Don't want to rub salt on the wound but stay out of dual agency situations. This might have been handled differently if their agent wasn't also your agent.
Yes, I agree that giving a proper Notice of Defects (WB-41) as well as the Cancellation and Mutual Release agreement is necessary. The WB-41 notifies the seller that you are NOT waiving the home inspection contingency and you are not moving forward with the transaction due to the defects disclosed during the home inspection. This should be delivered to the seller before the home inspection contingency period expires. The cancellation agreement is typically handed in along with the Notice of Defects.
I'm not a lawyer...just friendly advice from someone who works with many buyers and generally represents them as a Buyer's Agent!
You can click the "Contact" link below my name if I can be of further help!
Kris Plechaty - First Weber Group Realtors
Your signature within the contingency period is of greatest importance. What harm would there be to submit both WB-41 and WB-45? This way all of your bases would be covered.