Caveat Emptor Rule

Caveat emptor is a Latin term meaning "let the buyer beware". It is a general rule of law that a purchaser assumes the risk of his/her purchase. The intent of the rule is to place a duty of care on the buyer in selecting an item and putting forth appropriate inquiry before completing the sale. In this way, a seller is also protected from liability for buyer's remorse.

Today, the rule applies in "as is" sales, sheriff's sales, and forced sales. However, modern concepts such as an implied warranty of merchantability (that the item is fit for its intended purpose), implied warranty of habitability in landlord-tenant law, and financial disclosure rules in stock transactions, have softened the harsh application of the rule. The concept also applies to returns, so that a buyer is responsible for following the seller's policies which may limit the time for returning an item, require a receipt, or impose other requirements.

Certain states have abolished the rule in regard to certain purchases. For example, in at least one state, the rule of caveat emptor no longer applies to new home sales. However, it does still apply to sales of used homes. In order to hold the seller liable in such cases of new home sales, the buyer must show:

1. There was a material defect which adversely affects health or safety;

2. The seller or the seller's agents knew of the defect before the sale;

3. The defect was such that it could not be discovered by due diligence; and

4. The house was not bought "as is."

5. The law prohibits seller or the seller's agents to engage in fraud, or deceit,

or to make misrepresentations about the condition of the property.

Exceptions to the rule of caveat emptor

There are eight exceptions to this rule of caveat emptor. They are:

1. Purchase by descriptionThe rule of caveat emptor does not apply in a case where goods are bought by description from a seller. In such a situation there is an implied condition that the goods shall correspond with the description. It is a condition which goes to the root of the contract, and the breach of it entitles the buyers to reject the goods.2. Purchase by samples and descriptionWhere goods are bought by sample as well as by description and the bulk of goods do not correspond with the sample or with the description, the buyer is entitled to reject the goods.the rule of caveat emptor shall not apply in such a case.3. Fitness for purposeWhere the buyer informs the seller the particular purpose for which the goods are required and relies upon the seller’s skill or judgment there is in that case, an implied condition that the goods shall be reasonably fit for the purposes for which they are required.

4. Trade nameIn the case of a contract for the sale of a specified article under its patent or other trade name, there is no implied condition as to its fitness for any particular purpose.

5. Merchantable qualityWhere the goods are bought by description from a seller who deals in goods of that description whatever he is manufacturer or producers or not, there is an implied condition that the goods shall be of merchantable quality.

6. Usage of tradeWhere the usage or trade annexes an implied condition or warranty as to quality or fitness for a particular purpose and seller deviates from that, then this rule (of caveat emptor) does not apply.

7. Sale by sampleIn a sale of goods by sample, the rule of caveat emptor does not apply if the bulk does not correspond with the sample or if the buyer is not given an opportune ity to compare bulk with the sample.

8. Consent by fraudWhere the seller makes a false statement intentionally to the buyer and the buyer relies on it or where the seller knowingly conceals the defects in the good, the doctrine of caveat emptor does not apply.

Case Examples for Caveat Emptor Rule

Smith v Marrable (1843)

In this case the courts recognised an exception to the caveat emptor rule, which is a common law rule meaning ‘let the buyer beware’. In the absence of any express agreement betweent the parties, neither party is responsible for the condition of the property, or repairs. Under this principle, the onus is on the person entering into a tenancy to satisfy himself of the condition of the property to which the tenancy relates. A landlord  rented out furnished premises to Sir Thomas Marrable. Lady Marrable subsequently found the premises to be infested with bugs and Sir Thomas gave notice to the landlord that he was giving up the tenancy.  The landlord argued that Sir Thomas had no right to give up this tenancy because it had been agreed for a minimum term of 5 weeks and only five days had elapsed.

HELD: Lord Abinger CB directed the jury that "in point of law, every house must be taken to be let upon the implied condition that there was nothing about it so noxious as to render it uninhabitable."However, the landlord had impliedly promised that the premises would be fit for habitation at the commencement of the tenancy, because the agreement was for a furnished letting. The exception to caveat emptor was justified on the basis that a prospective tenant of furnished premises did not have unimpeded freedom to inspect those premises to see the nature and quality of everything that he was getting. As the rule in Smith v Marrable is a rule of common law, not a statutory provision, it is therefore possible to exclude it altogether by means of an express term in the tenancy agreement.Since the introduction of fitness standards in the 1950s, the caveat emptor rule has been largely replaced by statute which protects the occupier against the worst conditions and risks.

