Today in 1817: The Supreme Court establishes the principle of “caveat emptor”

March 15, 2013

Today in Legal HistoryMost of us have heard the adage “buyer beware.”

The saying, often more commonly known by its Latin name “caveat emptor” (“let the buyer beware”), is a contract law rule holding that a seller is under no duty to communicate to the buyer the existence of defects – even hidden ones – in what he is selling (unless the seller somehow implies that such defects do not exist).

Nowadays, of course, there are all kinds of statutory provisions that limit the gravity of this standard (e.g. the Uniform Commercial Code’s implied warranty of fitness).  Nevertheless, caveat emptor remains the norm instead of the exception.

As much of a cornerstone of contract law that this principle is today, it was not always so.

In fact, it was the Supreme Court itself that established caveat emptor as a foundation of our legal system – 196 years ago today, on March 15, 1817.

On that date, the Court handed down its unanimous decision in Laidlaw v. Organ.

Interestingly, Laidlaw was about a buyer’s duty to disclose, rather than a seller’s.

The buyer, Hector M. Organ, was negotiating to acquire a large quantity of tobacco from New Orleans tobacco broker Peter Laidlaw & Co.

The night before the close of the deal, Organ heard from his brother that America and England had signed the Treaty of Ghent, ending the War of 1812.

Prior to the signing of the treaty, the British blockaded eastern U.S. ports, such as New Orleans, making trade with other countries all but impossible.

As a consequence, the price of tobacco – a highly exported commodity – was drastically reduced.

However, when news of the treaty became common knowledge, the cost of tobacco soared since, with the blockades gone, the commodity could be once again sold abroad.

Francis Girault, the partner at Peter Laidlaw with whom Organ was dealing, did not know of the treaty at the time of the sale; as such, he sold Organ the tobacco at the depressed price.

Within hours of the sale, though, Girault learned of the war’s end, and subsequently refused to deliver the tobacco to Organ.

During the morning of the sale, Girault asked Organ “if there was any news which was calculated to enhance the price or value of the article about to be purchased.”  There was no evidence as to how Organ responded to the question, if at all.

Thus, the trial court did not find any evidence that Organ had communicated anything to make Girault believe that any such news did not exist, and ruled for Organ.

On appeal, the Supreme Court found that Organ had no duty to disclose news of the treaty to Girault, further stating that it would be difficult to create a doctrine to the contrary.

Despite Laidlaw’s prominence as the case that established caveat emptor, the ruling still placed two significant restrictions on the principle.

First, the withheld information must be “equally accessible to both parties.”

Second, each party must “take care not to say or do any thing tending to impose upon the other.”

The second restriction is significant in Laidlaw.  The Supreme Court’s ruling remanded the case for a new trial, since the district court during the first trial refused to allow the jury to decide whether Girault had asked Organ the question about “any news” that could have affected the price of the tobacco, and, if so, how Organ replied.

The presumption here is that, had the jury found that Organ been asked the question and responded in any way – including silence – to make Girault believe that there was no such news available, the Court would have found for Laidlaw.

But since the Supreme Court was not considering the case with the element of Girault’s question (it was not part of the jury’s verdict at the trial court level), the Court only ruled on the question of whether a party has an affirmative duty to disclose an important piece of information – not whether a party has a duty to disclose that information when directly asked.

Thus, perhaps there are two “buyer beware” warnings found in this case.

The first is the general legal definition.

The second is directed to the “buyers” such as Organ: “caveat emptor” does not mean that you can actively conceal a material fact from the other party.