Caveat Emptor Case Study

Caveat Emptor means “let the buyer beware”, for example the buyer must take care. As a general rule, the buyer purchases goods after satisfying himself as to quality and fitness and, therefore, the buyer purchases the goods at his own risk, relying upon his own skill and judgment. In a contract for sale of goods there is no implied warranty or conditions as to quality or fitness for any particular purpose of goods and therefore, the buyer purchases the goods at his risk relying on his own skill and judgment (Sec 16).

Exceptions: (Sec 16) In the following cases, doctrine of Caveat Emptor does not apply, for example, under the following circumstances the seller gives an implied warranty as to quality and fitness of the goods and if the goods are not fit for sale, the seller cannot take the defense under doctrine of Caveat Emptor and he shall be liable for breach of warranty of quality or fitness.

1) Custom or usage of Trade: an implied warranty or condition as to quality or fitness for a particular purpose may be annexed by the custom or usage of trade. However, custom should not be unreasonable and should not be inconsistent with the express terms of the contract.
2) Fraud: Where the seller is guilty of fraud, for example, where the seller obtains the consent of the buyer by fraud or conceals a defect, the seller is liable. Where the buyer purchased pigs at an auction sale and paid a fair price for them as healthy pigs, and subsequently turned that the pigs were ill, it was held even though the vendor had committed fraud by connecting the health of pigs, caveat emptor will apply. However, the situation would be different if the pigs had been bought from dealer in work.
3) For specific purpose: (1) Where the goods are ordered for specific purpose, and (2) the seller is made aware of it, and (3) the buyer relies on the skill or judgment of the seller, there is an implied condition that the goods shall be reasonably fit for such purposes.

Where the Doctor after purchasing woolen underpants from the defendant manufacturer took ill and it was diagnosed that the Doctor contacted illness due to defects in manufacturing underpants, it was held that Doctor was entitled to succeed.

The purpose for which goods are required is implied of these particular goods are purchased from a dealer dealing in those particular goods and if the goods subsequently turn out to be unfit for the purpose required, they can be rejected. Particular purpose for which goods are required is to be disclosed where goods can be used for more than one purpose. However, where the sale of a specified article is under its patent or trade name, there is no implied condition as to its fitness for particular purpose, i.e. doctrine of Caveat Emptor will apply.

Merchantable quality: Where (1) the sale is by description and (2) purchased from the seller who deals in goods of that description, there is an implied condition that the goods shall be of merchantable quality. Where a person ordered motor horns from a manufacturer of horns were damaged, it was held the buyer was entitled to reject the horns.

It should be noted that goods are merchantable if they are fit for any one of several purposes for which the goods may ordinarily be used. The word ‘merchantable’ commonly means “commercially saleable”. If the description is a familiar one it may be that in practice only one quality of goods answers that description, then that quality and only that is merchantable quality.

However, if the buyer has examined the goods, there shall be no implied condition as regards defects which such examination ought to have revealed. In all the above cases, seller is bond by implied warranty. Except in the above cases, doctrine of Caveat Emptor shall apply and the seller shall not be liable to any penalty if the goods purchased are unfit. The buyer may, however, protect himself by express warranty or condition.

This Latin term, caveat emptor, means “let the buyer beware,” and is commonly used in reference to purchasing real property, or used items that do not come with a warranty. This is a warning to buyers that they are responsible for making sure the property or item is in suitable condition, or that it fits their needs, before buying. To explore this concept, consider the following caveat emptor definition.

Definition of Caveat Emptor

Pronounced

kah-vee-aht emp-tohr

Noun

  1. The principle that a person buying something is responsible for making sure it is in good condition, or works properly.
  2. The principle that the seller of a product can only be held responsible for its condition or quality if he gives a warranty or guarantee.

Origin

1520-1525       Latin  (literally “let the buyer beware“)

The Principle of Caveat Emptor

There has always been a concern over the unevenness of available information between a buyer and seller of any item or property. The seller generally knows a lot more about the item’s condition, history, and suitability for any purpose than the buyer. The principle of caveat emptor was originally intended to settle disputes between buyers and sellers, when a buyer complained about the item’s condition after the purchase.

This principle is based on the understanding that buyers have an opportunity to inspect the item, to have it inspected by a qualified professional, and to research its history before making a decision to buy. This is true for everything from buying a home, to buying a car, or buying a stamp collection. If the buyer, whether he takes advantage of this opportunity or not, chooses to buy the item, he cannot blame the seller for any deficiencies he may later discover.

Example of the Principle of Caveat Emptor

Naomi wants to buy a 4-wheel drive SUV from the shop teacher at the school where she works. The SUV is 18 years old, and has about 220,000 miles on it, but the shop teacher, Bob, assures her it runs well. Naomi takes the vehicle for a short test drive around the compound at the school, then decides to buy the vehicle, giving Bob his full asking price of $1,500.

Naomi drives the SUV for a week, then it sat in her driveway throughout the weekend. When she started it up on Monday, it made a loud noise as she tried to put it in gear. When Naomi questioned Bob about the problem, he offered to look at it if she brought it into the shop. Bob told Naomi that it needed transmission fluid, but there was a chance the transmission might need to be overhauled or replaced. He couldn’t be sure, because that would entail disassembling the transmission, which he did not have time to do.

Naomi knew that replacing or rebuilding the car’s transmission would be very expensive, and she didn’t want to have that kind of hassle. She asked Bob to return her money, but he refused. Naomi filed a civil lawsuit against Bob, asking for her entire payment of $1,500 back, as well as filing fees, and wages for the day she missed work.

