Secrets and Lies (Part I)

Sellers of residential real property in Hawaiʻi must disclose facts that would affect their property’s value to a reasonable person. But what if a buyer agrees to purchase a property "as is"?

Secrets and Lies is a special two-part series featuring Jason E. Korta, staff attorney for Hawaii REALTORS(R), and Christopher St. Sure, a partner at Goodsill Anderson Quinn & Stifel. It answers questions like, "What defects or conditions of a property in Hawaii can a buyer agree to accept without disclosure?" and "Can an as is agreement protect a seller from a claim that they misrepresented, concealed, or failed to disclose a material fact?". 

Chapters

• 0:00 Introduction
• 0:45 Real Data Report
• 6:56 Focus Piece
• 33:01 Conclusion

Transcript

SECRETS AND LIES
PART I: MISREPRESENTATION AND CONCEALMENT

© 2023 by Hawaiʻi Association of REALTORS®. All rights reserved.

1259 Aʻala Street, Suite 300
Honolulu, HI 96817
Phone: (808) 733-7060
Email: har@Hawaiirealtors.com

Introduction

Welcome to Hawaiʻi Real Estate, a podcast by the Hawaiʻi Association of REALTORS®. Our podcast airs the first Wednesday of each month. Each episode includes a Real Data Report, which describes Hawaiʻi pricing, inventory, and market conditions, and offers a special focus piece on a legal issue surrounding the buying, selling, renting, leasing, or managing of property in Hawaiʻi.

Today is Wednesday, April 5, 2023. Our focus piece for this episode is part of a special two-part series. Secrets and Lies examines parties who misrepresent, conceal, or withhold information, and answers what powers so-called as is agreements have to cover their sins. 

But first we turn to our Real Data Report:


Real Data Report

Price

The median listing price for a home in Hawaiʻi in February 2023 was $827,500, which is $35,475 (4.11%) lower than the previous month. Both the City and County of Honolulu and Hawaiʻi County recorded declines in their median listing prices:

• Hawaiʻi County’s median listing price in Febrary 2023 was $599,250, which was $30,750 (4.88%) lower than the previous month; and
• the City and County of Honolulu’s median listing price in February 2023 was $781,250, which was $32,250 (3.96%) lower than the previous month.

Interestingly, neither Maui County nor Kauai County saw declines. The median listing price for a home in Maui County held at $1,395,000, and the median listing price for a home in Kauai County actually rose by $52,000 (3.39%) to $1,582,000.

Average listing prices followed a similar curve. Like the median listing price for a home in the State of Hawaiʻi, which declined last month by 4.11%, the average listing price for a home in the State of Hawaiʻi declined by 4.96%. Hawaiʻi County and the City and County of Honolulu, which each saw median price declines last month, also each saw average listing price declines, while Maui County saw really no change in either its average or median listing price. The near perfect overlays of the median and average listing price curves indicate that luxury homes, mid-market homes, and starter homes are experiencing the same price pressures.

The only notable difference is Kauai County, which saw an uptick in median home value last month of 3.39%, but did not see a material change in its average listing price. Luxury homes in Kauai County appear more resistent to economic indicators, interest rates, new construction, or other outside forces on price.

Monthly year-over-year price data supports this conclusion. Median monthly year-over-year listing price curves across the islands are pointing down. They remain in positive territory, but are lower than they were last month—with one exception Kauai County, which had a monthly year-over-year median listing price last month of 16.86%, approximately 3 pecentage points higher than the previous month. 

Overall, though, year-over-year price data indicates widespread price volatility. Median listing prices over the past five years have fluctuated signifianctly in all counties, with some counties showing negative year-over-year growh and others showing postiive growth. It is difficult to accurately forecast future prices.

Inventory

Housing inventory in the State of Hawaiʻi continued to grow. From January 1, 2023 until February 1, 2023, Hawaiʻi increased its active listings by 63.48%, a climb in monthly year-over-year changes in active listings begun over a year ago. The City and County of Honolulu saw the steepest rise in active listings, recording a 71.78% increase over the previous month, followed by Hawaiʻi County at 64.25%, Maui County at 45.62%, and Kauai County at 31.72%.

