Duty of disclosure and obligation to investigate in a sales agreement

The expectations of a buyer in a sales agreement depend on the features necessary for normal use of the object and on the information supplied by the seller in this respect. Buyers are also obliged to carry out an investigation themselves, especially if circumstances arise that require a further obligation to investigate. A seller must prevent a buyer from having a distorted or unfair picture of the object and share important details.

If a buyer of, for instance, a house finds out that the house does not have the features he or she could have expected and thus does not meet the agreement, this is referred to as non-conformity. What a buyer may expect depends on what is required for normal use of the object and the information supplied by the seller in this respect. Buyers also have the obligation to carry out an investigation themselves. When does a buyer have to investigate (further)? And when does the seller have to disclose information about certain features?

Normal use

A buyer may expect that an object contains the features necessary for normal use. The purchase of a race horse that turns out not to be able to race after the purchase, or the purchase of land that turns out to be contaminated are examples for objects that do not possess the features for normal use. Not all defects render normal use impossible. For instance, in a purchase of a house, the buyer will have to take into account a certain level of overdue maintenance or the age of the house.

Investigation?

If a buyer has doubts regarding the features of an object he must carry out an investigation. This can be done by asking the seller questions or by commissioning another party to carry out an investigation, such as a building survey in the purchase of a house.

In recent years, the buyer’s obligation to investigate has been attributed more and more importance by the courts. Important circumstances that establish an obligation to investigate (further) are the following:

• you observe a potential defect, for instance traces of leakage in a house;
• you buy a second hand or used object;
• you, as a buyer, are the expert or you are assisted by an expert;
• you, as a buyer, have experience with similar transactions ;
• you, as a buyer, are informed of many other known and manifest defects.

If any one of these circumstances arises, it is important that the buyer carries out an investigation regarding all important features of the object. If the buyer doesn’t, chances are he will not be able to hold the seller liable for potential defects.

Disclosure?

A seller must prevent the buyer from having a distorted and unfair picture of the object and has to share important information with the buyer voluntarily. Therefore, in a house sale the seller has to inform the buyer about existing problems regarding the house. The definition of important information depends on the knowledge of the seller about the buyer’s intentions regarding the object.

The existence and extent of the duty of disclosure depends more and more on the existence and breach of the obligation to investigate. However, the duty of disclosure still outweighs the obligation to investigate as the seller knows more about the object he sells than the buyer about what he buys.

If a seller is familiar with factual information that is relevant for the expectations of the buyer with regard to the features and purpose of the object, the seller must disclose this information to the buyer. What happens if the seller neglects to do so? In that event the buyer cannot be accused to have carried out insufficient investigation, even if the buyer was careless. An exception can be made under special circumstances, when it concerns an expert and experienced buyer.

Unknown defects?

The seller may not be aware of certain defects of the object for sale. This does not alter the fact that the object does not meet the buyer’s expectations regarding normal use. In addition, this may constitute a failure in the duty of disclosure. The duty of disclosure does not only apply to circumstances the seller is familiar with, but also to circumstances he should be familiar with, for instance due to his expertise.

An unknown defect can also be at buyer’s risk. For instance, in the purchase of a second hand car with incorrect mileage, the risk is borne by the buyer if the seller can prove that he had no knowledge about it. In second hand cars mileage cheating occurs frequently, therefore the buyer has a further obligation to investigate.

Our advice

It is important for both buyer and seller to exercise care when concluding a sales agreement. The seller is well-advised to ask the buyer about his or her intentions regarding what he or she buys and to disclose to the buyer important details regarding this intended use. As the courts are more likely to attribute greater importance to the obligation to investigate, the buyer is well-advised to ask the seller as many questions as possible and to personally carry out an investigation.

More information

Would you like to learn more about the duty of disclosure and the obligation to investigate? Or would you like to get more information about sales agreements? Please contact Russell Advocaten: