The Duty to Disclose and Conceal Defects in Contracts for the Sale of Goods, Slides of Law

Download The Duty to Disclose and Conceal Defects in Contracts for the Sale of Goods and more Slides Law in PDF only on Docsity! CONCEALMENT AND NON-DISCLOSURE OF QUALITY-RELATED DEFECTS IN CONTRACTS Ja m es D. Bissell* INTRODUCTION The purpose of this paper is two-fold. The first is to examine the ancient but relatively unexplored com m on law rules o f conceal­ ment o f quality-re la ted defects. These rules apply equally to every­ day consum er contrac ts for the purchase and sale o f goods, as they do to contracts for a business opportun ity or for the sale o f real es­ tate. This paper is concerned with the concealm ent or non-disclosure o f m ateria l facts and defects in goods and property which do not becom e a par t of the implied or express te rm s o f the final contract. A study of the com m on law reveals, perhaps surprisingly, tha t many o f the tactics em ployed by businessmen and even private sellers to in­ duce a cus tom er to buy before forming an independent opinion as to the quality o r value of the goods or property , may constitu te f raudulent concealm ent, entitling the buyer to an action in deceit for d am ages and rescission. However, in their a t tem p t to in troduce a degree o f conscionability into the bargaining process, the courts have not forgotten the maxim caveat emptor. Therefore, the com m on law has reached a point in its developm ent where a ra the r a rb it ra ry dis­ tinction is d raw n between the m ere failure to disclose defects which the buyer obviously does not know exist and active steps taken to prevent discovery o f those defects. Only the la tte r course o f conduct is actionable. The secondary purpose of this paper is to exam ine the a r ­ tificiality o f the distinction between non-disclosure and active con­ cea lm en t and to look at recent s ta tu to ry reform s in the area o f dis­ closure. It is submitted tha t a duty to disclose known existing m ater ia l defects would p rom ote the interests o f establishing con ­ scionability in contracting while still m ainta in ing the desired aims of c e r ta in ty an d finality . This has already been achieved to a con ­ siderable extent in the com m on law of most o f the U nited States. * James D. Bissell, Sackville, N.B., of the New Brunswick and Nova Scotia bars. This paper was originally prepared as a supplementary writing program under Professor Karl J. Dore, of the Faculty of Law at the University of New Brunswick and was revised and updated in February, 1976. U.N.B. L A W J O U R N A L 55 While it is beyond the scope o f this paper to exam ine the area of sta tu tory reform it should be noted tha t the need for s tronger dis­ closure requirem ents has been felt by m any legislators in the United S ta tes and C a nada , and elsewhere, where higher s tandards o f con­ duct have been imposed and new kinds o f relief established by legislation which is a im ed at either the regulation o f specific trades or at the sale o f goods generally .1 P A R T O N E C O N C E A L M E N T A N D D IS C L O S U R E O F Q U A L IT Y -R E L A T E D D E F E C T S : T H E C O M M O N LAW I. T H E R IG H T T O R E M A IN S IL E N T The com m on law m axim caveat em p to r is still very much a part of the law o f contracts . Its vitality is especially grea t with respect to private sales and sales o f specific goods where the buyer has been af­ forded an opportun ity to inspect the goods and is therefore deemed to have taken them subject to any apparen t, or patent, defect.2 The purpose of this paper is to exam ine this m axim as it relates firstly to the duty to disclose, and secondly the duty not to conceal, defects go­ ing to the quality o f the subject m a tte r in contracts for the sale o f goods. Essentially, the risk of all defects in goods falls upon the buyer3 unless (a) the seller has expressly assumed the risk by a te rm of the con trac t or a representation; or (b) if there is an implied condi­ tion or w arran ty under the New Brunswick Sale o f Goods A ct* The Sale o f Goods A ct has severe limitations upon its scope because most of the implied term s relating to quality are restricted to sales m ade in the ord inary course o f business and further because o f the uncertainty associated with such phrases as “ fitness for purpose” and “ m erchan tab il i ty” .5 The rules related to risk may seem to produce harsh results upon a buyer who has been the victim o f unscrupulous trade prac­ 1 See, for example, MOTOR VEHICLE IN FO RM ATIO N AND COST SA V ­ IN G S A C T \5 U.S.C.A. 1988, 1989; UNIFORM CONSUMER SA L E S PRAC­ TICES A C T (U.L.A.); TRADE PRACTICES A C T , S B C. 1974, c.96; Bill 55, 4th Sess., 29th Legis., Ontario 23 Eliz. II, 1974; Bill 21, 4th Sess., 17th Legis., Alberta 24 Eliz. II, 1975. 