Hawaiʻi County’s rise in active listings could, unfortunately, be a symptom of a cooling housing market. The median number of days homes stay on the market increased in all counties, but none so dramatically as Hawaiʻi County. A home that closed in Hawaiʻi County in February 2023 took 57.01% longer to close than a home that closed there the previous month. So Hawaiʻi County’s rise in active listings might stem from new homes being added to the market before homes already on the market can sell. 

Interestingly, though, the strongest markets in the state recorded the second and third highest monthly increases in listing periods. Homes that closed in Kauai County in February 2023 took 45.91% longer to close than homes that closed the prior month, and homes that closed in Maui County in February 2023 took 44.76% longer to close than homes that closed prior month.

Maui County’s median listing period increase might owe to Maui County’s existing short median listing period. Homes that closed in Maui County in February 2023 closed in a median 23.5 days, that’s the shortest listing period in the state.

By contrast, homes that closed in Kauai County in February 2023 were on the market a median 116 days, nearly twice the time it took to close a home in the City and County of Honolulu (66 days), five times the time it took to close a home in Maui County (23.5 days), and four times the time it took to close a home in Hawaiʻi County (30.5 days). It’s unclear why Kauai County, which manifests many other relatively strong housing market indicators and already had an exceptionally long listing period, suffered the greatest increase in the median number of days homes stayed on the market.

Interest Rates

As we predicted during our last month’s Real Data Report, the U.S. Federal Reserve raised the target range for interest rates on March 23, 2023 by a quarter point. Surprisingly, on the day the Fed announced the target range hike, averages for the 30-year and 15-year fixed rate mortgage dropped. 

On March 23, 2023, the last day for which data was available before this Real Data Report was recorded, the 30-year fixed rate mortgage average in the United States was 6.42%, and the 15-year fixed rate mortgage average in the United States was 5.68%.

Rentals

The rental vacancy rate for the State of Hawaiʻi is reported annually. On March 15, 2023, we learned that Hawaiʻi’s rental vacancy rate in 2022 was 6.9%.

Over the past 37 years, rental vacancy rates in Hawaiʻi never exceeded 10.6%. The vacancy rate reached that high in 2016 and has since been on a mostly steady decline. So, although the housing market is slowing and showing volatility, the rental market is tightening and remaining predictable.


Secrets and Lies
Part I: Misrepresentation and Concealment

Introduction

Some facts are better left unsaid. Imagine sitting down to a first date in a fine romantic restaurant. It’s eight o’clock, your table is lit with candles, and your date is strikingly gorgeous. As they open their mouth to speak, the waiter arrives. The waiter announces the restaurant’s specials with practiced professionalism and surprises the table with complimentary champagne.

As the waiter retreats to allow you time to consider the haute cuisine on offer tonight, your gorgeous date leans in over the table, between the romantically lit candles, and whispers delicately so that only you can hear: “I have a contagious skin disease, and mental illness runs in my family.” 

Whoa, for a potential romantic partner, that’s arresting. I suspect most who hear it will decide that there will be no second date. Must your disclose their condition and family history and risk ending a relationship with you before it starts?

Secrets and Lies is a special two-part focus piece on what must be disclosed, and when.

Buyer Beware

Kramer and Newman, two loosely sane characters from the popular 90s television sitcom Seinfeld, strike a deal: Kramer will give his police radar detector to Newman in exchange for Newman’s motorcycle helmet. They shake hands and agree to make the exchange in their neighbor Jerry’s apartment.

Jerry is the show’s eponymous driving force—and Newman’s nemesis. He notices immediately that the deal is unfair: a police radar detector is worth much more than a motorcycle helmet. Just as Kramer and Newman are about to make the exchange, Jerry turns to Kramer: “Hey, you know you’re getting gypped over here?”

But it’s too late. Kramer and Newman already have a deal. They’ve had it since they shook hands outside Jerry’s apartment and agreed to exchange their gear—all that’s left now is for them to perform on their obligations.

