As-is Where-is and Whose Problem Is It Anyways? 

As-is, where-is, whatever-is clauses cast a pall over our welfare ideals. Property buyers must now also contend with sellers’ cynical disavowal of responsibility.

Table of Contents

1. Introduction
2. As-is, Where-is, What is?
3. Unjustifiable Legislation
4. The Situation Abroad
5. The Judiciary’s Tight Rope Walk
6. What Can Go Wrong
7. The Dangerous Ones
8. Socialism Where Art Thou?
9. Lis Pendens Pendens
10. The Prudent Buyer
11. The Consensus Ad Idem Gambit
12. A Word on Drafting
13. References

Introduction

In 2014, Ku Chih Choi [1] won a bid for a property that was being auctioned off by the Central Bank of India under the SARFAESI Act. After paying the bid amount of Rs. 35 lakhs, the Buyer was dismayed to discover that the Bank did not even have possession of the property. In fact, the earlier occupants were still residing in the property. In the resulting suit, the Bank argued that the property had been sold on an As-is, Where-is basis and therefore the Buyer did not have recourse to Bank for lack of possession! It was only after a decade of litigation that the Calcutta High Court excoriated the Bank for its continued wrong against Ku Chih Choi and ordered it to pay damages with interest.

This article is all about the ‘as-is’, where-is, what-is’ clause (“AIWI clause”). The AIWI clause is like a gangster’s carpet – all manners of sin are swept under it after which the gangster pretends that nothing is untoward. Depressingly, there is currently some legal basis for this clause or at least nothing expressly against it. After analysing the history and impact of the clause we will recommend actions that the hapless Buyer can take to save himself from the worst excesses of this clause.

As-is, Where-is, What is?

The AIWI clause simply means that the Buyer is buying the good or service as it exists, where it exists and in whatever condition it exists. In other words, the Seller recuses himself from providing any further information to the Buyer. It is a type of Caveat Emptor clause. Caveat Emptor means ‘Buyer Beware’ in Latin. The principle behind this maxim is that in purchasing anything, it is the buyer’s obligation to take care to check everything about the good or service before paying the price.

Think of a Haat where the trinkets are laid out at each stall. The law expects you, the Buyer, to make sure that you’ve checked the trinket for any defects before you purchase it. It is a matter of convenience not necessarily one of equity or justice. The law cannot deal with all such acquisitions where the buyer could have easily identified any flaws in the good before handing over the money and therefore it is content for the Buyer to take responsibility for his purchase.

An interesting article posted by Professor Moglen of Columbia University’s Law School [2] analyses the history and impact of the (in)famous Chandelor v. Lopus case. In that case, a goldsmith managed to convince a credulous Buyer that a particular stone was the mystical ‘bezoar’ stone. The bezoar stone was supposed to have magical healing properties. After the Buyer discovered that the stone he had bought was not in fact magical, he brought the suit against the Seller for breach of warranty. Although, it might appear to us now as a slam-dunk case, the Court of the time held that the Seller was entitled to ‘creative embellishment’ to sell his products but that in the instant case such embellishment fell short of an ‘express warranty.’

The article goes on to describe the evolution of ‘Covenant’ i.e., contract law in England. Historically, such covenants or warranties in an agreement were difficult to prove. Therefore, it was equally difficult to prove that a Seller had breached any contract at all. To bypass this bottleneck, aggrieved buyers sought instead to complain of tortuous trespass in which they did not need to produce the (verbal) contract but simply needed to prove the Seller’s misfeasance. The Moglen Article therefore indirectly provides that in case of a defective good or service, historically there have been two causes of action – (1) breach of contract or (2) tort.  

In India however, the legislation allows vendors to slip through the patchwork wall made up of both causes of action.

Unjustifiable Legislation

As we have discussed in previous articles, the Indian Contract Act (“ICA”) governs contracts in India. There is no provision per se preventing a Seller from including an AIWI clause in a contract of sale. While the ICA is a general act covering contracts, for immoveable properties, which will be the focus of this article, the Transfer of Property Act (“TOPA”) also comes into play.

Section 55 of TOPA lays out the rights and liabilities of buyers and sellers. The wording of this section has important ramifications:

Section 55(1)(a) therefore seems to give us a lot of comfort – a Seller is bound to disclose any ‘material defect’ in title or property to the prospective Buyer which the Buyer could not discover himself. This type of defect is typically called a ‘latent’ defect i.e., one which is not apparent on the face of it. Its opposite is a ‘patent’ defect which can be discovered by ordinary due diligence. However, the same section adds an exception to this duty in its very first sentence – ‘in the absence of a contract to the contrary.’ Therefore, under the provisions of TOPA the Seller’s argument would be that the AIWI clause is a ‘contract to the contrary.’ By virtue of that clause the Buyer is supposedly agreeing to waive the duty that the Seller owes him under section 55(1)(a).