2 Ontario Law Reform Commission, REPO RT ON CONSUMER W A R R A N ­ TIES AN D G U ARAN TEES IN THE SA LE OF GOODS (Ontario, Department of Justice, 1972) p. 32. 3 See: P.S. Atiyah and F.A.R. Bennion, “ Mistake in the Construction of Contracts;, (1961), 24 Mod. L.Rev. 421 at 433. 4 R.S.N.B. 1973, c. S-l ss. 13-16. 5 Ontario Law Reform Commission, Supra n.l at pp. 36-41. 58 U.N.B. L A W J O U R N A L conclusion as to the natu re o f this all im por tan t distinction between concealm ent and non-disclosure. Essentially the types o f concea lm ent which am oun t to a fraudulent m isrepresentation, entitling the purchaser to an action in deceit seem to fall generally into one or m ore o f the following categories: (1) steps taken to prevent exam ination; (2) camouflaging the defect; (3) diversion of the buyer’s a t tention; (4) avoidance of the buyer’s suspicion; or (5) creation o f a false m arket. There is however, nothing sacred abou t the preceding classifica­ tions and it is quite possible tha t o ther methods o f concealm ent could be construed as fraudulent m isrepresentations. B. THE TYPES (i) Steps Taken to Prevent Examination. The philosophy behind the m axim caveat em ptor is tha t the purchaser is free to inspect the goods or property offered for sale. He should therefore be responsible for his failure to discover patent defects. Consequently , any a t tem pt by the vendor to prevent the purchaser’s exam ination of the goods or property and to thereby avoid his discovery o f the defects, am ounts to actionable conceal­ ment. Schneider v. H eath18 provides the best illustration of conceal­ ment by means of avoiding inspection. In tha t case, the defendant had taken his ship, the Juno, from the w ater to dry dock for minor repairs when he discovered tha t the ship’s keel was in an advanced state o f deterioration . The Defendant prom ptly “ took her from the ways on which she lay, and where the s ta te o f her bo ttom and her keel might easily have been discovered, and kept her constantly afloat, so tha t these defects were completely concealed by the w a te r .1” ’ The ship was advertised for sale “ with all defects” and sold to the Plaintiff. Lord Mansfield, C .J. held that such conduct con­ stituted “ positive fraud” , entitling the plaintiff to a return o f his deposit. Intention to defraud the P laintiff was implied from the D efendant’s conduct. Schneider v. Heath should be contrasted with Baglehole v. Walters20, where Lord Ellenborough affirmed the sale o f a ship “ with all defects” on the ground tha t no active step had been taken to con­ 18 (1813), 3 Camp. 506, 170 E.R. 1462. 19 Id., 170 E.R. 1462 at 1463. 20 (1811), 3 Camp. 154, 170 E.R. 1338. U.N.B. L A W J O U R N A L 59 ceal the defect. Since the a l l- im portan t requirem ent for some positive act, such as returning the ship to the water to prevent ex­ am ination , was lacking, the defendant was guilty o f no fraud. Lord Ellenborough said: “ In a con trac t such as this I think there is no fraud, unless the seller, by positive means, renders it impossible for the purchaser to detect la tent faults .” 21 A nother com m on m ethod o f preventing the purchaser from conducting an exam ination o f the goods being offered for sale is by m eans of a falsehood to the effect tha t the goods for some reason canno t be inspected. This tactic is frequently employed in the sale of real property . F or example, in Leeson v. Darlow22 the defendant would not allow the P la in t i f fs representative to see any par t o f the tenem ent house except the basem ent by suggesting: “ . . . it would be unwise to make any attempt to see through the building, that the tenants objected to being shown through, prospective purchasers and such like and that it would be better not to go through” .23 T here followed a positive assurance tha t the premises were in excel­ lent repair; nonetheless, the a t tem p t to prevent the purchaser from discovering the dilapidated condition o f the house constitu ted a fraudulent concealment. M asten J.A . o f the O n ta r io C ourt o f A p ­ peal said: Active concealment of a fact is equivalent to a positive statement that the fact does not exist. By active concealment is meant any act done with intent to prevent a fact from being discovered...24 A similar finding was m ade in A bel v. M acDonald25 when the plaintiff purchased premises in such a sta te of repair that they im ­ mediately collapsed. The Defendant had prevented the plaintiff from discovering the s ta te o f disrepair by refusing to allow the plain­ tiff to examine certa in room s o f the house on the excuse tha t her child was ill and also by drawing the blinds to those room s to frustra te any a t tem p t m ade by the plaintiff to inspect from the o u t­ side. (ii) Camouflaging The Defect Another positive act am ounting to fraudulent concea lm ent is the cam ouflaging o f defects. As stated in Kerr on Fraud And M istake , “ ...a vendor may not. ..use any art or practise any artifice to conceal defects...for the purpose o f throwing the buyer off his guard , or use any device to induce the buyer to omit inquiry or exam ination 21 Id., 170 E.R. 1338 at 1339. 