PeterSimone v. Homecheck

PeterSimone v. Homecheck, et al.,2007 NY Slip Op 06224 [42AD3d 518], held that numerous structural and material defects in a home purchased by the Plaintiffs could not constitute a basis for action or damages by the buyer.

The Court held that unless the seller actively concealed any conditions and actively made representations in the Further, the Court found that making an untrue statement on the property condition disclosure statement required under New York State Law was, in effect, not concealment, but, rather that a thwarting of the buyers effort to discover conditions was necessary in order to impose liability upon the Seller. Thus, anyone who thought that the disclosure statement. Gave protection to a purchaser should be on notice that .it isn’t necessarily so. The Court in that case did uphold the idea of a fraudulent representation cause of action based on the property condition disclosure report but dismissed the breach of contract claim on the basis that the contract did not contain the representations in question, the contract merged any prior representations, and that the closing extinguished any claimsbased on the contract. As in the above matter, the Court held that the closing precluded any contract claim by the purchaser.

IMPLIED TERMS IN SALE OF GOODS ORDINANCE

IMPLIED CONDITIONS

1. Condition as to title

There is an implied condition on the part of the seller that, in the case of a sale he has the right to sell the goods, and in the case of an agreement to sell, he will have the right to sell the goods at the time when the property is to pass.

Examples:

Niblett v Confectioners Materials Co

In Niblett v Confectioners Materials Co. sellers agreed to sell a consignment of 3,000 tins of condensed milk. The tins bore a wrapping which infringed another company’s trade mark and that company had the legal right to stop the sale by an injunction. The buyer had to remove the labels and sell the tins at a reduced price. He sued the sellers for damages for breach of what is now s12(1). He succeeded in the C.A. Although property in the tins had passed to the buyers, never the less they could have been stopped by injunction from selling the tins.

Roland vs Divall

Roland v Divall involved the sale of a car. The buyer used it for 4 months before discovering it had been stolen. The seller was not the true owner. The buyer returned the car to the true owner and sued the seller for return of the purchase price. The C.A. held that there was a total failure of consideration. The buyer had bargained for ownership not use. Since the buyer had received no consideration there was no acceptance by him. The 4 months use was regarded as irrelevant. No set off (a sum deducted to take into account any advantages received or detriments suffered) was allowed for the 4 months use.

Kissenchund vs Ramprotap.

In a contract for the sale of shares there is an implied condition that there is no encumbrance of charge on the shares in favour of a third party. Kissenchund v. Ramprotap.

Butterworth vs. Kingsway Motors 1954 1 W.L.R.1286.

Where a seller having no title to the goods at the time of the sale, subsequently acquires a title, that title feeds the ,that title feeds the defective titles of both the original buyer and the subsequent buyer.

2. Sale-by description

Where there is a contract for the sale of goods by description, there is an implied condition that the goods shall correspond with the description.-Sec. 15.Goods are to be sold by description when the contract contains a description of the goods to be supplied. Such description may be in terms of the physical characteristics of the goods or may simply mention the trade mark, trade name, brand or label under which they are usually sold. A sale of 50 boxes of X brand soap or of 10 tons of Y brand mustard oil, is a sale of goods by description. In such cases the goods supplied must be the same as the goods described.

Examples:

Re Moore Vs Landauer [1921]

There was an agreement for the sale of 3,000 tins of canned fruit packed in cases of 30 tins. When delivered it was discovered that half the cases contained only 24 tins although the total number of tins was still 3,000. The market value was not affected. The Court of Appeal held that notwithstanding that there was no loss to the buyer, he could reject the whole consignment because of the breach of s13 of the Sale of Goods Act (goods must correspond with the description). 

Cf Pinnock Bros v Lewis & Peat Ltd [1923]

Cf Pinnock Bros v Lewis & Peat Ltd [1923] 1 KB 690: Contract for the sale of copra cake but when the goods were delivered in fact an admixture of copra cake and castor beans. The goods did not correspond with their description. The question of whether the substance has remained in substance the same or really becomes a substance of a different character “may if pressed to analysis, be a question of an Aristotelian character”. : intended to be a broader more common sense test according to commercial use.