Since both the ICA and TOPA apply to a contract over immoveable property, we can also refer to the ICA to see if there is any provision that protects the Buyer. Section 17 of the ICA defines fraud. Fraud in the ICA renders a contract voidable at the option of the party that has been defrauded (section 19). The definition of fraud seems to work in the Buyer’s favour. Specifically, section 17(2) defines one type of fraud as ‘the active concealment of a fact by one having knowledge or belief of the fact.’ Luckily this section also doesn’t have the dreaded exception ‘in the absence of a contract to the contrary.’ So does this provide a bulwark against the wishy-washiness of section 55 of TOPA? Unfortunately not. An explanation to section 17 of the ICA states as follows:

 ‘Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak , or unless his silence is, in itself, equivalent to speech.’

The bold portions of this explanation are undoubtedly in harmony with the exception in section 55 of TOPA and with the use of the AIWI clause by sellers of immoveable properties.

Therefore, from this cursory analysis, there is statutory protection for AIWI clauses.

There is an aspect of valid contracts under ICA that to our knowledge a Buyer has not assailed in courts successfully. That aspect is that for a contract to be valid, there must be a meeting of minds (consensus ad idem) i.e., all parties should have the same understanding in the same sense of the subject matter of the contract. Later, we shall present a possible argument along the consensus ad idem lines that a bold advocate may attempt in court.

The Situation Abroad

The situation in the US provides the most interesting contrast for the situation in India. The US has a truly federal character unlike India which is regarded as ‘pseudo-federal.’ America’s federal character extends to its judicial system wherein different state courts may treat similar cases differently.

In a case [3] in the state of Missouri, the Buyer had purchased a house and had hired a Septic Consultant to check the septic tank of the house (which the Septic Consultant had themselves previously been hired to install). In many states in America, the Seller of a house must submit a disclosure to the Buyer listing items in the house that they have checked and repaired and those which they feel are in disrepair or are matters of concern. In the present case, the Buyer realised after the purchase that the Seller and the Septic Consultant had misrepresented the actual state of the house. In the suit, the Buyer argued that he had relied on the strength of the disclosures by both the Seller and Septic Consultant before making the purchase. The Seller and the Septic Consultant in turn pled that since the Buyer had agreed to the AIWI clause there was no implied warranty in the disclosures. The Court held that the Septic Consultant who had himself been hired by the Seller earlier to work on the property could not wash his hands off his false report. Similarly, the Court held that the Seller must have known that the Buyer was basing his purchase decision on the strength of the Seller’ disclosures.

This must have been one of the rare cases in America wherein the AIWI clause was defeated based on pith and substance rather than the wording of the contract. A more famous case was that of IBM v. Lufkin [4] in the Texas Supreme Court.

IBM, a global IT giant, misrepresented that it could implement an out-of-the-box SAP solution for Lufkin with minimal costs and quick turnaround time. The parties agreed on a contract however, IBM’s implementation was far from ideal. The IBM team kept delaying the go-live because their solutions kept failing. This increased Lufkin’s costs. When IBM finally took the solution live, it was an ‘ugly’ fix and caused numerous issues for Lufkin leading to further losses. Lufkin sued IBM primarily on grounds that IBM fraudulently induced them into a contract. While initially successful, Lufkin’s claim on that ground was defeated because the contract with IBM strictly disclaimed any warranty (AIWI clause).

Although the Court allowed Lufkin to try to prove breach of contract, this case established two important points:

1. Contractual wording is an important factor in deciding the rights of the parties regardless of clear evidence of bad faith by one party.
2. A properly worded AIWI clause can defeat even claims of fraud/misrepresentation.

The second point is particularly stark. Lord Denning’s remarks [5] in a famous case were:

‘fraud unravels everything.’

The Indian Supreme Court also remarked [6] that:

‘fraud vitiates every solemn act.’

This has been taken to mean that anything done fraudulently voids all actions that stem from the fraudulent act. This has been a catchall provision that no amount of contractual wrangling could previously waive. However now, in the US this maxim no longer seems to apply insofar as the AIWI clause is concerned.

The Judiciary’s Tight Rope Walk

In India, thankfully, the judiciary has been more sagacious in dealing with AIWI clauses. While cases involving AIWI clauses are still dealt with on a case-by-case basis, from some of the examples below the general reasoning that Indian courts have evolved should become clear.