Kramer receives Newman’s motorcycle helmet, and Newman—greedily giggling—receives Kramer’s police radar detector. Newman is excited. He rapidly waddles his jiggly frame out of his nemesis’s apartment. Down the stairs and to the street below Newman finds his car. He plumps down into it. Armed with Kramer’s police radar detector, he drops the hammer on the throttle and races to the Palisades for reckless adventure [car pealing out].

Minutes later, while speeding down the Palisades, [police siren growing louder] a strange sound pierces the air. Newman looks down to his new radar detector. It’s silent and dark. But there can be no doubt—the piercing sound emanates from the approaching long-arm of the law.

Parked in the breakdown lane on the Palisades while the police officer behind him writes him a ticket, Newman is awash with a sudden realization. He’s traded his motorcycle helmet to Kramer for an empty box.

Newman wants his helmet back. He meets Kramer in Jerry’s apartment and argues that he has the right to rescind his agreement with Kramer and get back his helmet because the radar detector he traded his helmet for was worthless. Jerry, as neutral mediator to Newman’s and Kramer’s dispute, looks Newman squarely in the eyes and says with the joy of a young boy on his birthday: “Buyer beware.”

Jerry is citing a centuries-old legal maxim. Buyer beware, or caveat emptor, dates back to 16th century England. We imported the concept to support our jurisprudence. Justice Davis, writing the U.S. Supreme Court’s 1870 majority opinion in Barnard v. Kellogg recognized as much when he supported the court’s holding for a seller who failed to disclose his products defects, reasoning that:

"No principle of the common law has been better established, or more often affirmed, both in this country and in England, than that in sales of personal property, in the absence of express warranty, where the buyer has an opportunity to inspect the commodity, and the seller is guilty of no fraud, and is neither the manufacturer nor grower of the article he sells, the maxim of caveat emptor applies."

Simply put, the default rule is caveat emptor, or “buyer beware,” and buyer beware burdens the buyer with discovering a product’s defects. It’s not the seller’s responsibility to inspect the product for those defects or to disclose them to the buyer. The Barnard court reasoned, like hundreds of courts since then, that a buyer is equally capable of evaluating a product as a seller, and thus a seller bears no special burden to inspect a product or disclose its defects. “Buyer beware,” Newman. 

There is no evidence that Kramer misrepresented the detector, actively concealed its defects, expressly warranted it, or prevented Newman from inspecting it. Kramer didn’t breach any warranty or commit any fraud. Newman chose not to inspect the detector. He risked trading his helmet for a defective product. Now Kramer has his helmet, and Newman has Kramer’s joyride junk. That’s sad for Newman, but Jerry was right, at least with respect to most commercial transactions: “Buyer beware,” Newman.

Misrepresentation: Hughes

Howard Hughes

Howard Hughes lived his last 15 years in self-imposed exile. As a younger man, though, he saw the world. He was a business magnate, investor, aviator, aeronautical engineer, filmmaker and philanthropist of world renown.

Hughes was born in Texas in 1905 and was the son of an oil tycoon. Both his parents died when he was young. So, at age 19, he inherited his family’s fortune.

That fortune helped propel his adventuring and success. As an aviator, he suffered four crashes—two spectacular, and one while setting the world airspeed record. He dated Joan Crawford, Bette Davis, Ava Gardner, and Katherine Hepburn—all Hollywood starlets. 

A court would remark that, later, “[b]y adopting a solitary existence that some would term eccentric, Mr. Hughes . . . drew even more attention to himself.” [Rosemont Enter., Inc v. McGraw-Hill Book Co., 380 N.Y.S.2d 839, 843 (Sup. Ct. 1975)]. He retreated to his home movie theatre, sat naked alone, and ordered his domestic servants to deliver his meals—always a medium rare steak with salad and peas—although the large peas would be meticulously identified and rejected. Same room. Same meal. For years.

There are reports that his lawyer once asked him to appear in court to sign a paper before a judge. After signing, he would be able to immediately leave.

“What would happen,” Hughes asked, “if I do not appear as you request?” “The judge could find for the other party,” the lawyer responded. “You would likely lose $100 million.” “Oh, fine, yes,” Hughes replied. “I’m staying.