3. Sale by Sample

When goods are to be supplied according to a sample agreed upon, the following conditions are implied.-Sec. 17.(a) The bulk shall correspond with the sample in quality(b) The buyer shall have a reasonable opportunity of comparing the goods with, the sample.(c) The goods shall be free from any defect rendering them unmerchantable. which would not be apparent on reasonable examination of the sample- If the defect is easily discoverable on inspection and the buyer takes delivery after inspection, he has no remedy.

Merchantable

This term was defined as follows : "The article in such ttality and in such condition that a reasonable man, acting reasonably, would after a full examination accept it under the circumstances of the case in performance of his offer to buy that article, whether he buys for his own use or to sell again." Bristol Tramways Co. v. Fiat Motors Lid .

Examples:

James Drurnmond and Sons v. g. H. Yan ingen ak Co

Some mixed worsted coatings were sold by sample. it was found that owing to a hidden defect of the cloth which could not be detected on reasonable examination, coats made out of it could not stand ordinary wear and were,thtrefore unsalable. The buyer was held to be entitled to damage. James Drurnmond and Sons v. g. H. Yan ingen ak Co

E&SRuben Ltd vs.Fair Bros, 1949 1K.B.254.

A agreed to buy some rubber material from B. The sample of the rubber was shown to A .On receiving the rubber material, A found that the measurement of the rubber material was different from that of the sample. The court held that measurement of the rubber material was part of its quality. It was held that the goods did not correspond to the sample.

Lorymer vs Smith, (1822) 1B&C1., 

Two parcels of wheat were sold by sample. The buyer went to examine the wheat a week later. One parcel was shown to him but the seller refused to show the other parcel as it was not there. In this case the buyer was not given reasonable opportunity to test the bulk with the sample. The court held that the buyer was entitled to reject the contract of sale.

4. Sale by sample as well as by description

When goods are sold by sample as well as by description, the goods shall correspond both with the sample and with the description.-Sec. 15.

Examples:

Nichol vs. Godts (1854) 156 er 410.

Nichol showed samples of oil to Godts. He described the oil as: ‘Foreign refined rape oil, warranted only equal to samples’Godts entered into a written contract to buy 33 tons. The oil corresponded with the sample, but not the description. It was a mixture of rape and hemp oil. Godts refused to accept or pay the goods.

Wallis v. Pratt, (1911) A.C .394,

in a contract for the sale of a quantity of the sale of seed described as “common English Sainfoin”, the seed supplied was of a different kind, though the defect was not discoverable except by sowing the defect also existed in the sample. Held the buyer was entitled to recover damages for the breach of contract.

5. Condition as to fitness or quality

There is an implied condition as to quality or fitness for the purpose of the buyer under the following circumstances only:

A. 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 judgment, and the goods are of a description which it is in the course of the seller's business to supply (whether he is the manufacturer or not).

Examples of rule A:

(i) Jackson   vs. Watson & Sons .

W supplied J with tinned salmon which was poisonous. J fell ill and his wife died as a result of eating the salmon. Held, there was an implied' condition of fitness because the seller obviously knew that the salmon was being purchased for consumption. The condition was violated by the grocer and damages were recoverable.

(ii) Frost vs. Aylesbury   Dairy Co.   Ltd.

M a milk dealer supplied F with milk which was consumed by F and his family. The milk contained germs of typhoid. F's wife was infected and died. Held, there was a breach of an implied condition of fitness and A was liable to pay damages. 

(iii) Manchester Lines v. Rea Ltd

There was a contract to supply 500 tons of coal for the S.S. "Manchester Importer". The coal supplied was found to be unfit for this ship. It was held that the buyer was entitled to get damages. in this case it was held that a buyer relies on the skill of the seller when he makes known to him the purpose for which the goods are required and the circumstances are such that any reasonable seller would tak6 it that his judgment is being relied upon.

(iv) Preist v. Lasts

The plaintiff, who was a draper and had no special knowledge of hot water bottles, went to a chemist and asked for a "hot water bottle". Held, which the bottle supplied, must be fit for use as a hot water bottle. 

B. An implied condition of fitness may be annexed to a contract of sale by usage of trade or custom of the locality.

C. when goods are bought by description from a seller who deals goods of that description (whether he is the manufacturer or producer or not) there is an implied condition that the goods are of merchantable quality, that is, fit to sell. There is one exception to rule C.-1f the buyer has examined the goods, there shall be no implied condition as regards defects which that examination ought to have revealed.

Examples of rule C:

(i) Jackson   v. Rotax Motor

Some motor-horns were to be delivered by installments. The first installment was accepted but the second contained a substantial quantity of horns which were damaged owing to bad packing. Held, the buyer was entitled to reject the whole installment as the goods were not saleable quality. 

