Caveat Emptor (Buyer Beware): What It Is, vs. Caveat Venditor

What Does Caveat Emptor Mean?

Caveat emptor, a Latin phrase meaning "let the buyer beware," implies that buyers take the risk in a transaction. Potential buyers are warned by the phrase to do their research and ask pointed questions of the seller. The seller isn't responsible for problems that the buyer encounters with the product after the sale.

Caveat emptor is sometimes used in legal contracts as a type of disclaimer. In many jurisdictions, it is the contract law principle that places the onus on the buyer to perform due diligence before making a purchase.

The term is commonly used in real property transactions. It relates to adverse situations that may arise with real estate after the date of closing. It also applies to transactions that involve other types of goods, such as cars or items at thrift stores or yard sales.

Understanding Caveat Emptor

Caveat emptor is intended to preclude post-purchase disputes arising from information asymmetry, a situation in which the seller has more information than the buyer about the quality of a good or service.

For example, if Hasan wants to buy a car from Allison, and caveat emptor applies, he is responsible for gathering the necessary information to make an informed purchase. In gathering this information, Hassan may decide to ask Allison how many miles the car has on it, whether any major components need to be replaced, whether it's been serviced regularly, and more. If he buys the car for the asking price, making little or no effort to assess its true condition or value, and the car subsequently breaks down, Allison is not technically liable for damages. 

However, in practice, there are exceptions to this principle. Caveat emptor doesn't give sellers carte blanche to promote a fraudulent transaction. For example, if Allison lied about the car's mileage, maintenance history, or repair needs, she would have committed fraud. In theory, Hasan would be entitled to damages.

Caveat emptor can apply in real estate transactions involving previously owned houses in all U.S. states. Therefore, buyers need to make every effort to discover any and all property defects. They might hire a highly rated house inspector to help.

However, in the majority of states, this principle is not necessarily business as usual. What's more, within the U.S., home builders are required to issue an implied warranty of fitness to buyers of new properties. These properties come with the expectation that the seller is liable for faults.

Reducing Caveat Emptor

Market forces and other factors can reduce the feasibility of caveat emptor in some cases. For example, with real estate, because a seller typically knows the condition of a property better than a buyer, legal decisions relating to quality issues have begun to favor the buyers. There are other ways that buyers can feel more assured of quality.

Warranties

Warranties are guarantees of quality or satisfaction that sellers issue voluntarily to buyers. If sellers provide a quality product, they will not need to provide refunds or replacements very often. Buyers will be inclined to choose those vendors that provide a perception of quality or a warranty.

There are several types of implied warranties:

• Merchantability warranties assure buyers that a product will operate as expected for normal purposes. These warranties are considered to apply to all sales unless a seller specifically disclaims it. 
• Fitness for a particular purpose warranties apply to products that sellers claim function as described.
• Title warranties guarantee that sellers have the legal right to transfer (sell) their goods. Title warranties apply to every sale unless disclaimed by the seller.

Disclosure Laws

These laws have been enacted for the protection of consumers buying certain goods and services, especially since the 2008 financial crisis. For instance, financial services institutions know much more information about their products and services than their customers do. This information can relate to fees, responsibilities, risks, and benefits. The Truth in Lending Act (TILA) requires financial services providers to inform consumers of the terms and costs of consumer credit products.

Other Government Oversight

Informal transactions such as the one between Allison and Hasan are usually unregulated. However, the U.S. government pushes back against the principle of caveat emptor to protect consumers' interests in more than just the financial services industry. Many other industries must provide buyers clear, largely standardized information about a product or service.

At the same time, safe harbor statements and legally mandated quarterly reports can reinforce the principle of caveat emptor. Many companies continue to promote the expectation that buyers have access to all the information they need to make a reasonably informed decision.

States That Apply Caveat Emptor

Most states don't uniformly apply caveat emptor, offering buyers some assurance of product/service protection. However, the courts in the states below still tend to uphold it for real estate transactions.

• Alabama
• Arkansas
• Georgia
• North Dakota
• Virginia
• Wyoming

Caveat Emptor vs. Caveat Venditor

Caveat emptor refers to instances when buyers must be vigilant about researching the condition of an item for sale. The seller has no responsibility for after-sale problems that occur.

However, a different phrase often applies to sales in the U.S. nowadays. It's caveat venditor and it translates to "let the seller beware." Times have changed and goods and services are often covered by an implied warranty.

Unless they're labeled "sold as is" or some other understanding between the buyer and seller is reached, most consumer products are guaranteed to function when used for their intended purpose.

The Bottom Line

Caveat emptor is a Latin phrase that translates to “let the buyer beware.” In use for hundreds of years in the U.S., it puts the burden of researching the quality of products and services on the buyer in a transaction. It's often used when selling previously owned real estate.

These days, caveat emptor isn't applied very often to other types of transactions. That's due to regulations that are intended to provide consumers with more information and protection. It's more likely that caveat venditor, or "let the seller beware," applies.