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“As-Is” Contracts Part III: Dealing With the “Sophistication of Parties” Problem
In two companion articles, we have discussed a couple of important aspects of “as is” contracts. “As-is” contracts are among the most vulnerable contracts to an eventual court challenge if the buyer has remorse after the transaction is consummated. As discussed in our companion articles, because of the vulnerability of “as-is” contracts, it is important to insist that the buyer engage in due diligence and a solid, well-drafted contract is needed. In this article, we discuss the problem of differing “sophistication of the parties.” A good San Diego corporate attorney can help.
San Diego “As-Is” Contract: Courts Consider the “Sophistication” of the Parties
As noted in our earlier articles, a typical “as-is” contract deals with goods or tangible assets in their current condition. A seller explicitly intends to sell the goods or assets without any guarantee or warranty of quality or fitness for any given purpose.
In circumstances in which a buyer has “buyer’s remorse” after the contract is finalized, a buyer will sue to void the contract. The general avenue of attack is a combined argument about mistake-of-fact and some sort of fraud or deceit on the part of the seller. An aspect of both is a claim with respect to the relative sophistication of the contracting parties. The buyer attempts to position himself or herself or itself as an innocent party victimized by a slick sophisticated “operator.” Sometimes, this is actually true and California courts have long held that proof of the relative sophistication of the parties is relevant to issues of fraud and mistake. See, e.g., Julius Castle Restaurant, Inc. v. Payne, 216 Cal. App. 4th 1423 (Cal. App. 1st Dist. 2013). In particular, the sophistication of the parties is pertinent to the reliance element for fraud and to the mistake and was-not-careless elements of a defense of mistake-in-fact.
If we assume, as an example, that the “as-is” contract concerned antique furniture, courts will consider facts related to the sophistication of the parties as relevant. If the seller has been in the business of selling antique furniture for 50 years, but the buyer is a first-time buyer, that might be a large factor in resolving a question of fraud or mistake-in-fact. By contrast, if both parties have been “in the business” for 50 years, then the issue of sophistication is minimized.
San Diego Business Law: Using Contract Language
Strong contract and waiver language can help minimize the “sophistication of the parties” problem. As noted above, due diligence should be required by the contract and the buyer should waive all claims of fraud and/or mistake if the buyer fails to conduct due diligence and inspections. Furthermore, the contract can specifically state that the “parties agree and acknowledge that they are of equal sophistication.” If there is, in fact, an expertise differential, then the language can state that the “parties agree and acknowledge that, by virtue of equal access to information and experts, the parties are of equal sophistication.” Finally, a good “as-is” contract should have language whereby the buyer waives any right to claim lack of sophistication as a basis for challenging the contract.
Contact San Diego Corporate Law Today
If you would like more about information about business contracts including “as-is contracts, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard has extensive experience in drafting contracts necessary for protecting your business. Mr. Leonard can be reached at (858) 483-9200 or via email.
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