(ii) Morelli v. Fitch Gibbons

:Masked for a bottle of Stone's ginger wine in a restaurant. When he was drawing the cork the bottle broke and at was injured. Held, the sale was one by description and since the bottle was unmerchantable was entitled to recover damages. 

(iii) Thornett   & Fehr v. Beer & Sans

B wanted to purchase some glue. The seller showed him the glue which was stored in his warehouse in casks. B did not have the casks opened, which he could have done easily, but merely looked at the outside of the casks. The glue was found to have defects which would have been found out if B had inspected the contents of the casks. Held, there was no implied condition as to merchantable quality.'

4. Condition as to merchantability.

Section 16 (2)-Where goods are bought by description from a seller who deals in goods of that description whether he is not the producer or manufacturer or not, there is an implied condition that the goods shall be of merchantable quality

The above provision reveals that the condition of merchantability is applicable when,

a) The goods are sold by description

b) The seller deals with such goods

Merchantable means that the goods must be fit for the ordinary purpose for which such goods are used. For example, when shoes are sold, merchantability requires that the shoes have their heals attached well enough, that they will not break of under the normal use.

Examples:

Jones vs. Just, 1868LR 3 QB 197, B & Co 

A firm of merchants contracted to buy from S some bales of Manila Hemp. This was to arrive from Singapore. The hemp arrived wetted with sea water. It was so damaged that it was not possible to sell it as Manila hemp in the market. The court held that the hemp was not of merchantable quality and it was entitled to be rejected.

But where the buyer examines the goods and the defects are such which can be revealed by ordinary examination, the condition of merchantability does not apply to the extent of such defects.

 Where the product has some latent defects which cannot be revealed by ordinary examination, the condition of merchantability would apply when even if the buyer has examined the goods.

Thornet v. Beers, (1919) 1 KB 486, 

B wanted to purchase some glue. The glue was stored in the seller’s warehouse in barrels. B was given every facility to open the barrels and inspect them but B did not open the barrels. Liter on the glue was found to have defects which B could have noted if he had opened the Barrels. The court held that there is no breach of implied condition as to merchantability in this case and B was not entitled to any relief.

 Now what amounts to an examination is a question of fact in each case. In Thornet’s case the buyer had the product before him to examine but he chose not to examine it. Here as against the seller the examination is deemed to be made by the buyer.

 Packing of goods is an equally important consideration in judging their merchantability.

 Morreli v Fitch &gibbons (1928)2K.B.636, 

M asked for a bottle of Stones Ginger Wine at S’s shop. This was licensed for the sale of wines. while M was drawing the cork, the bottle broke and M was injured. Held the sale was by description and M was entitled to recover damages as the bottle was not of merchantable quality.

5. Condition as to wholesomeness. 

In the case of food products the condition of fitness or merchantability requires that the goods should be wholesome, that is it should be fit for consumption.

Examples:

Chapronier vs. Mason,(1905)21 TLR633, 

C brought a Bun from a baker’s shop .The bun contained a stone which broke of C’s teeth. The court held that the seller was liable to pay damages as he breached the condition of wholesomeness.

Frost vs Aylesbury Dairy Co Ltd (1905)

The plaintiff bought milk from thedefendant for family consumption.The milk contained typhoid germs and the wife died after drinking the milk. The English court held that themilk was clearly for human consumption and it was unfit for its purpose. There was a breach of theimplied term that it should be fit for its purpose under S14(3) The Sale of goods ordinance. 

Wren v Holt

where a buyer sued a pub owner successfully forselling beer of unmerchantable quality. The beer was found to have been contaminated byarsenic (a poison). It was no defence to the pub owner to argue that the beer came fromreputable suppliers and that he had done all that he reasonably could to ensure that the beerwas fit for consumption, short of carrying out a chemical test, which may not be reasonableto expect under the circumstances. In contrast, such arguments are not only relevant, butalso critical in a negligence case.

IMPLIED WARRANTIES

In the absence of an agreement to the contrary, the following warranties are implied in every contract of sale:

1. The buyer must get quiet possession: The buyer shall have and enjoy quiet possession of the goods. [Sec. l4(b)]. Since disturbance to quiet possession is likely to arise only where the vendor does not possess the right to transfer the goods, this clause may be regarded as an extension of the implied condition of title provided for by Section 14(a).

