The Principle Of Buyer Beware In Contract Law

June 10, 2015

By Mark Mikulasik

Co-Authored by Jon Clark (Student at Law, Weilers)

Love them or hate them, the reality is that contracts are part of our everyday lives. For many the first experience with the law is when faced with a contract for something as simple as a cell phone or the purchase of one’s first home. It is always a good idea to read and understand the material terms of any contract before agreeing to be bound by those terms. Sometimes, however, one can attempt to read and understand the terms of the contract and still end up being legally bound by terms that were misunderstood and therefore unexpected. With any contract, each party has an obligation to perform due diligence when purchasing an item or service, in addition to merely reading and attempting to understand the terms of the contract. The legal doctrine is called Caveat Emptor or ‘buyer beware’.

Outside of contracts of utmost good faith (e.g. insurance), there is no general duty for one party to disclose all information in their possession with respect to a contract, prior to signing. The basic premise is that parties are free to negotiate the material terms of the contract. This often leads to problems when one party has significantly more information about the subject matter of the contract than the other. Parties may use this information to negotiate and are free not to disclose this information to the other party. It is up to the parties to the contract to investigate and perform proper due diligence when faced with the question of whether to enter into a contract. Outside of actionable fraud, mistake or misrepresentation, the common law courts have been reluctant to grant relief when one party makes a bad business decision because it did not ask the right questions or perform due diligence prior to signing a contract.

BUYER BEWARE IN THE SALE OF GOODS

In recent years the doctrine of Caveat Emptor has lost some of its lustre, particularly in the sale of goods. In Ontario, the sale of commercial goods is governed by the Sale of Goods Act. The Sale of Goods Act implies a deemed condition into a contract for the sale of commercial goods that attempts to alleviate the harsh result of the doctrine of Caveat Emptor where:

“the buyer, expressly or by implication, makes known to the seller the particular purpose for which the goods are required so as to show that the buyer relies on the seller’s skill or judgement, and the goods are of a description that it is in the courts of the seller’s business to supply… there is an implied condition that the goods will be reasonably fit that such purpose.”

If the above-noted conditions are met, an implied warranty may be inserted into the contract that the particular commercial product is fit for use of the particular purpose. The Sale of Goods Act has attempted to bring fairness into commercial transactions, however, it still is not absolute as the deemed warranty, discussed above, may be excluded by express contractual terms.

BUYER BEWARE IN REAL ESTATE TRANSACTIONS

Although the principle of buyer beware has been minimized by the Sale of Goods Act, the doctrine remains applicable in real estate transactions. The Supreme Court of Canada in Winnipeg Condominium Corporation No. 36 v. Bird Construction Co. held:

“The maxim, Caveat Emptor, operates as between purchaser and vendor. But the very existence of the principle instructs the potential purchaser to rely on his own investigations, inspections and inquiries… The concept of ‘buyer beware’ tells the potential purchaser that if it seeks greater protection than its own investigations, inspections and inquiries provide, it should seek appropriate warranties from the vendor or, if that cannot be bargained, to seek out an insurer to cover anticipated future risks.”

In real estate transactions, the law makes a distinction between two different types of defects, patent defects and latent defects. A patent defect is a defect that can be found on reasonable inspection. If the defect should have been discovered by the buyer, the doctrine of Caveat Emptor will often preclude the buyer from claiming damages based on the principle that the buyer should have identified the defect in his investigation and negotiate accordingly. A true latent defect is a defect that neither the buyer nor the seller has knowledge prior to the signing of the contract. If the latent defect is discovered after the buyer takes possession of the home, the buyer will often be responsible to remedy such defect, unless the buyer can prove that the seller had prior knowledge of the defect.

GOING FORWARD

Read every single contract before you sign it, and then read it again. When in doubt, or just to confirm your understanding of a contract, contact a lawyer – that’s what we’re here for. Most importantly, perform your due diligence, ask questions to the other party (in writing) and follow up to ensure you receive the information you have requested. In the end, you are the first line of defence and responsible to protect your interests, and the best way to do so is through due diligence and investigation.