Howard Hughes, business magnate, investor, aviator, aeronautical engineer, filmmaker, and philanthropist, was not well.

Clifford Irving

Clifford Irving decided to take advantage. To him, Hughes’s apparent agoraphobia was an opportunity.

Irving was born in New York City to a family of writers and intellectuals, unlike Hughes, who was born in Texas to oil tycoons.

But both grew up privileged and attended prestigious universities on their family’s largess, and both rocked their industries.

Hughes showed an early aptitude for aeronautical engineering and piloted his era’s most thrilling and possible most important flights. Irving also showed an early aptitude, but not for science or aeronautics. His talent lived in writing and journalism.
Irving began his career as a freelance writer, contributing to Esquire and Playboy. He gained early critical acclaim for his biography of the artist Elmyr de Hory, a notorious Hungarian art forger, who profited mightily by swindling NAZI officers into purchasing fake masterpieces. The book, titled Fake!, was a bestseller and established Irving as a respected author. 

Defrauding McGraw-Hill.

After writing Fake!, Irving traveled to his home on Ibiza, a small island of the coast of Barcelona. Traveling on a ferry from the mainland Spain to Ibiza, Irving read an article in Newsweek titled “The Case of the Invisible Billionaire.”

The story was about Hughes, of course, and it gave Irving an idea. Hughes’s had for years cloistered himself from the outside world. With each passing day intrigue grew. The people needed to know what had happened to this man who once loomed so large. “Can you imagine,” Irving thought, “what the public would pay to read Hughes’s biography?”.

“Even more, can you imagine what the public would pay to read his autobiography?” Autobiographies always generate greatened interest and produce greater profits. But Hughes, the incommunicative billionaire, would never write an autobiography. And so Irving thought: “What if I wrote it for him?”.

Hughes could contest the work as a fake, of course, but how likely was that? The man does not communicate with the outside world. Remember the reported decision he made on whether to appear in court to sign a paper before a judge? Hughes refused to leave his home, and so $100 million left his home instead.

Even if Hughes learned that there was a book out there, purportedly written by him and about him, would he leave his home or communicate with the outside world to contest it?
Irving bet he wouldn’t. And so Irving decided to get to work on a true fake.

The first step would be to convince a publisher to publish it. Irving already had a relationship with the major New York publisher McGraw-Hill. They had published his biography on Elmyr de Hory, the Hungarian art forger. Irving could contact Betty Lou, his editor at McGraw-Hill, and tell her that he had sent his art forger biography to Hughes because Hughes had known his father, and after reading it Hughes was so impressed that he asked Irving to help him write his autobiography. The story was a bit of a stretch, but remember: Irving’s parents had been upper-crust intellectuals from New York City. It wasn’t too farcical to suggest that they knew Hughes, who also ran in New York’s upper echelon.

Still, McGraw-Hill had a reputation for being a conservative publisher. They would need more evidence. “No problem,” thought Irving, the Newsweek article he read contained a photo of a letter Hughes had handwritten and signed. He could use that photo to forge a note on yellow legal pad paper, which he learned from the article was the only paper Hughes would use to write. The note would confirm that Hughes wanted to write an autobiography, helped by Irving, who would serve as Hughes’s sole interlocutor in this matter.

The note, combined with Irving’s story of a family connection to Hughes, was enough to convince McGraw-Hill to publish.
Step one complete.

Writing It

The next step for Irving was to learn everything he could about Hughes. That’s difficult, of course, because Hughes was a famous recluse. Very little information about his life over the past many years has seeped out of his very close circle of trusted advisers. How could Irving get the information about Hughes that he would need to make his Hughes autobiography convincing?

That’s when Irving was struck by grand serendipity. You’re going to think I’m making this up. I promise you, I’m not.
Irving visits his aunt at just the time he’s searching for fodder to make his Hughes autobiography believable. With his aunt while he’s visiting is a television producer and old family friend who had for years encouraged Irving’s writer career. The friend thinks he has a project for Irving.

Noah Dietrich, right-hand man to Hughes for the past 15 years, was recently fired, and he’s writing a tell-all book about Hughes, but he’s having difficult putting words to paper. He needs an editor and muse. Irving is a talented chap. Perhaps he could lend his talents to the project.