2. The goods must be free from encumbrance :There is an implied warranty that the goods shall be free from any charge or encumbrance in favour of a third party not declared or known to the buyer before or at the time when the contract is made by Section 14 (c).The effect of this clause is that if the buyer pays off the charge or encumbrance, he will be entitled to recover the money from the seller.

3. Fitness of goods, required for a purpose, may be warranted by usage of trade : A warranty as to fitness for a particular purpose may be annexed to a contract of sale by a custom or usage of trade.-Sec. 16(3).

Examples:

Whitehouse vs. Lange (1996)

One court found that horse buyers who indicated to the sellers their intention to use the horse for breeding were using the horse for a particular, nonordinary purpose The buyers soon discovered that the horse they purchased was incapable of reproducing. Because the court found this use of the horse to be nonordinary, the buyers were entitled to an implied warranty of fitness.

Huprich vs. Bitto, (Ala. 1995)

A farmer who sold defective horse feed was found not to be a merchant of horse feed. The court stated that the farmer did not hold himself out as having knowledge or skill peculiar to the sale of corn as horse feed, and therefore was not a merchant of horse feed for purposes of determining a breach of implied warranty of merchantability

Impact of the caveat emptor rule for the sale of goods contract

The effect of the maxim caveat emptor is that a person has no duty to disclose problems voluntarily.  Thus, if one person is labouring under a misapprehension, there is no duty on the other person to correct it.  However, there are three fundamental exceptions to this rule:

The representor must not misleadingly tell only part of the truth.  Thus, a statement that does not present the whole truth may be regarded as a misrepresentation.

Where a statement was true when made out but due to a change of circumstances has become false by the time it is acted upon, there is a duty to disclose the truth.

Contracts uberrimae fidei (contracts of the utmost good faith) impose a duty of disclosure of all material facts because one party is in a strong position to know the truth. Examples would include contracts of insurance and family settlements. A material fact is something which would influence a reasonable person in making the contract.  If one party fails to do this, the contract may be avoided. Where there is a fiduciary relationship between the parties to a contract, a duty of disclosure will arise, for example, solicitor and client, bank manager and client, trustee and beneficiary, and inter-family agreements.

The Impact of Implied terms in sale of goods ordinance forthe sale of goods contract

A sale of goods is a "contract by which the seller transfers or agrees to transfer the property in goods to the buyer for money consideration called the price": s 2(1) Sale of Goods Act.

In order to constitute a sale of goods under the legislation, the consideration must be money, the price is fixed during the course of negotiations between the parties and the contract of sale must be in relation to goods (or chattels) rather than land or buildings. The agreement need not be in writing, but is sound practice to do so to avoid uncertainty and the terms of the sale contract, such as the time of delivery, the price, standard of goods, whether they have been sold subject to a description, whether they may be returned, and whether a retention of title is intended to apply to the goods sold under the contract.

The ownership of goods passes at different times, depending upon the type of goods sold in the sale of goods contract, and are different for specific and named goods, unascertained goods and future goods. The time the ownership (i.e. title) passes in sales of goods is important as the owner of the goods bears the risk in the event that the goods are destroyed or they perish. In some instances the contract may be able to be avoided in its entirety.

Terms implied into sales of goods contracts by the Sale of Goods Act include:

1. The seller has the right to sell the goods;

2. The goods are free from any security interest;

3. The buyer will have quiet enjoyment of the goods;

4. Where the goods sold by description, the goods will conform with the description;

5. Where the goods sold by sample, the goods will conform with the sample;

6. The goods are of satisfactory quality unless defects are brought to the notice of the

buyer prior to the contract or a reasonable inspection would reveal the defect; 

7. The goods are reasonably fit for the purpose stated by the intended buyer or

implied by the buyer's statements and conduct;

Possible ExclusionsThe parties may agree that the implied warranties relating to sale by description, satisfactory quality and sale by sample do not apply in commercial, rather than consumer sales. The warranty that the seller has the right to sell the goods may not be excluded by agreement

SRILANKA INSTITUTE OF ADVANCED TECHNOLOGICAL EDUCATION

NISHANTHINI NITHIYANANTHAN

ATI/TCO/HNDA/F/E/09/17

ADVANCED TECHNOLOGICAL INSTITUTE TRINCOMALEE

Reference:-

http://www.lawyersnjurists.com

http://www.letlink.co.uk

http://www.lawyersclubindia.com

http://hubpages.com