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Due Diligence With Respect to “As-Is” Contracts in California

Sometimes, San Diego businesses and individuals agree to what are generally called “as is” contracts. In general, such contracts are enforceable under California law as California law favors the idea of “freedom to contract.” However, “as-is” contracts present a host of potential legal problems, and it is best to seek the counsel and advice of a good San Diego corporate attorney before signing an “as-is” contract. The legal issues include:

Issues with respect to potential mutual mistakes
Did the parties actually come to a meeting of the minds?
Impact of various implied-by-law covenants — can they be forsworn?
Impact of various implied-by-law warranties — can they be forsworn?
Interplay with representations and warranties (if any)
Potential fraud aspects such as misrepresentations, willful concealment, failure to disclose, etc.
Pre-contracting due diligence

This article provides a brief discussion of the last issue – pre-contracting due diligence. This is a buyer responsibility, but the contract language with respect to due diligence is important for sellers since good contract language helps avoid future litigation.

San Diego Business Law: What is an “As-Is” Contract?

Usually, an “as-is” contract deals with the sale of goods or something tangible such as real estate but can occasionally cover more intangible goods such as a business process, method, or intellectual property such as a patent/trade secret licensing. Essentially, an “as-is” contract states that the product or goods are sold in their present condition. A typical “as-is” contract contains language whereby the seller specifically refuses to make any representations or warranties as to quality or about the fitness of the products/goods for any intended or unknown purpose. A well-drafted “as-is” contract will also contain language dealing with the buyer’s requirement to conduct due diligence.

San Diego Business Law: Requiring Due Diligence or Waiver

To protect against future litigation, a good “as-is” contract should require that the buyer engage in due diligence and/or inspections. Furthermore, it is important that time be provided for the process of due diligence and/or inspection. In other words, there should be no high-pressure, sign-now type of tactics. This protects against the buyer later claiming that he/she was rushed into the deal and there was a mistake of fact.

It is also important that sufficient time be provided for the due diligence. Obviously, the more complicated the deal, the more time should be provided. If the goods are a truckload of apples, a day or two is probably sufficient. But for the purpose of real property where professional inspections are needed, a month or two may be needed.

As part of the BUYER’s due diligence, the seller should NOT make any statements about the goods/products. The natural inclination from any person is to answer questions and provide the buyer with assurances, but that can lead to litigation. Best to just say in response to a question: “The sale is ‘as-is.’ Please do your own inspection.”

Finally, the contract should contain language whereby the buyer accepts the due diligence obligations. Language might be something like this:

“BUYER has conducted its own due diligence, has completely and without consultation with the SELLER chosen what due diligence to conduct, has consulted an attorney, has consulted whatever experts BUYER has determined are needed, has NOT asked SELLER for information and, even if the SELLER has or will provide information, BUYER specifically states that BUYER is NOT relying and will not rely on any information provided by SELLER.”

In addition, it is important that the buyer waive rights to sue based on failure to conduct due diligence or based on inadequate due diligence. Language might be something like this:

“BUYER hereby waives any right to sue for breach of this agreement based on failure to conduct due diligence or inadequacy of due diligence including any claim that SELLER did not provide sufficient time or sufficient information. BUYER acknowledges BUYER is wholly responsible for conducting due diligence.”

From a legal standpoint, an “as-is” contract is most dangerous for a seller since there is a high risk of “buyer’s remorse”; the buyer did not really know what he/she/it was getting into and, years later, the buyer files litigation claiming some basis for rescission of the contract or breach of contract. A good, strongly-worded contract is needed to protect against this.

Contact San Diego Corporate Law

If you would like more information, contact Michael Leonard, Esq. of San Diego Corporate Law. With all business contracts, it is essential for all parties to do their due diligence. Mr. Leonard has been named a “Rising Star” three years running by SuperLawyers.com and “Best of the Bar” by the San Diego Business Journal. Contact Mr. Leonard by email or by calling (858) 483-9200.