“I can get you Dietrich’s manuscript,” the old friend promises Irving, “but you will have to keep it in strictest confidence. It contains detailed, inside information on Hughes. Can you keep it secret?”

“Suuuurre,” responds Irving, not quite believing his luck. He receives the confidential Hughes manuscript and takes a walk to the Xerox store.

For a man writing a fake Hughes autobiography, the Dietrich manuscript is a treasure-trove and godsend. It contains not just valuable substantive content, but also illuminates certain intangibles about Hughes, like his parlance and mannerisms, that will bestow particular creditability to the fake.

Step two complete.

Release

Irving delivers a draft manuscript to McGraw-Hill. Later, when it’s ready to publish, McGraw-Hill issues a press release announcing to a stunned world that Hughes had secretly collaborated with Irving and McGraw-Hill to produce his autobiography, which would identify lies spoken about Hughes during his disappearance from the public eye and set the record straight before he dies.

As expected, the press release generates mass furious interest. Newspapers around the world publish stories on Hughes’s soon-to-be released autobiography. The Wall Street Journal, for instance, runs a headline that “Howard Hughes, perhaps the world’s best-known, least-seen man” was releasing an autobiography. The people ate it up.

But there is one person who objects. And I think you might know who.

Caught

Way beyond eccentric. Most everyone in the world thinks he’s mentally ill.

He can’t bring himself to leave his home or speak to anyone with whom he does not have a direct personal connection. But then he hears that he’s written an autobiography. 

The news hits him like a blunt instrument to the head. After the initial stupor wears off, indignation begins to burn. He must inform the world that the book is not his autobiography, but there he is, sitting naked in his home movie theatre, segregating the large peas from the small peas on his dinner plate of peas, salad, and medium rare steak. He must gather himself and contact the outside world.

Seated around a semi-circular conference room table thousands of miles away in Los Angeles, sit seven journalists with whom this man has a direct personal connection. Each was selected by his personal representative to sit at that semi-circular conference table to hear an important message. 

The man’s voice emanates from a telephone loudspeaker at the center of the table. Those seated around the table haven’t heard his voice for years—many, many years—but each seated soul instantly recognize it.

They take down his words. Speaking on the book identified as his autobiography, he says: “I only wish I were still in the movie business, because I don’t remember any script as wild or as stretching the imagination as this here has turned out to be.” When asked about his relationship to Irving, he says: “I don’t know him. I never saw him. I have never heard of him until a matter of days ago when this thing first came to my attention.”
Hughes phoned the world. The jig is up.

Ramifications

Irving induced McGraw-Hill into signing an agreement with him by misrepresenting his relationship with Hughes and by misrepresenting that manuscript they were paying him to produce would be Hughes’s autobiography. McGraw-Hill paid $765,000 under the agreement for the manuscript. Hughes would later prove to the Appellate Division of New York’s Supreme Court that the manuscript was a fake. The court would enter an order prohibiting McGraw-Hill from:

"publishing or disclosing in any manner whatsoever, in whole or in part, [t]he manuscript . . . , or any purported autobiographical materials of Hughes, prepared, assembled or written, in whole or part, by Clifford Irving, and from representing, either publicly or privately, that . . . [it] is entitled to publish the manuscript."

Like Newman and his worthless radar detector, McGraw-Hill had contracted for a worthless product. McGraw-Hill could do nothing with or say anything about the manuscript for which it paid $765,000. Buyer beware?

No, the legal principle of buyer beware that frustrated Newman’s attempt to nullify his contract with Kramer does not similarly frustrate McGraw-Hill’s attempt to nullify its contract with Irving.

Why? Buyer beware rests on the principle that a buyer and seller are equally capable of evaluating a product. If a buyer is induced into a purchase contract by reasonably relying on a seller’s representations about that product, which turn out to be false and determined to be offered to induce the buyer into agreeing to the purchase contract, then the buyer is not held liable for the product’s defects. The buyer may nullify the contract and get whatever they traded for the purchased product back. Misrepresentation makes a contract like it never existed.

