Contesting Disclaimer-of-Reliance Clauses by Efficiency, Free Will, and Conscience: Staving Off Caveat Emptor
This Article hopes to make evident two trends seemingly in conflict. The first trend is toward raising the standards of probity and veridicality in contractual relations toward greater accountability and liability on market actors operating outside traditional bounds. The first is expressed by new rules that: require good faith and fair dealing between parties; ensure sellers are obligated to disclose material facts about a property otherwise unavailable to buyers; and make wrongdoing parties liable to non-parties who foreseeably relied on the wrongdoers' contractual undertakings. This trend promises to avert injury, achieve efficiency, and seems to accord with society's evolving notions of fairness.
The second trend, exemplified in Teers, counters the first. Because humans are innately self-interested, entrepreneurs (and rascals) have devised techniques to avoid these new levels and kinds of exposure to potential liability for non-disclosure and to non-parties. They have employed market and contract strategies that purport to shift to the other party the onus of uncovering the truth--which might be buried under layers of misrepresentations and that limit non-parties' right to rely on contract promises. The effect is to enable a market actor to contract away liability for intentional wrongdoing by the simple expedients of “as is” and “disclaimer-of-reliance” clauses--the result in Teers. This is troubling in a number of respects. First, the clauses undercut the fundamental character of enforceable contracts being the product of free will. Indeed, the first requirement of contract formation is a meeting of minds. Fraud, ostensibly camouflaged by disclaimers, negates the unknowing party's free will. Second, such liability-avoidance techniques, although ostensibly consistent with the contracting parties' free will, disturb the markets because of the externalities. Absent the truth about the quality or condition of the property, buyers enter into transactions, or pay too much for property unsuitable, or useless, for its intended purpose. Undisclosed defects present the potential for injury to third parties. A buyer's costs of inspection and discovery are greater than a seller's costs of disclosure. Lastly, the exploitative use of these clauses disturbs our sensibilities, offends the law's conscience, and debases not just the parties, but society at large.
Courts' responses to these opportunistic maneuvers have been disparate. Some courts enforce the clauses without much hesitation, focusing on the venerable values of freedom and certainty of contract, chastising buyers for their gullibility. Others categorically outlaw the clauses, expressing consternation at conduct that seems abjectly fraudulent and exploitative. Yet others appear to be inclined to uphold agreements that are freely entered into, although these courts take a case-by-case approach, making fine distinctions based on subtleties in the clause's language, which might allow an injured party relief. These trends must be examined in context, historical and contemporary, to determine whether they reveal a rational response to the self-interested choices of contract participants and whether these responses must be bolstered to ensure that responsibility for unrealized expectations or harm is fairly allocated among the parties. In the end, this Article proposes that disclaimer-of-reliance clauses should be presumptively unenforceable, as they offend current market morality and public policy.
Part II will trace the evolution of thought on market transactions and contracting. Part III discusses the shift in thinking about contract. Part IV reviews limits on contracting imposed by law and policy. Part V discusses the imperative of the law's conscience, outlining a framework for evaluating disclaimer-of-reliance clauses. This Article ends with conclusions and comments on how legal relations have, and must, change in the interests of fairness and efficiency in real estate markets.
Shelby D. Green, Contesting Disclaimer-of-Reliance Clauses by Efficiency, Free Will, and Conscience: Staving Off Caveat Emptor, 2 Tex. A&M L. Rev. 1 (2014), http://digitalcommons.pace.edu/lawfaculty/986/.