Daily Development for Wednesday, November 29, 2000

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

VENDOR/PURCHASER; MISREPRESENTATION; "AS IS" CLAUSE; FRAUD: Although, an "as is" clause will protect a seller from liability for negligent misrepresentation, it will not protect against liability for fraudulent misrepresentation.

Snyder v. Lovercheck, 992 P.2d. 1079 (Wyo. 1999).

This carefully annotated opinion collects case law from around the country to address a matter that has led to considerable disagreement in the courts.

Purchasers of a wheat farm brought claims against their sellers for breach of contract and against both sellers and the seller's real estate broker for negligent misrepresentation and fraudulent misrepresentation. The trial court granted summary judgment to defendants.

On appeal, the Wyoming Supreme Court affirmed the decision granting summary judgment, but only because it found that there were insufficient allegations to make out a case for fraud. It overturned the trial court's legal determination that an "as is" clause is an adequate protection, in and of itself, from charge of fraudulent misrepresentation.

The court acknowledged that a number of courts have found that "as is" clauses, stating that the buyer is not relying upon any representations by the seller, will be a complete defense to a claim of fraud. It noted that some courts, notably New York, differentiate between "general merger" clauses and "specific disclaimers." In Danan Realty Corp. v. Harris, 184 N.Y.S.2d 599 (N.Y. 1959), for instance, there was a general merger clause stating that the full agreement of the parties was expressed in their final written instrument, and that all prior representations, agreements and understandings were superceded. This is a standard "merger" clause.

But the Danan agreement included additional language stating that the buyer was not relying upon any representation by the seller, had inspected the buildings, and was thoroughly acquainted with their condition. The New York court held that this latter language barred an action for fraudulent representation concerning the condition of the building. Otherwise, argued the court, how could parties ever contract to eliminate the risk of subsequent backlash by the buyer?

The Wyoming court here liked the reasoning of Danan, but observed that it had been followed primarily in cases in which the statement concerning acceptance of conditions and waiver of representations was quite specific. In the instant case, however, the disclaimer language, part of the Wyoming standard form purchase and sale agreement, stated simply that there is no reliance on any representations of any kind: "Purchaser is not relying upon any representations of the Seller or Seller's agents or sub-agents as to any condition which the Purchaser deems to be material to Purchaser's decision to purchase the property."

It is not clear, however, that the Wyoming court in fact relied upon the generality of the disclaimer provision here in distinguishing Danan. Rather, a better reading of the Wyoming result is that it rejected Danan's reasoning altogether and concluded that even specific waivers of reliance upon specific representations would be set aside if such representations in fact were established to be fraudulent. The colorful language of the Massachusetts ruling which the Wyoming court embraces, embodying this concept, is worth repeating: "In the realm of fact it is entirely possible for a party knowingly to agree that no representations have been made to him, while at the same time believing and relying upon representations which in fact have been made and in fact are false but for which he would not have made the agreement. To deny this possibility is to ignore the frequent instances in everyday experience where parties accept, often without critical examination, and act upon agreements containing somewhere within their four corners exculpatory clauses in one form or another, but where they do so, nevertheless, in reliance upon the honesty of supposed friends, the plausible and disarming statements of salesmen, or the customary course of business. To refuse relief would result in opening the door to a multitude of frauds and in thwarting the general policy of the law."

Thus, the court appeared to conclude that an "as is" clause will not stand up to a fraud charge, regardless of how specific the clause.

The court then, as indicated, concluded that in the case at hand the allegations were not sufficient to support a fraud claim, and granted summary judgment for defendants on that claim.

The court then proceeded to the charge of negligent misrepresentation against the sellers and brokers. In this case, the court found that there was an adequate basis upon which to support a claim. Here the court changes direction and concludes that unless there is contractual liability, there can be no claim. Because of the presence of the "as is" clause, the buyers could make no claim for breach of contract, and consequently, the court concludes that the "as is" clause protects both the sellers and sellers' brokers from liability, as it constituted a contractual disclaimer that the seller was relying upon the representations of either.

The court acknowledged that its ruling on the application of the "as is" clause to fraud claims would permit the plaintiffs to sue in tort where fraud is involved, and that the same injuries are involved both with respect to fraud and with respect to negligent misrepresentation. But it concluded, apparently, that the public policy against fraud is strong enough to overcome the normal preference that contracting parties should be limited to contract damages, while there is no such policy concern with respect to ordinary negligence.

Comment 1: Only a common law court with a relatively uncrowded docket could engage in such an extended analysis of the common law. The opinion is well worth reading. The editor finds himself agreeing with it. This appears to be the most logical approach to reconciling the competing considerations of permitting contractual waivers to be enforced but nevertheless protecting victims from fraud.

Comment 2: The downside, of course, is that unhappy buyers will always be able to drag the sellers and brokers into court on fraud charges, and, if they survive summary judgment, put them before a jury. The editor doesn't like this result, as juries often have difficulties putting themselves in the shoes of commercial parties in the bargaining context, but his concerns really relate to issues that go beyond those involving the recognition of fraud claims.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

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