So now you can see why Newman is stuck holding the bag while McGraw-Hill gets its money back. In the McGraw-Hill case, Irving misrepresented his relationship to Hughes and misrepresented the manuscript. He did so knowingly and with the intent to get McGraw-Hill to contract with him for the rights to publish the manuscript. The Kramer-Newman deal, by contrast, offers no evidence that Kramer misrepresented the radar detector to induce Newman into trading his helmet for it. The difference between the two cases is misrepresentation.

There’s a direct throughline between this bedrock principle of contract law and Hawaiʻi’s residential real property disclosure regime. Section 508D-7 of the Hawaiʻi Revised Statutes, for instance, requires seller agents to correct material misrepresentations that they know have been made to the buyer.

The duty to correct known misrepresentations cannot be excused or waived by getting the buyer to purchase the property as is. The duty rests on a fundamental principle of contract law—namely, that a seller cannot induce a buyer into a contract to purchase a good or service by knowingly or recklessly misrepresenting that good or service. 

Think back to Justice Davis, the man who wrote the U.S. Supreme Court opinion recognizing the principle of buyer beware in U.S. law. He’s the justice that said that “[n]o principle of the common law has been better established” than buyer beware, but even he recognized that buyers are not responsible for justifiably relying on a seller’s knowing or reckless misrepresentation.

Everyone who enters into a contract promises to act in good faith. Knowingly or recklessly misrepresenting a fact to induce another into a contract violates that duty and can give rise to a buyer’s right to void the contract, regardless of whether a buyer signed an as is agreement.

Concealment: Lance Armstrong

Nike Contract

Nike identified Lance Armstrong early as one of the world’s most promising professional cyclists. In 1996, Armstrong and Nike entered into a sponsorship contract whereby Armstrong agreed to wear Nike-branded clothing and shoes during professional cycling competitions, like the Tour de France, and other public appearances to promote Nike’s products. In exchange, Nike agreed to pay Armstrong a generous sum per year.

The contract also included a morality clause, which prohibited Armstrong from engaging in any behavior that could damage Nike’s brand or reputation.

Achievements in Cycling and Philanthropy

While under the Nike contract, Armstrong won the Tour de France seven times, making him one of the most successful riders in the history of that race. He also won a number of other major professional cycling events while under the Nike banner, including the Tour of California, the Tour de Suisse, and the Dauphiné Libéré.

Armstrong was also widely admired for his work as a cancer advocate and philanthropist. He founded the Livestrong Foundation in 1997, which raised millions of dollars for cancer research and provided support and resources to people living with cancer.

Armstrong's achievements made him one of the most successful and influential athletes of his generation, and he was widely regarded as a role model and inspiration to many.

Long-Denied Allegations of Doping

But nagging suspicions spread that Armstrong’s athletic achievements were in part owed to illegal doping.
Performance-enhancing drugs have plagued professional cycling since at least 1896.

In the early years of the Tour de France, doping was widespread and largely tolerated. Cyclists used various substances, such as alcohol and cocaine, to help them cope with the grueling physical demands of the race.

Amphetamines became popular among professional cyclists in the 1960s and 1970s, providing them with increased energy and reduced fatigue. As the dangers of these drugs became more widely known, however, they were banned.

During the 1980s and 1990s, professional cyclists turned to anabolic steroids, erythropoietin (EPO), and blood transfusions, which significantly increased their performance and were difficult to detect.

Armstrong's seemingly superhuman ability to recover from grueling athletic trials made him a likely suspect. His competitors vehemently protested, arguing that Armstrong’s performance could not be possible without the aid of performance-enhancing drugs.

In addition, there were numerous rumors and reports of Armstrong's association with controversial figures in the cycling world, including doctors and coaches who were known to be involved in doping. These rumors were further fueled by the fact that Armstrong had been diagnosed with testicular cancer in 1996 and had undergone aggressive treatments, including chemotherapy, that many believed could have affected his ability to perform at such a high level.

