Court Opinion

ID: 9781837
Source: CourtListenerOpinion
Date Created: 2023-08-30 17:33:04.888326+00
Date Added: 2024-06-11T07:34:40.082180
License: Public Domain

EHRLICH, Judge,
Dissenting.
¶ 46 I dissent from the analysis employed by the majority. This case presents a paradigm for the application of contract principles to a straightforward commercial real-estate contract between equally informed and sophisticated parties represented by legal counsel.
¶47 When the appellees bought the two apartment complexes from the appellants, both purchase contracts contained a substantially similar provision, which stated:
Disclaimer of Warranties. Buyer acknowledges that except as expressly set forth in the Agreement, Seller makes and has made no representations or warranties of any kind whatsoever, including but not limited to warranties concerning the condition of title, physical condition, encroachments, access, zoning, value, future value, income potential, any survey, environmental report or other information prepared by third parties, loan assumability, or the presence on or absence from the Property of any hazardous materials or underground storage tanks. Buyer is purchasing the Property as a result of its own examination thereof in its “AS IS” condition, and upon the exercise of its own judgment and investigation.
(Emphasis added.) Both contracts also contained the following provision for the appellees to inspect the property:
Buyer’s Inspection. -During the Review Period described ... below, Buyer and Buyer’s agents, servants, employees and independent contractors shall have reasonable access to the Property for the purpose of investigating the condition of the same, and for any other reasonable purpose which relates to the potential use, occupancy, operation and maintenance of the Property; provided, however, that in conducting any such investigations ... (ii) Buyer shall not injure or damage the Property, and shall indemnify and hold Seller harmless for, from and against any and all liability, loss, cost, damage, or expense ... which may arise out of such entry and Buyer’s activity upon the Property____ [I]n the event that this Escrow does not close, Buyer shall restore the Property to the same condition which existed at opening of Escrow —
(Emphasis added.)
¶ 48 Prior to the close of the transactions, the appellees inspected the property in accord with the contract. Those inspections did not reveal any substantial problem with the buildings’ plumbing. It was not until *25approximately two years after closing that the appellees learned that the plumbing in both Presidio North and Bell Tower consisted of polybutylene (“PB”) pipe.
¶49 When the appellees sued the appellants alleging fraud and non-disclosure for having failed to disclose the defective plumbing prior to the close of the transactions, the appellants candidly responded that, because they were unaware that the buildings had been constructed using PB pipe when they sold the property to the appellees, they could not disclose the unknown condition. The appellees in turn acknowledged that their inspections of the buildings had not revealed the presence of PB pipe.
¶50 The parties do not dispute that the appellees’ claim for non-disclosure is predicated on Restatement (Second) of Torts section (“Section”) 551 (1977), and the appellants do not claim that the “as is” clause in the purchase contracts relieves them of tort liability for non-disclosure as a matter of law. Rather, the appellants argue that the “as is” clause pertains to but one element of the tort of non-disclosure — the element of duty — relieving them of liability as follows: Even had they known of the defective plumbing' — which they did not, the appellants were under no duty to disclose the PB pipe to the appellees by operation of the “as is” clause; the “as is” clause did not act as a waiver of the appellants’ tort liability but, instead, concerned the assignment of duty and risk; the burden of discovering the defect thereby shifted to the appellees; the appellants did not withhold from the appellees the opportunity to discover the defective plumbing; the appellants accordingly are not liable for the appellees’ failure to discover the PB pipe, and the appellants should have been granted judgment as a matter of law.
¶ 51 Comment j to Section 551 describes a fact basic to a transaction as
a fact that is assumed by the parties as a basis for the transaction itself. It is a fact that goes to the basis, or essence, of the transaction, and is an important part of the substance of what is bargained for or dealt with. Other facts may serve as important and persuasive inducements to enter into the transaction, but not go to its essence. These facts may be material, but they are not basic.
Section 551 sets forth a plaintiffs burden when claiming that a defendant negligently failed to disclose facts basic to the transaction:
(1) One who fails to disclose to another a fact that he knows may justifiably induce the other to act or refrain from acting in a business transaction is subject to the same liability to the other as though he had represented the nonexistence of the matter that he has failed to disclose, if, but only if, he is under a duty to the other to exercise reasonable care to disclose the matter in question.
(Emphasis added.) According to Section 551(2)(e):
(2) One party to a business transaction is under a duty to exercise reasonable care to disclose 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 the facts.
¶ 52 Thus, Section 551(2)(e) imposes a duty of disclosure on a commercial seller only if certain conditions are met. Specifically, the seller must (1) know the basic fact that is not disclosed; (2) know that failure to disclose the basic fact may induce the potential buyer to enter the transaction; (3) know that the buyer is under a mistake as to the basic fact and (4) know that the buyer reasonably expects disclosure of the basic fact. Whether a buyer may reasonably expect disclosure of a basic fact depends on the contract — -the relationship between the parties, the customs of the trade or other objective circumstances. Again according to comment j of Section 551, “if the parties expressly or impliedly place the risk as to the existence of a fact on one party ... the other party has no duty of disclosure.”
