The Perils And Pitfalls Of Caveat Emptor

Ever wonder what caveat emptor actually means? Wonder no more.

DISCLAIMER:

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This Buzzfeed article was prepared as the final assignment for LAW 163 (Contract Law). I am a first year law student at Queen's University.

In this article, I have attempted to explain the concept of caveat emptor and the common law doctrines of unilateral and common mistakes as to fact and frustration. This article is not legal advice. Instead, it contains legal information that may or may not be accurate. Please consult an actual lawyer if you require legal advice.

Caveat emptor means, "let the buyer beware."

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Caveat emptor. It's old, it's Latin, and you've probably heard people throw it around a lot. But what does "let the buyer beware" actually mean?

In short, caveat emptor means that a buyer has the responsibility to ensure that what they're buying is what they actually want to be buying.

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Confused yet? Here's an example:

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We will be dealing strictly with common law and equity for the following scenarios. Statutory duties are assumed not to apply.

Sally has an old red wagon from her childhood. Jeremy wants to buy Sally's old red wagon for his daughter.

Caveat emptor requires that Jeremy investigate the item he wants to buy prior to actually purchasing it. It is Jeremy's responsibility to make sure that the item is without defect (or that any defects are both acceptable to Jeremy and reflected in the purchase price).

If Jeremy buys the old red wagon from Sally without investigating the condition of the wagon, any defects are his problem, not Sally's. Jeremy cannot try and collect damages (such as a refund) from Sally should the wagon be defective.

But that's unfair!

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Like most things in life, it is unfair. Sally told Jeremy that she had an old red wagon to sell him. Most people would assume that, since she is offering the wagon for sale, the wagon would be in working condition unless otherwise stated.

However, Sally has no duty to tell Jeremy everything about the wagon. Instead, it is Jeremy's responsibility to ask Sally about the wagon.

What should Jeremy do?

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Before buying Sally's old red wagon, Jeremy should ask to see the wagon in person. He should ask questions about the wagon (how old is it, what condition is it in, has it ever been damaged, etc.).

Jeremy needs to make sure that the wagon meets his standards prior to purchasing it. If it's not, he's free to walk.

What if Sally lies to Jeremy?

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Say the following took place:

Jeremy: "Sally, does the wagon have four wheels?"

Sally: "Yes! It still has all four original wheels."

Jeremy pays for the wagon and arranges to pick up the wagon later that week. However, when Jeremy picks up the wagon, he discovers that two of the wheels are missing. Sally misrepresented the number of wheels the wagon actually had and Jeremy feels cheated as a result.

There are two possible situations that could play out.

1. Sally knew that two wheels were missing.

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If Sally knew that the wagon was missing two wheels and, after being asked directly by Jeremy, said that the wagon wasn't missing any wheels, then this is a unilateral mistake as to fact. A unilateral mistake as to fact is when one party knows something that the other party does not.

Typically, unilateral mistakes as to fact do not affect the enforceability of a contract, even when the other party knows that you are making a mistake--caveat emptor (Smith)! This is why your parents always told you to ask the seller questions whenever you buy something--statutes aside, they're allowed to let you muse aloud and make incorrect assumptions and they're allowed to withhold information you don't ask for. (We'll look at statutes later.)

They are not, however, allowed to deliberately mislead you. If you ask them a question and they lie in response, then they have deliberately misled you.

A misrepresentation is a statement made by the misrepresenter (here, Sally) to the misrepresentee (here, Jeremy) regarding a material fact that was calculated to induce the misrepresentee into entering a contract (Redgrave). Unless the misrepresenter can show that the misrepresentee had knowledge of the falsehood or that the misrepresentee was not induced by the misrepresentation, we assume that the misrepresentation induced the misrepresentee to enter the contract (Redgrave).

A material fact is anything that, to a reasonable person, would be important in inducing the formation of a contract (Redgrave). It does not, however, have to be the sole, or even a major, inducing factor (Redgrave).

In this situation, Sally knew that the wagon was missing two wheels and, upon being questioned, lied. She deliberately (fraudulently) misrepresented the state of the wagon. As such, this contract is unenforceable.

More precisely: the contract is voidable: Jeremy may seek rescission (with restitution). To rescind a contract is to essentially unwind a contract and return both parties to the places they were before the contract was formed. Restitution is compensation for a loss (in this case, it would be the amount Jeremy paid for the wagon).

2. Sally did not know that two wheels were missing.

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When two parties make a common mistake as to fact, we must look at whether or not the common mistake was fundamental.

In this situation, both Sally and Jeremy believed that the wagon had four wheels. Her lie was unintentional. While it might seem unrealistic that Sally would not be aware that a wagon she intended to sell was missing two wheels, it is not implausible. For all we know the wagon had been sitting in her garage for years and last she checked it still had four functioning wheels.

The enforceability of the contract in this instance hinges upon whether or not the mistake was fundamental (Sherwood). Here, Jeremy was buying a wagon for his daughter. It's very unlikely that he was looking for an antique to show to others; he wanted a wagon that his daughter could play with. A wagon missing two wheels is not suitable for a child to play with.

As such, missing two wheels is a fundamental mistake and the contract is unenforceable.

More precisely: the contract is voidable. Jeremy may seek rescission (with restitution) in equity.

(While the first scenario played out in common law, here we must turn to the courts of equity for our remedy. In common law, Jeremy would be limited to seeking compensatory damages for the tort of negligence, but only if the misrepresentation were carelessly made. If the misrepresentation was not carelessly made, then he would be limited to seeking rescission in equity.)

