves and to serve their clients, home inspectors should understand the basics of business law. The following is a very brief discussion of basic legal concepts and procedures as they relate to operating a business. Business schools spend at least one semester teaching these concepts, so a few paragraphs are only to introduce the concepts.
Laws dealing with the conduct of business, including conducting business with consumers, are governed mostly by state laws. These laws vary significantly between states. The following discussion of business law is based on general principles. When dealing with laws, the devil is very much in the details. The details could make a substantial difference in how home inspection agreements and home inspection reports should be written.
PRE-INSPECTION AGREEMENTS (CONTRACTS)
Introduction
No inspection service should be performed without first having a signed pre-inspection agreement (contract). Getting a signed contract before every inspection has been difficult in practice, but with modern communications (email, the internet) and modern methods to obtain signatures on documents, it should not be too difficult to obtain a signed contract before beginning each inspection. Some states that regulate home inspections, and many insurance companies that write errors and omissions insurance for home inspectors, require obtaining a signed contract prior to the start of the inspection.
Contracts are governed by state laws (statutory law) and by court decisions (case law). The rules governing contracts are different in every state. Some contract provisions, such as limitations of remedies (liability), are allowed in some states and not in others. The following discussion covers information about contracts that is common among most states; however, this is not intended to offer legal advice. The home inspector should review all contracts with a local attorney, ideally one that is knowledgeable about home inspections or one with some experience in real estate law.
Many home inspectors perform ancillary services in addition to home inspections. Examples of ancillary services include radon measurement, mold sampling, water quality sampling, pool and spa inspections, wood destroying organisms inspections, and new construction inspections. Each ancillary service is different with different objectives, scope, and limitations. Each service should be performed using a separate inspection agreement that is written to address the unique nature of the ancillary service. The following discussion of contracts applies to home inspection contracts and to contracts for ancillary services.
Contract Basics
Definition of a Contract: A contract is an agreement between two or more parties that creates obligations that may be enforceable at law. The operative word in this definition is agreement. There must be an agreement between the parties that a contract exists, and an agreement about the terms of the contract, otherwise there is no contract. This agreement (mutual assent) was sometimes called a meeting of the minds.
Most contracts need not be in writing; in fact, the written document is not the contract. The agreement between the parties is the contract; the written document is just the vehicle for documenting the agreement. In practice, unwritten (oral) contracts are extremely difficult to enforce because it is difficult to objectively establish the terms of the agreement. All contracts should, therefore, be in writing. Once a written agreement has been reached between the parties, oral testimony is usually not allowed to alter the terms. All contract terms should, therefore, be within the four corners of the final written document.
Elements of a Contract: Four elements must exist before there is an enforceable contract. All four elements are required. The elements are offer, acceptance, consideration, and mutual assent. There are, of course, other elements, rules, and exceptions involved when dealing with contracts. These are out-of-scope for this book, and beyond what most home inspectors need to know.
There must be an offer. An offer is a promise to do something, or to refrain from doing something at a future time under certain conditions. For example, a home inspector’s website lists a fee of $350 to inspect a house up to 2,000 square feet; this constitutes an offer.
There must be acceptance of the offer as offered. Acceptance may be an act or may be inferred by conduct. An attempt to accept an offer that changes the terms of the offer is not acceptance; it is a counteroffer. For example, a prospective client calls the home inspector and schedules a home inspection of a 1,999 square foot house; this would constitute acceptance. Scheduling a home inspection of a 2,001 square foot house for $350 would constitute a counteroffer which the home inspector would need to accept before an agreement is reached.
There must be an exchange of consideration. Consideration is something of value. Consideration may be money, property, or a promise to do or not to do something. Continuing the example, the home inspector’s consideration is the promise to perform a home inspection for $350, and the client’s consideration is the promise to pay the home inspector $350.
There must be mutual assent (agreement) to enter into a contractual relationship. The best way to establish mutual assent is by both parties signing the written contract; however, mutual assent may be established by the actions of the parties. Electronic signatures are usually valid.
Agency As a general rule, the contracting parties, the principals, should agree to the terms of the contract. For home inspection contracts, the principals are usually the home inspector and the clients, usually the buyers. Internet-based methods of delivering and signing contracts make it easier to get client signatures on inspection contracts. There are times, however, when it is not practical to have all principals, or any principals, sign the inspection contract. This raises the question about who, other than the principals, may sign an inspection contract? The answer is based in the concept of agency.
Agency is a fiduciary relationship in which one party (the agent) may act on behalf of another party (the principal) and, among other actions, enter into an agreement (contract) that binds the principal. A real estate agent is only one type of agent; there are many others.
Whether an agent (real estate or otherwise) may sign an inspection contract and bind the client (buyers) depends on whether the agent is acting within the scope of the agent’s authority. In other words, did the clients authorize the agent to act on their behalf and sign the inspection contract? This can be a complicated question. It is uncommon for the home inspector to have actual knowledge of the scope of an agent’s authority. As a general rule, home inspectors should have their client’s sign the contract because a real estate agent’s signature may not bind the client(s) to the terms and conditions of the contract. The home inspector should consult with a local attorney to determine how the state laws impact whether agents can sign home inspection contracts on behalf of clients.
Adhesion Contracts An adhesion contract (also known as a contract of adhesion), in colloquial terms, is an offer he can’t refuse. The conditions for an adhesion contract can occur when there is no opportunity to negotiate the contract terms, especially when a court finds that one party has more power or knowledge compared to the other. When dealing with clients, the home inspector is considered to have more power or knowledge than the client. A finding that an inspection contract is an adhesion contract can cause the contract itself or clauses such as a limitation of remedies to be severed from the contract and deemed unenforceable.