*26¶ 53 By expressly providing that the property was being sold “as is,” the purchase contracts between the appellants and the appellees placed the risk as to the existence of defects on the appellees. Universal Inv. Co. v. Sahara Motor Inn, Inc., 127 Ariz. 213, 215, 619 P.2d 485, 487 (App.1980); see Haney v. Castle Meadows, Inc., 839 F.Supp. 753, 757 (D.Colo.1993); Richey v. Patrick, 904 P.2d 798, 804 (Wyo.1995); Arbor Village Condominium Ass’n v. Arbor Village Ltd., 95 Ohio App.3d 499, 642 N.E.2d 1124, 1132 (1994); Omernik v. Bushman, 151 Wis.2d 299, 444 N.W.2d 409, 411 (App.1989). Consequently, absent fraud or misrepresentation, a contractual agreement to accept real property “as is” with the right to inspect defeats liability pursuant to Section 551 because it relieves the seller of the duty to disclose that the property was sold in defective condition. Richey, 904 P.2d at 804; Kaye v. Buehrle, 8 Ohio App.3d 381, 457 N.E.2d 373, 376 (1983).
¶ 54 The presence of an “as is” clause in a contract for the sale of real property substantially increases the buyer’s duty to exercise diligence in discovering defects in the property prior to purchase. This is especially true in contracts for sale of commercial property because in cases involving the sale of such property it is presumed that the business persons involved know the meaning of the “as is” phrase and protect themselves accordingly. To sophisticated parties represented by counsel as were these, an “as is” clause serves not only as a warning to the buyer but a disclaimer of a representation of condition or quality.
¶ 55 The appellees rely upon Salt River Project Agricultural Improvement & Power District v. Westinghouse Electric Corporation, 143 Ariz. 368, 694 P.2d 198 (1984), and Aranki v. RKP Investments, Inc., 194 Ariz. 206, 979 P.2d 534 (App.1999), in which this court cited SRP in its holding, and argue that the existence of an “as is” provision in a purchase contract cannot operate as a waiver of tort claims. The holdings of these cases are insufficient to support the appellees’ position.
¶ 56 The court in SRP specifically considered whether a general Uniform Commercial Code warranty disclaimer could necessarily act as a waiver of claims for strict product liability pursuant to Section 402A. It did not address the issue of negligent non-disclosure under Section 551, the duty of disclosure imposed by Section 551(2)(e) or the effect of an “as is” clause on that duty. Additionally, the actual holding of the court in SRP, which holding was reiterated in Aranki, stated that an agreement will not be enforced to constitute a waiver of tort liability when it is the product of coercion or inadvertence, when the agreement consists of a mere exchange of preprinted forms, when no evidence exists that an agreement was actually bargained for and when the evidence suggests unequal bargaining strength. Salt River Project, 143 Ariz. at 385, 694 P.2d at 215; Aranki, 194 Ariz. at 209, 979 P.2d at 537. However, the court in SRP stated that a waiver will be given effect
where commercial parties have equal bargaining positions so that the choice was freely and fairly made and not forced by the circumstances. Further, the parties must have negotiated the specifications of the product and have knowingly bargained for the waiver. Under these circumstances our courts will enforce the bargain, even if it turns out to have been a bad bargain for one party or the other.
143 Ariz. at 385, 694 P.2d at 215 (emphasis added).
¶ 57 The question is whether the foregoing quotation describes the relationship and therefore the duty between the appellants and the appellees. The answer first requires a determination whether, in fact, a contractual agreement between two parties with equal bargaining positions was freely and fairly made and whether the parties actually negotiated the specifications of the contracts and knowingly bargained for the agreements which contained the “as is” clauses.
¶ 58 The appellees have been registered real-estate agents since 1984. By the time the appellants approached them about purchasing the property, the appellees had earned several million dollars from real-estate dealings. In addition to their own knowledge and experience in the commercial real estate business, in this particular matter, the appellees had retained experts to assist *27them in the purchase of the property, including legal counsel. Indeed, paragraph 28.13 of the contracts to which both parties agreed states:
Interpretations and Definitions. The parties agree that each party and his counsel have reviewed and revised this Agreement and that any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not apply in the interpretation of this Agreement.
Furthermore, neither party knew for two years that the plumbing was inherently defective.
¶59 The purchase contracts between two parties in equal bargaining positions were freely and fairly made. Both parties, with the aid of legal counsel, negotiated the specifications of commercial contracts and knowingly bargained for agreements that contained the “as is” clauses. When the agreements expressly placed the risk as to the existence of defects on the appellees, they should be expected to have been aware of the meaning of an “as is” sale and to have taken precautions to examine the property thoroughly before buying it.
¶ 60 On this latter point, the appellees argue that the appellants prevented them from inspecting the buildings such as to find the defective condition. This argument is unsatisfactory. The purchase agreements expressly provided that the appellees could investigate the condition of the property as well as its “potential use, occupancy, operation, and maintenance.” While the agreements barred irreparable damage to the property, investigation and inspection unlimited as to the plumbing system were permitted with only the proviso that, as was necessary, if escrow did not close, the property was to be restored “to the same condition which existed at [the] opening of escrow.”
¶61 The issue of duty usually is one for the court to decide as a matter of law, Markowitz v. Arizona Parks Bd., 146 Ariz. 352, 354, 706 P.2d 364, 366 (1985); Diggs v. Arizona Cardiologists, Ltd., 198 Ariz. 198, 200 ¶ 11, 8 P.3d 386, 388 (App.2001), as is a trial court’s decision on a motion for judgment. Monaco v. HealthPartners of S. Ariz., 196 Ariz. 299, 302 ¶ 6, 995 P.2d 735, 738 (App. 1999). When issues can be decided as a matter of law, this court has the authority to vacate the judgment in favor of one party and enter judgment in favor of the appropriate party. Anderson v. Country Life Ins. Co., 180 Ariz. 625, 628, 886 P.2d 1381, 1384 (App.1994). The judgment in favor of the appellees should be vacated and judgment in favor of the appellants should be entered.