22 (1926), 59 O.L.R. 421; (1926] 4 D.L.R. 415 (Ont. C.A.) 23 59 O.L.R. 421 at 439-440. 24 59 O.L.R. 421 at 440. 25 (1964), 45 D.L.R. (2d) 198 (Ont. C.A.). 60 U.N.B. L A W J O U R N A L into the defects of the thing sold” .26 In Horsfall and Another v. Thomas27 the defendant ordered a cannon from the plaintiff, giving two bills o f exchange in paym ent therefor. The defendant defaulted on the second bill when a defect in the cannon caused it to explode. The defendant claimed tha t the p la intiff had inserted a metal plug in the cannon to conceal the defect from any person inspecting the gun. Bramwell B. said th a t the defendant would have been justified in rescinding the con trac t if there was evidence o f active concealm ent which did in fact conceal the defect. However, since the court found tha t the defendant had not exam ined the cannon, it was impossible for the a t tem pted con­ cealm ent to have had any opera tion on the de fendan t’s mind or con­ duct. On this ground, judgm ent was entered for the plaintiff vendor. T h a t pa r t o f Bramwell B.’s judgm en t has since been questioned. The facts presented in the case could equally support the conclusion tha t the defendant did indeed exam ine the cannon. C ockburn L.J. in Smith v. Hughes28 would likely have allowed the defendant to repudia te the con trac t on grounds o f active concealm ent tan tam o u n t to fraud. Certain ly the p la in t i f f s a t tem p t in the Horsfall case met the test of active concealm ent put forth by M asten J .A. o f the O n ­ ta rio C o u r t o f Appeal in Leeson v. Darlow: “ ... to cover over the defects o f an article sold with intent tha t they shall not be discovered by the buyer has the sam e effect in law as a s ta tem ent in words tha t those defects do not exist” .29 Defects may also be cam ouflaged by the m ethod o f packing. It is not uncom m on, for example, to purchase a bushel of what appears to be fresh, ripe apples, only to discover upon removing the top layer tha t the bulk is neither ripe nor fresh. While this may at tim es fall under the sale by sample rules o f the N ew Brunswick Sale o f Goods Act*0, such practices would also seem to constitute active conceal­ ment. In Udell v. Atherton3I, M artin B. suggested tha t it was fraudulent to conceal a hole in a log of m ahogany being offered for sale by turning the log over. In Jones v. Bowden'2 it was held th a t a m isrepresenta tion had been m ade in the sale o f sea-dam aged pimento , when the samples from the bulk showed no such defect in the pimento. 26 Supra., n. 16 at p. 49. 27 (1862), 1 H. & C. 90, 158 E.R. 813. 28 (1871), L.R. 6 Q.B. 597, See: J.P. Benjamin, BENJAM IN ON SA LE S (New York: Hurd and Houghton, 1877) p. 441-442. 29 Supra., n. 22 at 59 O.L.R. 440. 30 R.S.N.B. 1973, c. S -l, ss. 14, 16. 31 (1861), 7 H. & N. 172; 158 E.R. 437. 32 (1813), 4 Taunt. 847; 128 E.R. 565. See: Bower and Turner, THE LA W OF AC­ TIONABLE M ISREPRESENTATIO N, supra, n. 17, p. 72. U.N.B. L A W J O U R N A L 63 sent by implication the value o f the property offered for sale by m a k ­ ing the dem an d for it appear much grea ter than it is in fact. It can, however, be used to conceal facts o ther than the fair m arke t value or dem and. This m ethod o f concealm ent has probably had its greatest use in share transactions. In Scoff v. Brown, Doering, M cNab and Co.42 it was held that an agreem ent between two or m ore persons to purchase shares in a com pany to induce o thers to believe tha t there was a far g rea ter value to the shares than actually existed was a fraud on the persons so deceived. III. THE POSITIVE ACT PREREQUISITE W hether the concealm ent is brought about by (i) preventing an exam ina tion by the purchaser, (ii) cam ouflaging the defect or m ateria l fact, (iii) diverting the buyer’s at tention , (iv) avoiding his suspicions or (v) creating a false m arke t , the com m on thread running th roughou t the cases on actionable concealm ent is the requirem ent for som e positive, aggressive act of concea lm ent on the part o f the vendor. The only real chink in the a rm o u r was Hill v. G ray , al though that too is reconcilable.45 The im portan t and decisive ele­ ment is tha t of the positive act because the o ther required elements o f fraudulent intent, deception and materia