Caveat Emptor

DEFINITION of 'Caveat Emptor'

A neo-Latin phrase meaning "let the buyer beware." It is a principle of contract law in many jurisdictions that places the onus on the buyer to perform due diligence before making a purchase. The term is commonly used in real property transactions, but applies to other goods, as well as some services. 

BREAKING DOWN 'Caveat Emptor'

Caveat emptor is an ancient principle that is intended to resolve disputes arising from information asymmetry, the pervasive situation in which the seller knows more than the buyer about the quality of a good or service. If Hasan wants to buy a car from Allison, he is responsible for gathering the necessary information to make an informed purchase. He should ask her how many miles it has on it, whether any major components need to be replaced, whether it's been serviced regularly and so on. If he simply buys the car for the asking price and makes little or no effort to assess its true value, and the car subsequently breaks down, Allison is not liable for damages under the principle of caveat emptor. 

In practice, there are many exceptions to this principle. For example, if Allison lied about the car's mileage or maintenance needs, she would have committed fraud, and Hasan would in theory be entitled to damages. Market forces act to reduce the applicability of caveat emptor in some cases. Warranties are guarantees of quality or satisfaction that sellers issue voluntarily (broadly speaking) to buyers; if the sellers provide a quality product, they will not need to provide refunds or replacements very often, and buyers will be inclined to choose these vendors based on a perception of quality. 

Governments also push back against the principle of caveat emptor in order to protect consumers' interests. Informal transactions like the one between Allison and Hasan are mostly unregulated, but in industries such as financial services – especially since the 2008 financial crisis – the buyer is often entitled to clear, largely standardized, information regarding the product. Many investors are familiar with what is colloquially called the "safe harbor statement," which complies with safeguards against companies that would deceive potential buyers about the quality of their stock. At the same time, such statements, as well as the legally mandated quarterly reports they accompany, reinforce the principle of caveat emptor, cementing the expectation that the buyer has access to all the information they need to make a reasonably informed decision.

In the U.K., the concept of caveat emptor is less applicable now than in the past. In general, the 1979 Sale of Goods Act provides consumers with more stringent protection than their U.S. counterparts enjoy.

Caveat emptor is particularly important in real estate transactions. In the U.S., home builders are required to issue an implied warranty of fitness to buyers of new properties. Subsequent transactions, however, are subject to caveat emptor rules, assuming no fraud has been committed. New residential properties come with the expectation that the seller is liable for faults; as for old properties, buyer beware. 

 

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