Caveat Emptor

Caveat emptor refers to a commercial and contractual law principle that exempts the seller from quality assurance liability while requiring the buyer to conduct due diligence of the product or service before purchasing it. In other words, the buyer must assess the quality and condition of the potential purchase and bear risks of possible problems or defects instead of blaming the seller.

It is a Latin phrase, which translates to "let the buyer beware" in English. Neither does this principle give the seller the right to commit fraud, nor does it bind them to disclose information about their offerings, no matter how important it is for the consumer to know. Except in financial services, it is more common in real estate and automobile transactions.

• Caveat emptor is a commercial and contractual law principle that transfers the liability of quality assurance from the seller to the buyer.
• It requires the consumer to conduct due diligence of the product before purchasing it and assume the risk of potential problems or defects.
• The principle comes with certain exceptions due to which the seller cannot take advantage of the faith the buyer shows in them, nor do they get the right to cheat the consumer.
• Its opposite is caveat venditor, which means "let the seller beware." Modern commerce, legal systems, and market economies introduce warranties and disclosure rules for certain products and services to safeguard buyers' interests.

Caveat emptor has its origins dating back to 1603 when the Chandelor vs Lopus case in England first used it. In the matter, the seller sold a bezoar stone known for its healing properties to the buyer. The buyer, later on, found that the healing properties of the stone were not working. As a result, he requested a refund from the seller, but the latter refused.

When the Exchequer Court heard the case, it ruled that mere verbal affirmation that the stone sold was a bezoar stone does not make the seller guilty. Neither the seller offered any warranty nor the buyer could prove that the seller lied about the stone. So, the matter was considered a case with no cause of action.

Since then, the term serves as a warning to warn customers to be alert, cautious, and aware before purchasing anything. It became the buyer’s responsibility to ensure that their potential purchase is free from any flaw and meets their expectations. Failing to do so will bar the buyer from receiving any compensation for any damages and exempt the seller from any legal action.

The notion applies to information asymmetry situations, where the seller rather than the buyer is aware of the product or service quality or defects. Because of this, legal contracts mention it as a disclaimer of warranties. It helps resolve commercial trade disputes in the absence of proof of assurance from the seller by requiring the buyer to perform the due diligence of the product ahead of purchase or be prepared to suffer the loss.

The seller cannot be held liable for any problem arising post-purchase. However, it does not encourage the seller to deceive or provide false information about the goods or service to the customer.

The caveat emptor principle was more widespread in transactions occurring in open marketplaces before the Industrial Revolution, such as land sales. However, because the modern trade system exposes buyers to greater risk for relying on their judgment or honesty of sellers, the latter now bear a much more share of responsibility for the quality of their products.

Therefore, modern commerce, legal systems, and market economies felt the need to safeguard buyers' interests. As a result, the term caveat venditor came into existence, which means "let the seller beware." Since buyers are the backbones of any business, they must remain satisfied with the products and services they purchase. According to caveat venditor laws guiding the market:

• The seller should provide certain items with a warranty, making them trustworthy and helping them stay ahead of their competitors.
• The seller must disclose all necessary information and cannot avoid liability by using a caveat emptor declaration.
• Consumer lenders, car dealers, mortgage brokers, and financial institutions are legally bound to make disclosures, offer a warranty on specific offerings, etc.

Let us take into consideration the following examples to understand what exactly caveat emptor means:

Example #1 - Real Estate

Kelly decides to buy a house from Joe, her friend's friend. She had a look at the residential property quite casually as she trusted the latter with the purchase as he was known to her. Kelly paid him and shifted a week later. With time, she identified issues with water taps and the roofing system.

She contacted Joe to discuss things and asked for a reduction in the amount she had to pay due to the additional costs she would have to incur on the house. Joe, unfortunately, refused to do so. Kelly then moved to the court of law. However, the court gave a similar verdict as witnessed in the case of Chandelor vs Lopus.

The court of law ruled that Joe could not be held responsible for issues. It stated that Joe did not provide any written proof for money back against any defects detected post-purchase, and hence, it does not call for any cause of action.

Example #2 - Stocks

In August 2018, Vanguard Group announced commission-free exchange-traded funds (ETFs) trading on its brokerage platform for investors, along with access to all other funds offered by its discount brokerage rivals. Over time, the brand has shown how a low-cost, buy-and-hold investment formula serves its brokerage customers.

Given this successful initiative, many other mutual fund and ETF companies tried to trick investors. They did so by promoting low-cost or free ETFs offerings, which depicted a clear case of caveat emptor stock. Thus, investors need to do due diligence as companies will not be liable for any risks with securities post-purchase.

Caveat emptor in real estate transactions is the most prominent example. In real property deals, sellers get exempted from the liability of disclosing any latent defects to interested buyers. It is because the former understand that revealing flaws would affect the property value. Therefore, buyers must exercise caution while inspecting the property and ensure it is safe for purchase.

The principle, however, comes with certain exceptions. As per these, sellers are not allowed to interfere with the inspection of the residential property. In addition, they should avoid concealing any defect intentionally. Besides, the principle has other seller restrictions to protect buyers' interests to some extent.

The caveat emptor rules do not apply to the financial services industry. It is because the government and financial agencies extensively control the industry. Unlike real estate transactions, financial service providers need to provide relevant information to investors about products or services. Thus, buyers can rest assured about the quality of investment products and the safety of their funds.

Under the doctrine of caveat emptor, sellers cannot take advantage of the faith shown by buyers in them. Also, they do not get the right to cheat consumers. The principle loses its significance in cases where sellers make false claims about goods or services to buyers.

To explore how it keeps customers protected, let us look at some of its exceptions:

• If the seller is aware of the purpose and intention of the buyer behind a potential purchase. In this case, if the seller sells anything other than what is required, the doctrine cannot save them.
• If the description provided for the product does not match its actual functions, the principle does not apply.
• Quality issues are unlikely if the buyer purchases an item from a brand or seller known for the standard quality. In case it happens, it is yet again an exception.
• If the seller obtains the buyer's consent for any fraud deal, the contract law principle cannot save them.
• If a product is sold to the buyer based on a satisfactory sample. But if the product delivered does not match the quality, the notion will not be applicable.

This has been a guide to What is Caveat Emptor and its Definition. Here we discuss exceptions of caveat emptor and how it works, along with examples. You may also have a look at the following articles to learn more –

• Economics
• Cross-Sell
• Seller’s Market