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S Development Company v. Pima Capital Management Co.8/30/2001
sclose to the other before the transaction is consummated,
(e) facts basic to the transaction, if he knows that the other is about to enter into it under a mistake as to them, and that the other, because of the relationship between them, the customs of the trade or other objective circumstances, would reasonably expect a disclosure of those facts. Restatement (Second) of Torts § 551(2)(e).
Essentially, the appellants argue that they were under no duty to disclose the defective plumbing to the appellees by operation of the "as is" clauses; that the "as is" clauses effectively shifted the burden of discovering the defect to the appellees and, therefore, the appellants are not liable for the appellees' failure to discover the defect, and they should have been granted judgment as a matter of law.
First, we find merit in the appellees' argument that the existence of an "as is" provision in a purchase contract generally operates only as a waiver of breach of warranty claims, not tort claims. See, e.g., Salt River Project Agric. Improvement & Power Dist. v. Westinghouse Elec. Corp., 143 Ariz. 368, 384, 694 P.2d 198, 214 (1984) (stating that " hile parties to a contract may 'disclaim responsibility for any potential [tort] liability . . . they must expressly spell out their intention'" (emphasis added) (quoting Penn. Glass Sand Corp. v. Caterpillar Tractor Co., 652 F.2d 1165, 1175 (3d Cir. 1981))); Mardan Corp. v. C.G.C. Music, Ltd., 600 F. Supp. 1049, 1055 (D. Ariz. 1984) (" he warranty disclaimer is effective to preclude only causes of action which are based upon breach of warranty theory."), aff'd, 804 F.2d 1454 (9th Cir. 1986); Southland Corp. v. Ashland Oil, Inc., 696 F. Supp. 994, 1001 (D.N.J. 1988) (" n 'as is' provision is merely a warranty disclaimer and as such precludes only claims based on breach of warranty."); Prudential Ins. Co. of Am. v. Jefferson Assocs., 896 S.W.2d 156, 162 (Tex. 1995) ("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."). A review of the disclaimer provisions at issue here does not evince an intent by the appellees to waive any tort remedies that may be available to them.
We also agree with the appellants' argument that the "as is" clauses may affect the duty of a vendor to disclose facts that are basic to the transaction and, therefore, preclude tort liability. We do not agree with the appellants that the facts of this case relieve them, as a matter of law, from the obligation to disclose the defective plumbing.
We begin by recognizing that Arizona law "implies a covenant of good faith and fair dealing in every contract" so that
"neither party will act to impair the right of the other to receive the benefits which flow from their agreement or contractual relationship." Rawlings v. Apodaca, 151 Ariz. 149, 153, 726 P.2d 565, 569 (1986). In keeping with the covenant of good faith and fair dealing, we hold that a vendor must disclose latent defects in property that are known to the vendor, notwithstanding the existence of a burden-shifting "as is" clause or disclaimer of warranties.
A latent defect is defined as " hidden or concealed defect. One which could not be discovered by reasonable and customary observation or inspection . . . ." Black's Law Dictionary 611 (Abridged 6th ed. 1991). Nondisclosure to the purchaser of latent defects known to the vendor "impair the right of the [purchaser] to receive the benefits" of the contract. Rawlings, 151 Ariz. at 153, 726 P.2d at 569. The very nature of a latent defect precludes the discovery of the defect upon a reasona
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