“As-Is” Contracts Part II: Avoiding Claims of Fraud

In a companion article, we discussed some aspects of an “as is” contract including the importance of the buyer’s due diligence/inspection requirements. As noted in that article, “as-is” contracts are enforceable in San Diego and California.

In this article, we discuss how to minimize the risk of litigation over fraud related claims. First, the contract itself should be well drafted. A good San Diego corporate attorney can help. Second, as discussed below, the seller should avoid certain behavior.

San Diego Business Law: Legal Principles With Respect to Fraud

A typical “as-is” contract deals with goods or tangible assets, like real estate, and the intent is for the seller to sell the goods/property in its present “as-is” condition. The goods/property might need repair or refurbishing or might have any number of other problems. The seller wants to dispose of the goods/property and wants the buyer to assume all risks associated with the quality and condition of the goods/property.

One of the largest legal risks for a seller is a claim of fraud by the buyer. Fraud can be a misstatement of fact, concealment, or omission (whether such are willful or negligent). A well-drafted “as-is” contract will address the various legal elements of a claim for fraud.

Under California law, in general, for a plaintiff to succeed with a claim for fraud in the inducement, aside from proving a contract, the plaintiff must prove the following:

• Seller made at least one misrepresentation — can be a false statement, concealment, or nondisclosure/omission
• Seller knew of the falsity
• Seller made the misrepresentation to induce buyer to enter into the contract
• Buyer relied on the misrepresentation
• Buyer’s reliance was justifiable or reasonable
• Buyer would not have entered into the contract if he/she/it had known the truth

As discussed in our companion article, the importance of insisting that the BUYER engage in due diligence is to eliminate any proof of elements #4 and #5 as listed above. If the buyer is conducting due diligence and inspections, then the buyer has no argument that he/she/it relied on alleged false statements AND the buyer cannot argue that any reliance was justified or reasonable. That is, even if the seller made a false statement, if the buyer’s due diligence shows the falsity, there can be no reasonable reliance. As a simple example, let’s assume the seller falsely claims to have a truckload of red apples for sale. The buyer inspects the apples — engages in due diligence — and discovers the apples are green. The buyer goes through with the transaction. The seller probably committed fraud, but the buyer cannot sue for fraud since the buyer learned the truth and entered into the contract anyway. See Bowmer v. H. C. Louis, Inc., 243 Cal.App.2d 501 (1966) (“The right to avoid for fraud, however, is lost if the injured party, after acquiring knowledge of the fraud, manifests an intention to affirm the contract.”)

Because of the foregoing legal principles, in addition to strong contract language, a seller must avoid certain behaviors; principally, the seller should not provide any information. If the seller makes no statements, then the seller cannot make FALSE statements. With respect to arguments of concealment and non-disclosure, the seller should respond to requests for information by saying, “The sale is ‘as-is’ and you should conduct your own inspections and due diligence.” With respect to concealment and nondisclosure, there are other contractual protections which we will discuss in another article.

San Diego Business Law: “As-Is” Contract Waiver

A strong “as-is” contract will contain language whereby the seller affirmatively states that the seller is providing NO statements or information or warranties. The contract should affirmatively place on the buyer the responsibility and need for inspections and due diligence. Furthermore, the contract should provide that buyer waives any right to sue for fraud AND that the buyer is waiving any claim or argument that the buyer is relying on information provided by the seller.

Contact San Diego Corporate Law

For further information, contact Michael Leonard, Esq. of San Diego Corporate Law. To schedule a consultation, contact Mr. Leonard via email or call at (858) 483-9200. Mr. Leonard’s law practice is focused on business, transactional, and corporate matters. We proudly provide legal services to business owners in San Diego and the surrounding communities.

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