lity may all be implied by virtue o f the ac t. To say, as did Jervis C .J. in Keates v. Cadogan44 tha t the act must be “ aggressive” is misleading. Anything tha t goes beyond mere silence or mere omission will suffice to constitute an “ active” concealment. Alternatively, the d isappointed buyer might argue that the mis­ take or deception was such tha t there was no consensus ad idem as to the identity o f the subject m a tte r or o ther materia l term . P roo f of the vendor’s active concealm ent is not essential to such an a rgu ­ m en t4'. If there is no consensus ad idem, there is no contract. Lord A tkin however, said that a m is take as to quality will not affect assent unless (1) it is the m istake o f both parties and (2) “ is as to the ex­ istence of some quality which m akes the thing without the quality es­ sentially different from the thing as it was believed to be.” 4h The fine line between active concealm ent and mere non­ disclosure is best exemplified in Schneider v. Heath , the facts of 42 [18921 2 Q.B. 724 (C.A.). See also: N ATIO N AL EXCHANGE CO OF Glasgow v. Drew (1855), 2 Macq. H.L. 103 and R. v. Deherenger (1814), 3 M. & S. 67; 105 E.R. 536. 43 See supra, at pp. 12, 13. 44 Supra., n. 35 at 138 E.R. 238. 45 Cundy v. Lindsay 3 A.C. 459; Smith v. Hughes (1871) L.R. 6 Q.B. 605; London Holeproof Hosiery Co. Ltd. v. Padmore (1928), 44 T.L.R. 499 (Eng. C.A.); Scriven Bros. A Co. v. Hindley & Co. [1913] 3 K.B. 564. 46 Bell v. Lever Brothers. Ltd., [1932J A.C. 161, 218 (H.L.). 64 U.N.B. L A W J O U R N A L which were discussed supra, and Ward v. Hobbs*1. In Ward v. Hobbs the defendant sold pigs “ with all faults” in a m a rk e t knowing th a t they were infected with typhoid. The Plaintiff purchased the pigs and, upon discovering the typhoid, sued the plaintiff claiming com pensa tion . The H ouse o f Lords said there was no du ty on the defendant to disclose the existence of the typhoid even though the health inspector at the m a rk e t had declared the pigs to be sound. By putting the pigs up for sale at the m arke t , knowing all the while o f the contag ious disease and of the health inspector’s e rror, the defen­ d an t had still com m itted no positive act o f deceit. Consequently the pla in tiff was without remedy. However, in the ana lagous Schneider case there was an additional factor: the defendant took the boat from the dry dock after realizing the condition o f its hull and put it in the w ater to avoid inspection by prospective purchasers. It was on this fact tha t the case hinged. I f the boat had been in the water all a long and if the vendor had som e other means whereby he knew of the condition o f the b o a t ’s bo ttom , the purchaser would have been left w ithout a remedy. It is interesting to note th a t in light o f R v to w Marine** both Ward v. Hobbs and Schneider v. Heath m ight be decided in favour o f the purchaser today on the ground tha t the concealed defects th rea tened the physical safety o f the purchasers. The Plaintiff would, however, be restricted to dam ages a t tr ibu tab le to breach o f the duty to warn which m ay, in an appropr ia te case, include econom ic loss. O f course this argum ent is o f no avail where the goods sold present no threa t o f physical harm and the defect or fact concealed affects only the value or quality o f those goods. Therefore R ivtow Marine would not be arguable in Am es v. Investo-Plan et al49 where, in selling treasury shares in the Perfo rm ance Plus Fund Ltd., it was not disclosed tha t the prospectus o f the com pany had never been approved by the Securities Com m ission o f British Colum bia . S ince the re was neither s ta tu tory relief available to the plaintiff nor any active concealm ent by the defendant, the British C olum bia C o u r t o f Appeal affirmed the validity o f the transaction . O ne interesting depa r tu re from the norm al positive act require­ m ent is in the area o f fraudulent concea lm ent o f a cause o f action. In A pplegate v. M oss50 and King v. Victor Parsons & C o .51 the English C o u r t o f Appeal has espoused a doctrine o f “ equitable f raud” . If the defendant is aw are th a t the p la intiff has a cause o f action against him 47 (1878), 4 A.C. 13 (H.L.). 48 (1974) S.C.R. 1189 (S.C.C.). 49 (1973) 35 D.L.R. (3d) 613 (B.C.C.A.). 