At trial, the judge asks Naomi if she test drove the vehicle before she bought it, to which she answered “yes.” The judge also asked if Naomi had had a mechanic go over the vehicle before she bought it. Naomi pointed at Bob, and answered, “Yes, he did.”

The judge pointed out that it was Naomi’s responsibility to have a mechanic that didn’t have an interest in the transaction look at the vehicle. Naomi’s purchase fell under the principle of caveat emptor, laying the full responsibility of checking out the car’s condition at Naomi’s feet. The judge ruled in favor of Bob.

Buyer Responsibility vs Fraud

Alternatively, when Naomi showed interest in the SUV, Bob falsely told her he had recently done a tune-up, changed the fluids, and rebuilt the transmission. This information lead Naomi to believe that a great deal of maintenance and repairs had been done by Bob, whom she trusted as a co-worker of many years.

At the trial, Naomi admits she did not have another mechanic inspect the vehicle before buying it, but argued that Bob had specifically told her he had recently rebuilt the transmission, which induced her to buy. If Naomi can provide a statement by another mechanic that the SUV’s transmission had not been rebuilt, the court is likely to find Bob has committed fraud. The contract would be “undone,” Naomi would be ordered to return the SUV to Bob, and Bob would be ordered to return Naomi’s money.

Implied Warranty

While there is an assumption in American law that a buyer is responsible to perform his own checks, or to have a professional inspect the item or property prior to purchase, there are certain circumstances in which an implied warranty will protect the consumer.

An implied warranty is not a written warranty, such as consumers often receive when purchasing brand new products. Instead, an implied warranty is an assumed guarantee that the product is fit for the purpose for which it is intended.

Also referred to as an implied warranty of merchantability, this principle assumes that cereal on the shelf at the local grocery store is fresh and edible cereal. If a consumer opens the cereal he just purchased, to find that the box is instead filled with cheese puffs, he can take the package back to the store to either exchange it for another box, or receive a refund. This is because the box of cereal has an implied warranty of merchantability, that it can be used as it was intended – as a box of cereal.

There is another implied warranty, referred to as an implied warranty of habitability, which holds a landlord responsible for ensuring a leased premises is safe, with no health or safety hazards, and that it provides certain minimal amenities, including clean, running water, hot water, and heat. Although a consumer must inspect any home or other premises he is considering to determine whether it suits his needs, he can assume there is a basic implied warranty of habitability.

Fraud in Residential Sale

Terry Visser (a real estate broker) and his wife Diane, bought a house in 2005 with the intent to renovate it, then use it as a rental. Trouble quickly appeared, as the flooring installer advised the Vissers that the floor joists were so rotted that he could not use screws to hold the flooring down. The Vissers told the man to “find a way” to attach it, going so far as telling the laborer to “cover it with trim … cover it in caulking, use a bunch of nails, paint it and seal it.” The laborer did as he was told and kept his mouth shut.

The couple changed their tactic to putting the least amount of money possible into making the home appear habitable, and putting it on the market to sell. Canadian couple, Nigel and Kathleen Douglas, made an offer on the house. During the escrow process, the Vissers provided the buyers with an incomplete Seller Disclosure Statement, on which most of the questions were answered simply “don’t know.”

In an attempt to gain more information, the Douglases asked a series of questions, and requested a copy of the Vissers’ inspection report. The Vissers returned responses that weren’t actually answers to the questions, and never did send a copy of the report. When the Douglases hired an inspector of their own, they were told of a “small area of rot and decay near the roof line,” and a “rotted sill plate.” Because they were told those two problems were not serious, the Douglases went through with the purchase transaction.

After they moved into the house, the Douglases had a problem, and called their inspector back. He discovered a leak when water poured down on him when he removed a ceiling tile. The couple called in a mold specialist who told them that the mold problem was so extreme that it would be cheaper to demolish the house and build it anew than to remediate the mold and repair the existing structure. As the Douglases pursued these issues, additional inspectors revealed the truth, that the Vissers had intentionally concealed rotted wood, mold, and other serious problems during the escrow process.

The Douglases filed a civil lawsuit against the Vissers for negligent misrepresentation, fraudulent concealment, breach of contract, violations of the Consumer Protection Act, and breach of Terry Visser’s duties as a real estate broker.

At trial, the court ruled in favor of the Douglases, citing Vissers’ acts as egregious. When the Vissers appealed the decision, however, the appellate court overturned the trial court’s decision. This was based on the fact that the Douglases had been made aware that there were certain problems by their own inspector, even though he had said at the time that they weren’t serious and could be taken care of later. The Douglases had a responsibility to look further into those problems, but didn’t until after the fact.

In this case of Douglas v Visser, the court’s return to a position of caveat emptor was disturbing. This is because, not only had the Vissers apparently lied on the state’s required disclosure form 17, which is required after the sale is completed, but they had taken affirmative and intentional actions to conceal the very serious defects in the property.

Many real estate professionals see Visser as a license to conceal defects, and lie on required disclosure forms, as long as the buyer’s inspector reports even a minor indication of a potential problem, but the buyer fails to investigate further. At the time of this article, it was unknown whether the case would be appealed to the Supreme Court.

Related Legal Terms and Issues

  • Breach of Contract – A violation of contract through failure to perform, or through interference with the performance of the contractual obligations
  • Civil Lawsuit – A lawsuit brought about in court when one person claims to have suffered a loss due to the actions of another person.
  • Fraud – A false representation of fact, whether by words, conduct, or concealment, intended to deceive another.

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