Smiley v. S&J Inv., Inc.: Purchasers' Lawsuit Based on Inspection Report Allowed to Proceed

Georgia appellate court has considered whether report could serve as the basis for lawsuit against seller and inspection company.

Ronald and Terry Smiley ("Purchasers") entered into an agreement to purchase a home from S & J Investments, Inc. ("Owner"). As part of the purchase agreement, Jack E. Hall, Jr. ("Licensee"), the principal agent, delivered to the Purchasers a copy of the seller's property condition disclosure statement ("Disclosure Statement"). The Disclosure Statement did not identify any structural problems or past water leakage in the home.

Prior to the execution of the purchase agreement, the Purchasers had retained a building contractor to perform an inspection of the home. The contractor's report concerned the Purchasers, causing the Owner to retain Hussey, Gay, Bell & DeYoung, Inc. Consulting Engineers ("Inspector") to conduct an inspection of the premises in order to allay the Purchasers' doubts. The Inspector prepared a report which concluded that the home had "no signs of structural failures." Prior to the Inspector's report, the Purchasers had offered $600,000 for the home but they increased their offer to $670,000 after receiving the Inspector's report.

Following their purchase, the Purchasers encountered numerous structural problems with their home. Eventually, they filed a lawsuit against the Owner, the Licensee, and the Inspector. During the course of discovery, it was learned that the Licensee was a prior owner of the property and had attempted to perform extensive repairs on structural elements within the house, but those efforts had not succeeded. The Licensee failed to disclose the work he had attempted on the property, despite allegedly receiving questions from the Purchasers related to this topic. The trial court ruled against the Purchasers on all of their allegations, and the Purchasers appealed.

The Court of Appeals of Georgia partially affirmed and partially reversed the trial court, sending part of the case back to the trial court for resolution of factual issues by a jury. The court first considered the allegations against the Inspector. The court affirmed the trial court's ruling that the Purchasers' professional negligence allegations against the Inspector should be dismissed because there was no professional relationship between the parties. However, the court found that the Purchasers could bring negligent misrepresentation allegations against the Inspector and so reversed the trial court on these allegations. A third party can bring negligent misrepresentation allegations against professional individuals or entities who provide false information due to lack of competence or failure to exercise proper care in preparing information which is relied upon by a third party and such reliance is foreseeable to the professional. The Inspector knew the purpose for which the report was going to be used (i.e., induce the purchase of the home), and there was expert testimony that the Inspector's report was negligently prepared, as the Purchasers' expert found there were structural defects which should have been discovered. Thus, the court reversed the negligent misrepresentation allegations against the Inspector and sent these allegations back to the trial court for further proceedings.

Next, the court considered the Purchasers' fraud allegations against the Licensee and the Owner. To successfully allege fraud, a party must show a false representation which is known to be false at the time it is made, made to induce the other party to act, and the other party justifiably relies on the representation, causing the other party damages. The Purchasers produced evidence showing that the Licensee misstated the following: the amount the Inspector received for preparation of its report; the work the Inspector undertook to prepare the report; and the Licensee's knowledge about structural repairs he had attempted on the property. The court found that all of this could lead to the conclusion by a jury that the Owner and Licensee had planned to defraud the Purchaser, and so the court sent the fraud allegations back to the trial court for further consideration.

Finally, the court considered the Purchasers' breach of contract allegations against the Owner. These allegations were based on the fact that the Disclosure Statement was incorporated into the contract between the parties. If the jury found that the Disclosure Statement falsely represented the property as having no structural defects, then the Owner would be liable for breach of contract. The court stated that the Owner's lack of knowledge of the structural defects would not be a defense to the breach of contract allegations, because the absence of such defects was a term of the contract. Thus, the court sent the breach of contract allegations back to the trial court.

Smiley v. S&J Inv., Inc., 580 S.E.2d 283 (Ga. App. Ct. 2003).