50 [1971] I Q B 406 (Eng. C.A.) 51 [1973] I W.L.R. 28 (Eng. C.A.). U.N.B. L A W J O U R N A L 65 for breach o f con trac t and he does not disclose tha t fact to the pla in­ tiff, the defendant is guilty o f a fraudulen t concealm ent whereby the English Limitations A ct s tipulates th a t the six year l im itation period will not begin to run against the plaintiff until he discovers the breach of contract. While these cases form an interesting con tras t to the co m m on law concea lm ent rules, their application is limited to disclosure o f breaches of te rm s o f existing contracts . The non­ disclosure does not give rise to any rights and liabilities; ra the r it ex­ tends a lready existing rights and liabilities. They have no par t in the negotiat ion o f contracts . IV. REMEDIES A . D A M A G E S D am ages are available to the victim o f a seller’s fraudulent con ­ cealment. Dam ages are recoverable for: (i) pecuniary loss; (ii) personal injury; (iii) property d am age or loss. A claim for dam ages for active concealm ent is founded in the to r t o f deceit. D am ages for pecuniary loss therefore do not reward the ex­ pecta tion interest. The philosophy behind dam age awards in tort c laim is to put the plaintiff in the position he would be in had the fraudulent m isrepresentation by m eans o f concealm ent not been m a d e .52 The m easure of dam ages is the difference between the purchase price actually paid by the Plaintiff and the value of the property at the time o f the sale. The failure to com pensa te the purchase r’s expectation interest can be o f considerable significance. Parna et al v. G A S . Proper ties Ltd. et a li} is an exam ple of such an instance. In the Parna case, the plaintiffs paid $251,000 for property , the net annual income on which the defendant vendor fraudulently represented to be $24,193, or an annual yield o f 9.6% on the actual purchase price. In fact, the net annual income of the property was only $21,807. The trial judge, in assessing the dam ages, determ ined the am oun t o f capital which at 9.6% would yield a net annual income o f $21,807. He found it to be $226,210. He then gave the plaintiffs judgm ent for the difference between $251,000 (the am oun t paid) and $226,210; in o ther words, $24,790. O n appeal, the judgm en t was varied and the plaintiff aw arded only the reduced sum o f $4,000. Evans J .A . said that the 52 John G. Fleming, THE LA W OF TORTS (Australia: The Law Book Co., 1971 ) pp. 560-561. See also: Parna et al. v. G. & S. Properties Ltd. et at (1969), 5 D.L.R. (3d) 315, at 317 (Ont. C.A.; Hepting et al v. SchaaJ, [ 1964J S.C.R. 100 (S.C.C.). 53 (1969). 5 D.L.R. (3d) 315 (Ont. C.A.) (per Evans J.A.). 68 U.N.B. L A W J O U R N A L PART TWO: REFORM OF THE COMMON LAW OF CONCEALMENT: A DUTY OF DISCLOSURE V. DISCLOSURE OF KNOWN MATERIAL DEFECTS The curious and rather a rb it ra ry distinction between mere silence and active concealment begs the simple question: “ W hy?” . The vendor scarcely seems less morally b lameworthy because he ac­ quiesces in the buyer’s m istaken belief. In either instance, he is t a k ­ ing an unfair advantage of an unsuspecting buyer. One may also question why the courts have moved only so far as to impose a duty to disclose those defects which endanger the user’s safety. Should this trend not be extended to include all defects, even those affecting quality. Finally, it remains to be considered why quality-related defects are not at least tan tam oun t to a breach of such o f the implied conditions as fitness for purpose.62 T h e m ax im caveat em ptor developed because o f the acknowledged need for certainty to govern the day to day affairs and dealings o f businessmen. It is essential to both parties in the bargaining process tha t identifiable rights and duties be created. Any other system would be intolerable and unm anageable . The courts are reluctant therefore to interfere in either the bargaining process or the final contract. Parties should be free to con trac t their own term s. Atkin L.J. expressed this sentiment in Bell v. Lever Brothers Limited:"' ...Nothing is more dangerous than to allow oneself liberty to construct for the parties contracts which they have not in terms made by importing implications which would appear to make the contract more businesslike or more just... and later: ...Nevertheless it is of greater importance that well established principles of contract should be maintained than that a particular hardship should be redressed... Bramwell B. said it would be “ mischievous” if the seller were: ...bound to point out everything which might by any possibility be con­ sidered a defect; and the consequence would be that if the manufacturer, for prudence sake, pointed out some flaw which made no difference whatever in the value of the article, the purchaser would immediately say, 'There is a defect, I must have an abatement of the price'....64 Such opinions are not without considerable merit. It would be in­ conceivable that a seller should be obliged to point out every single defect o r flaw. Such a standard would be thoroughly subjective and 62 SA LE OF GOODS A C T R.S.N.B. 1973, c. S -l, S. 15(a). 63 [1932] A.C. 161 at 226 and 229 (H.L.). 