Reviewed by Aug 27, 2020| Updated on
What is a Caveat Emptor?
Caveat emptor is a neo-Latin word meaning "let the buyer be vigilant." This is a contract law concept in many jurisdictions that positions the buyer's duty to perform due diligence before making a transaction. The concept is widely used in real estate transactions but refers to other products and services as well.
Breaking Down Caveat Emptor
The term is an ancient concept designed to settle conflicts resulting from knowledge asymmetry. In this prevailing situation, the seller knows more about the nature of a product or service than the buyer does.
If Mr A decides to buy a car from Ms B, then he is responsible for obtaining the details required to make an informed purchase. He would ask her how many miles she has on it, whether any big components need to be replaced, if it's regularly serviced, and so on.
If he merely buys the car for the price he asks and makes little to no attempt to determine its true worth, and the car eventually breaks down, Ms B cannot be held responsible for damages under the caveat principle.
Caveat Emptor Exceptions
In fact, this definition has many exceptions. For example, if Ms B lied about the mileage or maintenance needs of the vehicle, she would have committed fraud, and legally, Mr A would be entitled to damages.
In certain situations, market forces operate to minimize the applicability of the caveat emptor. Warranties are price or satisfaction assurances provided by sellers voluntarily (broadly speaking) to buyers.
If sellers have a reliable product, they will not need to offer refunds or substitutes very often, and buyers will be inclined to select such vendors based on price perception.
Governments are now pushing back on the caveat emptor principle to defend the interests of consumers.