Prudential Insurance Co. of America v. Jefferson Associates, Ltd.
1995 WL 114556, 896 S.W.2d 156 (1995)
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Rule of Law:
In a commercial real estate transaction between knowledgeable parties of relatively equal bargaining power, an 'as is' clause that is a material part of the bargain can negate the element of causation for claims such as fraud, negligence, and violations of the Deceptive Trade Practices Act (DTPA), provided the agreement was not induced by a fraudulent representation or concealment of information by the seller.
Facts:
- F.B. Goldman, a sophisticated real estate investor with extensive experience in 'as is' commercial property transactions, sought to purchase the Jefferson Building from The Prudential Insurance Company of America.
- Before submitting a bid, Goldman had the building inspected by his maintenance supervisor, a property manager, and an independent engineering firm.
- During the inspection process, Prudential's on-site property manager, Donna Buchanan, told Goldman's supervisor the building was 'superb' and 'super fine' with no defects apart from a known foundation issue.
- Prudential was aware of general public concerns about asbestos in buildings of that era but did not have actual knowledge of asbestos in the Jefferson Building, and did not disclose its general concerns to Goldman.
- Prudential did not provide the building's plans and specifications upon request, which called for a material that sometimes contained asbestos, although the plans alone would not have definitively confirmed the presence of asbestos.
- Goldman's final contract to purchase the building for $7,150,000 contained a prominent 'AS IS' clause, in which Goldman acknowledged he was not relying on any representations from the seller but rather on his own examination of the property.
- More than two years after the sale, Goldman discovered that the building's fireproofing contained asbestos.
Procedural Posture:
- F.B. Goldman sued The Prudential Insurance Company of America in state trial court.
- A jury answered a single liability question in favor of Goldman, awarding him over $6 million in actual damages and $14.3 million in punitive damages.
- The trial court entered judgment for Goldman in accordance with the verdict.
- Prudential, as appellant, appealed to the court of appeals.
- The court of appeals affirmed the trial court's judgment.
- Prudential, as petitioner, successfully petitioned the Supreme Court of Texas for a writ of error.
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Issue:
Does a buyer's agreement to purchase commercial property 'as is' and rely solely on their own inspection negate the element of causation required to recover damages from the seller for the property's subsequently discovered defects, when the agreement was freely negotiated and not induced by fraud?
Opinions:
Majority - Hecht, J.
No. A valid 'as is' agreement negates the element of causation required for recovery on all of the buyer's claims. By agreeing to purchase property 'as is,' a buyer agrees to make his own appraisal of the bargain and accepts the risk that he may be wrong, thereby breaking the chain of causation between the seller's actions and the buyer's injury. The court determined that such a clause is binding when it is an important, negotiated part of an arm's-length transaction between sophisticated parties. For the 'as is' clause to be invalid, the seller must have induced the buyer's agreement through fraudulent representation or concealment, or by impairing the buyer's ability to inspect the property. Here, Prudential had no actual knowledge of the asbestos and thus no duty to disclose it; the manager's statements were non-actionable 'puffing' or opinion; and withholding the plans did not impair the inspection, as the plans would not have revealed the asbestos. Therefore, the 'as is' clause was valid and conclusively negated causation, barring Goldman's recovery.
Concurring - Gonzalez, J.
Yes, I concur with the judgment. An 'as is' clause negates producing cause as a matter of law absent fraudulent inducement. I write separately to reiterate my position that reliance is a necessary component of producing cause in a DTPA action based on a misrepresentation. In the contract, Goldman explicitly stated he was not relying on any representations from Prudential but solely on his own inspection. Without proving reliance on Prudential's representations, Goldman failed to prove producing cause, an essential element of his DTPA claim.
Concurring - Cornyn, J.
Yes, I concur in the judgment but not the reasoning. The majority's holding that an 'as is' clause negates causation as a matter of law creates a 'distinction without a difference' and effectively allows a waiver of the DTPA, which is forbidden by statute. I believe the 'as is' clause should be relevant evidence for the jury on the issue of causation, but not controlling as a matter of law. I concur in the judgment, however, because there is no evidence that the building manager's innocent and informal misrepresentation was a producing cause of Goldman's damages. A sophisticated investor like Goldman would not have been substantially influenced by such 'puffing' in a multi-million dollar transaction.
Analysis:
This decision significantly strengthens the 'as is' defense in Texas commercial real estate transactions, clarifying that a well-drafted clause can serve as a near-complete bar to a buyer's post-sale claims for property defects. It establishes that, for sophisticated parties, freedom of contract allows them to allocate risk, and an 'as is' clause allocates the risk of unknown defects to the buyer by negating the causation element of seller liability. The ruling places a heightened burden on commercial buyers to conduct exhaustive due diligence, as their contractual agreement to rely solely on their own inspection will likely prevent them from later blaming the seller for any discoveries. Future litigation will likely focus on the exceptions noted by the court, such as fraudulent inducement and the relative sophistication of the parties.