64 Hors/all et al v. Thomas (1862), 1 H. & C. 90, 158 E.R. 813 at 817. U.N.B. L A W J O U R N A L 69 grossly unfair. N o vendor should be left so unprotected tha t he is not able to oblige a purchaser to accept responsibility for faults which to a reasonable m an with average intelligence would have been readily apparen t upon inspection, so long as nothing was done to hinder that inspection of the property. It is submitted , however, tha t where there are (1) m ajo r defects affecting quality; (2) o f which the vendor is aware (3) a t the tim e the con trac t is made, other principles ought to be considered. In all the cases where active concealment was held to be fraudulent, these three factors were present. In all instances the defects were such that, had the purchaser been aw are of the ex­ isting defects, he would not have entered into the contract o r a l te r­ natively, would have done so at a greatly reduced price. If any of these three requisites (materiality , knowledge, and pre-existence) were lacking, the purchaser would not have successfully proven con­ cealment. However, in creating the rules related to active concealment, the courts have perhaps mistakenly over-emphasized the infringement o f the right to inspect. As a result, we have arrived at this a rb itra ry dis­ tinction between active concealm ent and mere non-disclosure. The elements o f unconscionability, so im portan t to the result , have been overlooked in providing reasons for that result . Recognition should be given to a concept whereby knowledge affects the passing of the risk to the buyer. If a choice has to be m ade between an im m oral and unscrupulous vendor and a reckless, and perhaps naive, purchaser, surely the risk should fall to the individual guilty o f sharp and unconscionable conduct whenever the defect is o f m ore than minimal significance. O f course, the m ore significant the defect must be before there is a duty to disclose its existence, the grea ter the chance tha t a court would be able to fit it into one of the implied term s of the Sale o f Goods A ct. However, it is undesirable tha t a purchaser should be obliged to prove an implied term in all such cases. If the Sale o f Goods A ct is relied upon, a vendor with a superior bargaining posi­ tion who has intentionally taken advantage o f the weaker party may be able to con trac t out o f an implied te rm by a properly worded ex­ clusionary clause. F urtherm ore , the implied term s of the Sale o f Goods A ct apply only to dealers. It does not m ake sense tha t a duty of disclosure or a doctrine o f unconscionability should be limited to a vendor acting in the course of his business. It should apply equally to private sales. This p roposed duty of disclosure is not as broad as the duty to warn imposed by Rivtow Marine. There the duty is to warn of defects which endanger the user’s personal safety. The duty con ­ tinues even after risk has passed to the buyer. The reason for such a duty is the overriding public interest in its own personal security. In 70 U.M.B. L A W J O U R N A L the norm al contract situation, there is no reason to continue the duty of disclosure once property, and therefore risk, have passed to the buyer. The Rivtow Marine case seeks to protect an entirely different interest. The vendor’s knowledge at the time of bargaining is irrele­ vant in Rivtow. The reason for imposing a duty to disclose known m ateria l defects in everyday con trac ts is to introduce a degree of conscionability and fairness into the bargaining process, not to protect one’s personal safety. The bargaining is over when the con­ trac t is made. N o t only would a policy that required disclosure after risk had passed be unreasonably harsh, it would be impossible to ad ­ minister. If the buyer wishes such protection, he should procure specific assurances from his seller. If a duty to disclose known m ajo r defects is to be imposed, a test must then be found for m easuring the significance o f defects. Its s tandard must be objective. One possible test is whether o r not the defect is such that it renders the good unfit for the purpose for which it was intended to be put. Such a test would catch the dry rot on the ship’s keel in Schneider v. Heath , the typhoid infected pigs in Ward v. H obbs, the d ilapidated tenement house in Leeson v. Darlow and A bel v. MacDonald, the faulty cannon in Horsfall v. Thomas, the hole in the m ahogany log in Udell v. A therton , the sea-dam aged pim ento in Jones v. Bowden , the “ an t iqued” furniture in Patterson v. Landsberg and Son, and the phony painting in Hill v. Gray. An obligation to disclose such defects would impose no grea ter hardship on the vendor who is aw are o f the defect than is already imposed by the com m on law rule not to