Caveat Venditor!!

In general, Israel’s contractual laws can boast the manner in which parties are free to condition their legal liability and transfer the burden to the contracting party facing them. In most cases, this means a buyer or seller, service recipient or provider, as the case may be, assumes contractual liability.

The agreement expression of this liability, coupled with the parties’ intentions at the time of contract, forms a starting point to resolving legal disputes.

However, in terms of moral considerations, promoting competition and aiding weaker groups, it was found that in some cases, the law enforces the choice on the parties and denies them the power to negotiate and slide the commercial risk over to the other party. Thus, civil legislation contains compulsive (cogent) instructions that overrule any obligation, waiver, or contractual right the parties have given each other.

In the following case, a conflict arose between contractual stipulations holding commercial and legal meanings and compulsive legal instructions.

Background

Each day, various real estate sale transactions take place in Israel. In the vast majority of cases, sale agreements include standard paragraphs containing both seller’s and buyer’s representations and warranties. This way, in the normal state of affairs, when the real estate transaction refers to a built property, the seller represents that the property was built in accordance with a construction permit he received from the authorities, and that he has no knowledge of any construction deviations or latent defects in the property.

The buyer usually represents that he has seen and examined the property, through the eyes of a reasonable buyer, and has received and examined all of the necessary information, including all legal and planning information related to the purchase of the property and found them suitable for their needs and purposes. Most transactions are “as is” transactions, in which the buyer agrees to purchase the property as is, with its form and faults. In these cases, the buyer even waives any claim regarding the above mentioned.

The Supreme Court has recently ruled in a case[1] regarding a regular sale agreement, in which the sellers represented that the property was built in accordance with the construction permit he received and that he had no knowledge of any construction deviations or latent defects in the property. The buyers represented that they have examined the property themselves, as well as its registration and planning in the various authorities.

In retrospect, two significant facts were revealed: first, that the buyers did not perform the necessary examinations as he represented. Second, that an entire floor in the property was built by the sellers without a permit, a fact that was not disclosed to the buyers. The buyers asked that the agreement be annulled and demanded the full agreed compensation. The sellers asked to deny compensation, since the buyers did not perform the examinations, as opposed to their representation.

No one disputes the fact that this is an examination the buyers could have easily performed and had they performed it, they would have discovered this significant fact. The question is whether the non-disclosure of facts known to the sellers and contradictory to their contractual display suffices to enable the buyers the annulment of the agreement and award them an agreed compensation due to the breach.

Caveat Emptor and paragraph 16 of the Sale Law

The English law makes common use of the famous rule Caveat Emptor (Buyer Beware), meaning that buyers must examine their purchase for all its characteristics in the most profound manner and assume that they have to examine all information themselves without relying on sellers. This rule was rejected by the Israeli law upon the legislation of the Sale Law in 1968.

Paragraph 16 of the Sale Law states that “should non-compatibility stem from facts the seller has known or should have known about when finalizing the contract that they have not disclosed to the buyer, the buyer is entitled to rely on it despite paragraphs 14 and 15 or any agreement, provided they have notified the seller of it immediately upon discovering it”.

We shall note that in the facts of the case dealt with by the verdict, the absence of a construction permit was a significant fact well known to the seller, which they failed to disclose to the buyer.

Paragraph 16 of the Sale Law is classified as a cogent paragraph that the parties cannot condition in their agreement. There are three basic conditions to the application of this paragraph: the existence of non-compatibility in the property’s characteristics as defined by law; knowledge or potential knowledge of the facts by the seller; and lack of real knowledge of these facts by the buyer.

 Contributory fault defense for the breaching party, really?

The Israeli law contains partial defense to the party breaching a contract, centering round the affected party’s behavior[2]. It was determined that in cases in which the affected party’s behavior contributed directly to their damages, liability must be divided between the parties due to common liability to those damages. The severity of the breaching party’s breach versus the extent of fault tainting the affected party’s behavior may divide the damage between the two parties.

In the case of Einy v. Shifris that was discussed above, the majority rejected the position stating that a certain degree of “contributory fault” has to be attributed to the buyers due to their representation that they have examined the property’s status when in actual fact they have refrained from doing so. The seller cannot be awarded a “contributory fault” defense when there is a legal rule that cannot be conditioned. It was determined that only real knowledge of non-compatibility by the buyer will suffice to exclude the application of paragraph 16 of the Sale Law. Negligence, even gross negligence, on their part, is not enough to save the seller.

In the same way a swindler cannot be saved from the results of their swindle, because the opposite party could have discovered the truth (and did not discover it in actual fact)[3], a seller that has known of non-compatibility and did not disclosed it to the buyer cannot deny the buyer, that was negligent in examining the property, the remedy to which they are entitled to under paragraph 16 of the Sale Law. The result will differ only under circumstances in which the opposite party had real knowledge of the correct facts.

The duty of disclosure

The verdict also hones the question in the economic analysis as to the application of the duty of disclosure. In the normal state of affairs, when information is available to the buyer and such information can be easily obtain, the tendency is not to impose the duty of disclosure on the seller and vice versa. When the factual information required by the buyer is difficult and expensive to obtain, the tendency is to impose the duty on the seller. In the case above, it was determined that even if the information was obtainable through routine actions, the buyer should not be required to discover such details, burdened and coerced into a painstaking journey through municipal or governmental bureaucracy, when the seller knows the actual facts.

It was ruled that though the instructions of paragraphs 13-15 of the Sale Law are designed to relieve the seller and impose certain tasks on the buyer, clearly there is no justification in their activation when the seller knows, or could have known unless for his negligence, that the sale agreement was breached. The buyer should not be obligated to examine the state of the property where “the seller knew or should have known” of non-compatibility.

In closing

The court negates the option of diminishing seller responsibility (even partially), by attributing “contributory fault” to a buyer negligent in examining the property. The agreement instruction is rejected in the face of the cogent legal instruction. In paragraph 16 of the Sale Law, the legislator has conclusively expressed its opinion of paragraphs such as those in the contract before us, and chose to favor buyers protection over the principle of  “freedom of contract”.

In a conflict between a breaching seller that had known (or should have known) when settling the contract of certain facts, which they have not revealed to the buyer, and the negligence of the buyer who failed to examine and discover those facts (even had they declared they did) – the buyer has the upper hand. In such case – contributory fault is not to be attributed to the buyer.

The verdict fortifies the buyer’s position and highlights the duty of disclosure incumbent upon the seller, even prior to signing the sale agreement, regarding the property’s non-compatibility.