What wouldn't be fundamental? If the mistake had been that the wagon were blue instead of red, the contract would still be enforceable as the colour of the wagon is not a fundamental quality. (The exception to this would be if Jeremy had contracted specifically for a red wagon--then we would have to take a closer look at whether or not colour would be a fundamental quality. As it stands, however, the colour of a wagon does not impede one's ability to enjoy using the wagon, unlike the absence of two wheels.)

Wait a minute--rescission in equity?

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Unfortunately, nothing in the common law is ever simple.

In short, the Courts of Equity existed to address things that common law simply couldn't. Where common law failed to provide a remedy (or one that was not adequate), individuals would, once upon a time, petition the King. After a while, these petitions were made instead to the Lord Chancellor in the Courts of Chancery (also known as Courts of Equity).

These Courts gave rise to remedies that extended beyond the mere payment of damages, such as writs, injunctions, and specific performance. We are also able to seek common law remedies through equity in situations where they would be otherwise unavailable (as above, where Jeremy seeks rescission in equity).

Alternate scenario: Sally knew that the wagon was missing two wheels but Jeremy never asked.

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Unilateral mistakes as to fact (absent fraudulent misrepresentation) are where caveat emptor really shines.

Here, Sally has offered to sell Jeremy her old red wagon. He asks no further details and instead just pays her for the wagon. When he arrives to pick it up, however, he sees that the wagon is not what he'd pictured--the wagon is missing two wheels. He mistakenly believed that the wagon would instead have four functioning wheels.

Sally, however, knew that the wagon was missing two wheels, and did not raise this information prior to selling it to Jeremy. Even though Jeremy had been telling her all about his plans for the wagon (hoping to wheel it home immediately and take his daughter around the neighbourhood) and Sally was aware that her wagon would not be able to be wheeled anywhere, Sally had no duty to inform Jeremy of this. There is no general duty for one party to alert another to a mistake of fact (we're still ignoring statute--don't worry, we'll get there!).

This is a unilateral mistake as to fact. Jeremy believed that the wagon had four wheels. Even though Sally knew that Jeremy did not know that the wagon was missing two wheels, this contract is still enforceable.

Bitter, right? While caveat emptor is still very much alive and well in today's society, we have (somewhat) tempered the imbalance it creates between a seller and a buyer using statutory law. After one more scenario we'll take a look at the current statute addressing this in Ontario.

Bonus scenario: after signing a contract for the sale of the wagon, a tree fell and crushed the wagon (unbeknownst to both Sally and Jeremy).

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I know, it feels like the scenarios are getting less and less likely by the minute.

Forget everything about the missing wheels: here, we have a perfectly functional wagon. It has, however, been crushed by a tree.

If the tree had fallen before the contract was concluded, then there would be a common mistake as to a fact--that the wagon would be functional/not crushed by a tree. This is a fundamental mistake as to fact and Jeremy could seek rescission (with restitution) in equity.

However, in this case, the contract would be frustrated. This is because the contract, at the time of its conclusion, was enforceable, and only became void after the wagon became crushed (also known as the point of frustration).

For frustration, performance of a contract must be somehow impossible -- a mere reduction in benefits is insufficient (Claud Neon General Advertising Ltd.). There would be no frustration if the frustrating event were the result of a voluntary act of one of the parties or if the possibility of such an event were in the contemplation of the parties and provided for in the agreement (Capital Quality Homes Ltd.).

Here, performance of the contract would be impossible as the subject matter of the contract (the old red wagon) has been destroyed. As neither party has assumed the risk for such an outcome, nor was either party at fault for the tree falling, the contract is void. Jeremy may seek rescission with restitution.

This all still seems really unfair.

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I don't disagree. However, things are not as bleak as they might seem. We now have statutory law (law from statutes, or written law that originates not in the judiciary but in the legislature). Here in Ontario we have a Sale of Goods Act (SGA) that essentially regulates what goods may be bought and sold and enshrines the rights of sellers and buyers.

For example, the SGA introduced a number of implied "conditions and warranties" in contracts for the purchase and sale of goods. As per s. 13, it is implied that, unless otherwise explicitly drafted, the seller is entitled to sell the goods in question. As per s. 15, it is also implied that the goods are suitable for their intended use and that they are free from defects (unless otherwise noted) (Sale of Goods Act).

The purpose behind enacting such statutes is simple: sellers are in a better position than buyers to know whether or not the goods they are selling are what they say they are. The SGA is an attempt to level the playing field, so to speak, and establish some ground rules for all involved that are more robust and afford both parties greater protection than otherwise provided under common law alone.

In conclusion

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The law is not a babysitter. While statutory schemes (such as the Sale of Goods Act) have enshrined more robust protection for individuals than previously afforded under common law and in equity, caveat emptor has not gone away, nor have unscrupulous sellers. Exercising due diligence prior to making a purchase (whether or not there is a statutory regime where you live that affords you additional protections as a buyer) is crucial.

TL;DR? Always ask questions. Be direct. When making significant purchases, go in with a list of questions you prepared in advance and make sure that you get all the answers you need (even if they're not the answers you wanted). If you're worried about evidence of claims, etc., get things in writing. Be smart, be careful, and be familiar with the law. After all, it might just save you a lot of grief one day.

Hopefully this gave you a better idea of exactly what caveat emptor means and how mistakes as to fact play out! Thanks for reading.

Table of Authorities

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Case Law

Capital Quality Homes Ltd v Colwyn Construction Ltd (1976), 9 OR (2d) 617, 1975 CanLII 726 (ON CA)

Claude Neon General Advertising Ltd. v. Sing (1942) 1 DLR 26 (NS SC)

Redgrave v Hurd (1881) 20 Ch D 1

Sherwood v Walker (1887) 66 Mich 568, 33 NW 919

Smith v Hughes (1871) LR 6 QB 597

Statute

Sale of Goods Act RSO 1990, CHAPTER S 1