conceal such defects. The vendor is no less morally blam ew orthy by virtue of his silence. It might be felt tha t a fitness for purpose test is too strict. Perhaps the court should be given flexibility to impose disclosure re­ quirem ents where the fact not disclosed is m ajo r although not so significant as to affect its fitness for purpose. If such is the case, the test might be whether a reasonable purchaser, aw are o f the defects, would have entered into the transaction at all, or whether he would have done so only at a greatly reduced price. The draw back to such a test is its imprecision and uncertainty. How much lower would the fair value o f the goods have to be before a court could say with any certain ty that the buyer would have entered into the transaction only at a much lower price. A fitness for purpose test clearly affects only m ajo r defects and, if liberally construed, should catch most cases of injustice. On the other hand, the second test covers a much broader range of transactions than does fitness for purpose. For example, the fitness for purpose test does not catch the b la tant abuse m ade of suggestive selling techniques by m any fast food franchisers who know tha t the consum er is confused or misled as to what foods are included in each item of their menu. The consum er still gets food capable o f consum ption, but if he had been aw are of what he would U.N.B. L A W J O U R N A L 73 C. IM PLIED TERM S (i) Goods To Correspond With Description. Som e relief for the purchaser m ay be found in the implied term s o f the Sale o f Goods A c t ,69 especially m erchantabili ty (section 15 (b)) and fitness for purpose (section 15 (a)). Section 14, which implies a condition that the goods sold by description shall corres­ pond with the description, is o f little com fort where the defect is related only to quality. It is unlikely that the quality related defect will be so great as to affect the identity o f the goods offered for sale. However, once it has been shown tha t the goods do not correspond with the description, the implied condition o f conform ity is thereby breached regardless of how insignificant the variation. The initial, and usually fatal, hurdle is to show that the article purchased is not in fact the article described.70 The requirem ent that there be a sale by description is easily met despite tha t the buyer saw and examined the goods before m aking the contract if the deviation from descrip­ tion is not appa ren t .71 Even an over-the-counter t ransaction has been trea ted as a sale by descrip tion72. Generally, it is true to say tha t the only case of a sale not being by description occurs where the buyer m akes it clear tha t he is buying a particular thing because o f its uni­ que qualities and that no other will do. (ii) Merchantability. The consum er’s greatest friend is probably found in the m erchantabili ty rule of section 15 (b). It sta tes goods must be o f m erchantab le quality if: (1) they are bought by description, (2) from a seller who deals in goods of that description. The second requirem ent thereby rules out all private t ransac­ tions. Various definitions have been a t tached to “ m erchantab le qual ity ’’. Farwell L.J. described m erchantabili ty in the following terms: ...if article of such a quality that a reasonable man acting reasonably would after a full examination accept it under the circumstances of the case in per­ formance of his offer to buy that article whether he buys for his own use or sell again...73 69 R.S.N.B. 1973 c. S -l. 70 Arcos Ltd. v. E.A. Ronaasen and Son. [1933] A.C. 470, [ 1933J All E.R. 646 (H.L.). 71 Beale v. Taylor [1967] I W .L.R. 1193. 72 Godley v. Perry, [1960] I W.L.R. 9. However, see Godsoe v. Beatty (1958), 19 D.L.R. (2d) 265 (N.B.C.A.) which leaves the situation in New Brunswick very un­ settled; and Peters v. Parkway Mercury Sales Limited (1975), 10 N .B .R. (2d) 703. 73 Bristol Tramways Co., Ltd. v. Fiat Motors Ltd. [1910] 2 K B . 831 at 841. 74 U.N.B. L A W J O U R N A L Lord W right in Grant v. Australian Knitting M ills74 said m erchan ­ tability am ounted to fitness for the general purpose for which the goods are used. This la t te r definition would exclude minor defects which do not affect the useability of the good. The H ouse o f Lords in Henry Kendall and Sons v. William Lillico and Sons L td .1' said goods are of m erchan tab le quality if the buyer ...fully acquainted with the facts and, therefore, knowing what hidden defects exist and not being limited to their apparent condition would buy them without abatement of the price obtainable for such goods if in reasonably sound order and condition and without special terms.... While it is not within the scope of this paper to em bark on a detailed exam