Caveat Emptor: Buyer beware

Helen Harris, Intern, SpeakingThreads

Caveat emptor, quia ignorare non-debuit quod jus alienum emit.

“Let a purchaser beware, for he ought not to be ignorant of the nature of the property which he is buying from another party.”

Frustration Photo: BigStock

This Latin phrase more commonly known by its abbreviated version of “caveat emptor” can be traced back to the common law of contracts which prevailed in England around the 18th and 19th   century. The common law of contract was built on the two pillars of “freedom of contract” and “sanctity of contract”. The principle of caveat emptor stood at the threshold of these two pillars. This was initially regarded as the property law doctrine, which controlled the sale of real property after the date of closing. Under the doctrine of caveat emptor, the buyer cannot recover from the seller for defects on the property that renders the property unfit for ordinary purposes. However there was one exception, that being, wilful concealment on the part of the seller regarding patent defects.

The courts in England adhered to this principle as a Christian does to the Bible and the buyer had the duty not only to exercise full caution and diligence but also to act prudently.

Even at the turn of the 20th century, caveat emptor continued to be the touchstone of the law of contracts in many countries such as: the U.S., India etc. It’s the amplitude of its application has expanded over the years to cover not only real estate but also movables including securities.

In 1985 the Florida Supreme Court ruled in Johnson v Davis [1]: The tendency of the more recent cases has been to restrict rather than extend the doctrine of caveat emptor. The law appears to be working toward the ultimate conclusion that full disclosure of all material facts must be made whenever elementary fair conduct demands it.

In this case, the buyer specifically asked about the home’s roof and the seller misrepresented its condition. The fact that it was in bad shape was not readily apparent to the buyer, but the seller did know the roof leaked. The buyer accepted the seller’s word on the matter later only to discover a waterfall inside the house after a rain. The buyer asked for and received not only his deposit back, but also interest and court costs.

The court thus, enunciated a new rule requiring sellers of residential property in Florida to apprise buyers of any substantial defect in the property that would not be readily observable by the buyer.

An interesting illustration of the doctrine of caveat emptor is a judgment by the New York Supreme Court in Jeffrey M. Stambovsky v. Helen Ackley and Ellis Realty [2].

The facts of the case are as follows: During the course of her ownership of the property at issue, which was located in Nyack, New York, Helen Ackley and members of her family had reported seeing numerous poltergeists in the house. Ackley had reported the existence of ghosts in the house to both Reader’s Digest and a local newspaper on three occasions between 1977 and 1989, when the house was included on a five-home walking tour of the city. Neither Ackley nor her realtor, Ellis Realty, revealed the haunting to Jeffrey Stambovsky before he entered a contract to purchase the house in 1989 or 1990. Stambovsky was from New York City and was not aware of the folklore of Nyack, including the widely known haunting story.

When Stambovsky learned of the haunting story, he filed an action requesting rescission of the contract of sale and for damages for fraudulent misrepresentation by Ackley and Ellis Realty. The appellate court reversed the trial court’s decision regarding the rescission action, however, as it went on to note that “haunting” was not a condition that a buyer or potential buyer of real property can and should be able to ascertain upon reasonable inspection of the property. According to the court, though the doctrine of caveat emptor would normally operate to bar a rescission action, causing seller to have no duty to disclose information about the property to be sold (but also preventing the seller from affirmatively misrepresenting the condition of the property), the doctrine, in a merged law and equity system, can be modified to do justice to the parties. In this case, “the most meticulous inspection and the search would not reveal the presence of poltergeists at the premises or unearth the property’s ghoulish reputation in the community,” thus equity would allow Stambovsky the remedy of contract rescission against the seller, Ackley.

Thus, the New York Supreme court brought to light the fact that although a buyer has to exercise prudence and caution but when the most detailed of the inspection of the goods being purchased would not reveal the underlying defect, the buyer could not be termed as negligent.

In United States, the burden of caution and prudence has been shifting from the buyer to the seller. With the introduction of consumer protection laws, the seller is becoming increasingly wary not only of his rival competitors but also of deceiving the customers.

This shift is being observed in almost all countries. Over the years, a slipshod approach by the seller with regards to transactions of sale would be completely unacceptable .The sellers have a duty now to disclose all the material facts about the property/goods being so purchased even if it is not in his favour. Thus the new rule emerging is caveat venditor, that is ‘Let the Seller be beware’

But is the seller the only one who has to carry the burden of being careful?

An endorsement to caveat venditor would apply that the sellers would have no right. Any buyer by alleging a transaction as misleading or deceptive could get away with his claim. This would lead to an unfair advantage, which the buyers would constantly exercise over the sellers.

One approach in this regard being followed is that since the rule of caveat emptor emerges from the contractual liability between the parties, the seller should not be held liable for any so-called defective or misleading claim as made out by the buyer. The buyer cannot take the claim of being misled or deceived by the seller if the terms of contract are followed to the letter.

An Australian case given below is illustrative of this point:

A 2005 judgement of the New South Wales Supreme Court in Frontier Touring Co Pty Ltd v Peter Rodgers & Anor [3];

Under a contract, Frontier Touring paid money to Kidz.net to use in specified ways for establishing the Kidz.net business in the United States of America, South America and Canada.

Frontier later sued Kidz.net for various breaches. One of its claims was that it had been misled by “statements” made by Kidz.net during the negotiations for the contract. Those “statements” were that the money would only be used for specified purposes.

Frontier alleged that Kidz.net used a fraction of the money for different purposes.

Frontier’s “misleading” or “deceptive” claim was refuted because it didn’t raise matters that weren’t covered by the contract. In the court’s opinion, Kidz.net’s statements were statements purporting what it was prepared to offer by way of a contract.

The seller and the buyer both are equal parties to a contract. To favour one over the other would lead to miscarriage of justice. A balance has to be maintained between the rights and duties of both the seller and the buyer. The gaps between the rights of the two must be bridged. With various legislations in place governing the sale of goods, consumer protection laws, it should be remembered that ultimately a buyer would also be the seller of some good and the seller would also become the buyer with regards to some good. They cannot be thus regarded as two different classes, they would overlap and in order to ensure justice, a harmony has to be maintained between the protections conferred on both.

Chairman Arthur Levitt has aptly, observed [4]:

Imagine, if you will, a world in which the remedy against fraud is too weak: companies will be able to say anything they want about themselves or their expectations, but investors will not want to risk their capital.  Imagine, on the other hand, a world in which the remedy against fraud is too strong: any mistake in any company statement will risk huge lawsuits alleging fraud, so no company will be able to raise capital.  Either way, our capitalist system is the loser.  What we need is a balance between caveat emptor and caveat venditor — between “buyer beware” and “seller beware.””