United States Anti-Doping Agency Report

The United States Anti-Doping Agency investigated Armstrong's alleged use of performance-enhancing drugs. In October 2012, USADA released a report detailing its findings and conclusions.
It found that Armstrong was part of a sophisticated doping program that involved the use of EPO, testosterone, corticosteroids, blood transfusions, and other banned substances. The report included testimony from several former teammates who claimed that Armstrong not only used PEDs himself but also encouraged and facilitated their use among other riders on his team.

USADA concluded that Armstrong's doping was "the most sophisticated, professionalized, and successful doping program that sport has ever seen." The agency banned Armstrong from competitive cycling for life and stripped him of his seven Tour de France titles, which he had won between 1999 and 2005.

Morality Clause

Don’t forget that morality clause. Nike wanted Armstrong to be its brand ambassador. Its contract with Armstrong required Armstrong to conduct himself with honesty, integrity, and good sportsmanship, and to refrain from any conduct that could bring harm or disrepute to Nike.

For years, Nike paid Armstrong while he concealed his doping. Buyer beware?

Claw Back

No, the law prohibits anyone from entering into a contract in bad faith. It is illegal to trick someone into a contract by concealing something important to the contemplated transaction.

But that’s exactly what Armstrong did. He concealed his doping to trick Nike into thinking it was paying for one thing when it fact it was paying for another. Nike thought it was paying for a brand ambassador with honesty, integrity, and good sportsmanship, but in fact it was paying for a fraud.

Yes, buyers must beware, but buyers are not held liable for failing to discover facts that sellers actively conceal. Because Armstrong actively concealed his doping, Nike had a right to void their contract.

Now imagine Armstrong had demanded payment for his conduct “as is.” Would Nike still have a right to void the contract?

I spoke to Chris St. Sure, a partner at Goodsill Anderson Quinn & Stifel about sellers concealing material information.

"[M]ost people go in there and they think of an as is clause and, OK, there’s an as is clause for this transaction, buyer beware. The burden is on the buyer to retain their professionals, to do their due diligence, inspect the property, and the seller traditionally, at least the traditional thought was, 'Hey, I’m good. I disclosed it. It’s on the buyer to find out all the issues.' That’s not exactly entirely true for every situation."

"As is clause provides great protection to sellers, but it doesn’t protect them from everything, right? There’s certain types of information that are deemed material that they still have to disclose, especially when they have knowledge of it."  

So sellers can’t conceal material information. I asked him for an example. He gave me one right away:

"It’s a real estate transaction over here in Hawaiʻi. I won’t give the specifics of the case or the parties’ names, but the property had water damage, and the seller knew, because the seller was the one who was living in the property and went through that whole process and saw the mold on the walls."

"And what happened was, apparently, the seller painted over that mold with new white paint. So you couldn’t see the black mold. So when the buyer did the walkthrough, it looked perfectly fine, but I guess mold has a way of seeping through the paint, so eventually—ha, ha—it came out to find out in the case that it was repainted, the only person who could have done the repainting was the seller."

"So it became a whole lawsuit over liability and what the damage was. The buyer said, “If I had known that there was mold, I wouldn’t have purchased the property.” So there’s all sorts of damages involved there."

"Fortunately we were able to resolve that case, umm, but that goes to show you . . . if you have a fraudulent concealment an as is clause is not going to protect you from that." 

Parties to every contract must deal with each other fairly and in good faith. Misrepresenting a material fact, like Clifford Irving knowingly and falsely asserting to McGraw-Hill that the manuscript he provided was authorized by Howard Hughes, or concealing a material fact, like Lance Armstrong using undetectable performance enhancing drugs and secret blood replenishments to cover his cheating from Nike, violate the universal duties among contracting parties to deal with each other fairly and in good faith. 

Those universal duties cannot be waived, modified, or excused. They are bedrock principles of contract law dating back to 16th century England. A seller’s material misrepresentation or concealment cannot be sanctified by an as is agreement. 

But what if a seller simply remains silent? Can an as is agreement protect a seller from a claim that they failed to disclose a material fact? 

We turn to that question in the second part of our special two-part series. Part II of Secrets and Lies will be available for download the first Wednesday of next month. 

Conclusion

And that’s our episode. 

Remember, we release new episodes the first Wednesday of each month. 

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