ination of m erchantabili ty , it is clear from the above definitions tha t merchantabili ty is not a settled concept. All defects are not caught by it. It is a doctrine which relates more to useability and, consequently, many defects will not render the goods unm erchan ­ table.76 As in the case o f Smith v. Hughes much will depend upon the description by which the goods were purchased. (iii) Fitness For Purpose The fitness for purpose doctrine m ay also be used to the advan­ tage of a buyer who, to the seller’s knowlegde, has purchased goods under some mistaken belief as to their quality or o ther m ateria l fact. Section 15(a) o f the Sale o f Goods A ct states tha t where the buyer, expressly or by im plication, m akes known to the seller the particular purpose for which the goods are required so as to show his reliance on the seller’s skill or judgm ent, there is an implied condition that the goods shall be fit for such purpose. As with the merchantabili ty rule, the vendor must be a dealer in goods o f tha t description. Reliance is not difficult to prove because where goods are normally used for one purpose, the seller will be taken to know the purpose in the absence of a con tra ry indication by the buyer.77 F urtherm ore , substantial, not sole, reliance is all tha t is required .78 Section 15(a) does not apply where the sale was o f an article purchased under its paten t or other trade nam e. 74 [1936] A.C. 85. 75 [1969] 2 A.C. 31 (H L.). 76 For a further discussion on the question of merchantability, see: P.S. Atiyah, The Sale o f Goods (Toronto: Carswell Co. Ltd., 1971) 4th ed., pp. 80-85; Ontario Law Reform Commission, Report On Consumer Warranties and Guarantees in the Sale o f Goods (Ontario: Department of Justice, 1972), pp. 36-41; K.J. Dorè, First Report o f the Consumer Protection Project (New Brunswick, Department of Justice, 1974) pp. 69-90. 77 Grant v. Australian Knitting Mills [1936] A.C. 85 (per Lord Wright). 78 Freeman et al v. Consolidated Motors Ltd. (1968), 69 D.L.R. (2d) 581 (Man. Q B ). U.N.B. L A W J O U R N A L 75 (iv) Conclusion. M any instances of quality-re la ted defects will not be sufficient to render them unfit for their particular purpose. M erchantab ili ty is m ore likely to be of assistance to the buyer. Fitness for purpose does, however, provide an opportun ity for a court or judge to avoid an unjust result if active concealm ent cannot be established, whereby the m axim cavaet em p to r would otherwise be applied against the purchaser. The m ajor problems confronting a purchaser seeking to apply the implied conditions o f m erchantabili ty and fitness for purpose are: (1) p roof o f sale by description; (2) the dealer requirem ent; (3) the vagueness of the applicability o f the term s themselves; (4) the uncertainty whether the defect o f quality is sufficient to render the goods unfit for purposes or unm erchantable . D. THE D O C T R IN E OF FRA UD. T he positive act of concea lm ent is a fraudulent m isrepresen ta­ tion tha t the goods a re o f the condition and quality tha t they appear ex facie to be. If an act can constitute a m isrepresenta tion , so too should silence in approp r ia te situations. In o ther areas o f tort law, an omission to act can am o u n t to a breach o f duty with resultant liability. “ M isrepresen ta tion” is an unfortuna te label to apply to such conduct by the vendor. It is a m isnom er and may o f itself be responsible for re ta rd ing the expansion o f concealm ent rules into the area o f non-disclosure. The failure to impose a duty to speak when it is reasonably a p ­ paren t tha t the purchaser is labouring under a deceptive belief am oun ts to a licence to take unfair advan tage o f others. It is really a fraud on the buyer. “ F ra u d ” would be a m ore appropria te te rm than “ m isrepresen ta tion” and would be m ore conducive to expansion o f its rules into the area of non-disclosure. Such has been the ex­ perience in most A m erican jurisdictions. T o extend fraudulent con ­ cealm ent into the a rea o f non-disclosures would not m ean tha t the vendor thereby loses his right to secure the best possible bargain. It would not sanction the buyer’s recklessness. It means only that the seller shall be bound by the limits of reasonableness, fairness and honesty. Indeed, p roo f of the vendor’s fraud would be m ore difficult given the absence o f any positive act of concea lm ent and would con ­ sequently afford som e m easure of protection to the vendor. The A m erican approach , although similar in m any respects, has differed from tha t o f C an ad ian and English courts in one im portan t area; namely, the duty to disclose. The distinction between mere silence and active concea lm ent by some trick or contrivance also ex­