Daily Development for
Wednesday, May 31, 1995

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

VENDOR/PURCHASER; CAVEAT EMPTOR; "AS IS" Clause: Major Texas Supreme Court decision holds that, absent fraudulent misrepresentation or concealment of information, "as is" clause is a bar to recovery by buyer following purchase of property, even where seller has made innocent misrepresentations or warranties. Prudential Ins. Co. v. Jefferson Assoc., Ltd., 1995 WL 114556 (Tex. 1995). The case involves Prudential's $7 million sale of an Austin office building later found to contain asbestos. The trial court had found $6 million in actual damages and imposed $14 million in punitive damages upon Prudential. From the start of this opinion, it is clear that the Texas Supreme Court is determined to reverse that verdict. But the justices had difficulty agreeing how to do it. Five justices joined the majority opinion, but there were two separate concurrences, one individual and one joined by three of the justices.

The contract contained the following clause (copy it down for your own documents, sellers):

As a material part of the consideration for this Agreement, Seller and
Purchaser agree that Purchaser is taking the Property "AS IS" with any and
all latent and patent defects and that there is no warranty by Seller that
the Property is fit for a particular purpose.  Purchaser acknowledges that
it is not relying upon any representation, statement or other assertion with
respect to the Property condition, but is relying upon its examination of
the Property.  Purchaser takes the Property under the express understanding
there are no express or implied warranties (except for limited warranties of
title set forth in the closing documents).  Provisions of this Section 15
shall survive the Closing.

Prudential's building manager had described the building as "super fine" and free of defects (except for a minor non-asbestos problem). As the Texas Supreme Court saw the evidence, however, no one at Prudential had any actual awareness that asbestos was present. Thus, there was no fraudulent concealement or misrepresentation. Thus, the gist of the problem was whether there were actionable innocent misrepresentations here.

Perhaps because of the procedural nuances at trial, the supreme court here addressed the problem as one of causation. It held that the "as is" clause barred plaintiff as a matter of law from showing that any conduct by Prudential caused the injury. Despite the sweeping character of this statement, the court later qualifies it by stating that the "as is" clause is not effective if the seller has deliberately deceived the buyer as to the character of the premises:

"A buyer is not bound by an agreement to purchase something "as is" that he is induced to make because of a fraudulent representation or concealment of information by the seller."

The court also suggests that the "as is" clause may not provide such broad protection outside of the context of clear, arms-length, commercial contracts such as the one at hand.

"We also recognize that other aspects of a transaction may make an "as is" agreement unenforceable. The nature of the transaction and the totality of the circumstances surrounding the agreement must be considered. Where the "as is" clause is an important part of the basis of the bargain, not an incidental or "boiler-plate" provision, and is entered into by parties of relatively equal bargaining position, a buyer's affirmation and agreement that he is not relying on representations by the seller should be given effect."

The signficance of the opinion is affected somewhat by the existence of the Texas Fraudulent Trade Practices Act, which was an important element in the disagreement among the justices. Apparently the Texas legislature is considering amending the Act to take out large commercial transactions. But the above holdings seem to reflect clearly a position on the common law status of "as is" clauses in real property sales in Texas.

Comment: The outcome, at least on the view of the facts taken by the Supreme Court, seems wholly appropriate. One wonders whether the jury saw the facts in the same way when it awarded $14 million in punitive damages. Certainly, from the standpoint of encouraging predictability in commercial transactions, this opinion provides a real benefit. The onus is now on buyers to identify clearly what the seller has said that the buyer is relying upon and to make those items specific warranties that are unaffected by "as is" language.

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