In Leelamma Matthew v. Indian Overseas Bank [7], the bank had acquired a defaulter’s property under the provisions of the SARFAESI Act. It had published notice of an auction and invited bidders. Ms. Matthew was one such bidder. She had wisely asked the bank whether the property was free of encumbrances on several occasions. The bank was either silent to her questions or gave her bland reassurances. As the winning bidder she finally went ahead and paid the bid amount. Upon taking possession of the land, she found that the previous occupant was still occupying the land. She also discovered that the actual plot size was smaller than was recorded in the title documents. She thus sued the bank to recover her money claiming that the bank had failed to disclose material defects under section 55(1) of TOPA. The bank argued that Ms. Matthew was already aware that the actual size of the plot was different from the documented size. It also disclaimed liability for the continued occupation of the land by the previous occupants due to the AIWI clause in its agreement with Ms. Matthews. The court held in favour of Ms. Matthews noting that if the Seller i.e., the bank was itself not aware of the discrepancy in plot size, it could not be heard arguing that Ms. Matthews was. The Court also held that the bank could not hide from its obligations behind the AIWI clause.

In another case, V. Sambandan  v. Punjab National Bank [8] the facts are startlingly similar to the Leelamma Matthew case.

In this case, Mr. Sambandan was also the winning bidder in the bank’s auction of a property acquired under SARFAESI. In his suit, Mr. Sambandan claimed that the previous occupant still possessed the property, that the bank had failed to disclose existing encumbrances and that the bank had not shown him the original title deeds. The bank again claimed protection under the aegis of the AIWI clause. The Madras High Court held against the bank and noted, among other things, that the SARFAESI Act required the bank to notify the bidders either about specific encumbrances or to alert them that they would need to verify such encumbrances themselves.

There are two downsides to the Sambandan decision from our perspective:

1. Being a decision of the Madras High Court, it only has binding value for courts in that state.
2. The Court’s decision vis-à-vis the Seller’s duty to disclose material defects (encumbrances) is based on a statutory requirement under SARFAESI and is not an all-encompassing commentary on whether the AIWI clause defeats the duty to disclose or not.

Courts have not always supported buyers in AIWI cases such as in Ram Kala v. DDA [9], Punjab Urban Planning v. Raghu Nath Gupta [10] and Rajasthan State IDIC v. Diamond & Gem Development Corporation [11]. In these cases, the courts held that the purchasers of some rights or license over a property, who had not physically inspected the property prior to the purchase, could not later decry the state of the property upon taking possession, if there was an AIWI clause in the purchase agreement.

In general, some common points emerge from cases we have reviewed:

• Courts have protected buyers where the sellers have failed to disclose material latent defects i.e., material defects that could not have been ascertained by the buyer with reasonable due diligence.
• Courts have been especially protective of buyers in cases of intangible defects such as encumbrances, lack of possession or defect in title.
• Courts have been less impressed with buyers who claim damages due to material physical defects and especially in cases where buyers have clearly not inspected the property prior to purchase.

What Can Go Wrong

The question naturally arises – if Indian courts have been balanced in protecting buyers against the AIWI clause, then why this lengthy article?

The issue with the AIWI clause is that in India, if a Buyer does transfer money for a property and later does get a decree in his favour voiding the underlying agreement, then retrieving the consideration and damages is still a herculean task. In the Ku Chih Choi case described in the introduction, the petitioner had to wait 9 long years for a decree. That doesn’t even include any appeals or any delays in executing the decree. Moreover, despite the trend of decisions the outcome of such cases remains uncertain during the proceedings. So not only is the Buyer out of money for a long time, but he is also saddled with unnecessary stress. All this, because legislation allows the Seller to take a loophole out of sharing material information with the Buyer.

So, what kind of defects could be hidden behind an AIWI clause? Here are some of the more common ones:

• Encumbrances
• Co-owners
• Interested parties under personal laws for e.g., members of a Hindu Undivided Family (HUF), the Waqf
• Structural defects
• Lis pendens
• Potential claims

Out of these, the most dangerous defects are structural defects, lis pendens and potential claims. The other defects are those which the Buyer should be able to discover by ordinary due diligence.

The Dangerous Ones

Structural Defects

 In the case of structural defects, the Buyer may not be able to discover these even if the Seller gives him and his agents access to the property beforehand for inspection.

For example, if a Buyer is looking to purchase a flat in a particular apartment building wherein the cooperative housing society has been lax in its duties and has allowed residents to make egregious alterations to support beams. Even were the Buyer to seek a structural engineer or architect’s help in inspecting the flat, he would be unlikely to independently discover the fundamental problem with the building.

Lis Pendens

Lis pendens essentially means pending litigation. This principle says that if there is an ongoing or pending litigation in which the subject matter is an immoveable property, then any disposal of the property during such litigation will not defeat the rights of the decree-holder under that litigation. This principle is captured in section 52 of TOPA. The principle makes eminent sense. If it were not in place, then any litigant could defeat a property suit by transferring the property post-haste. However, it presents a problem for a bona fide Buyer. If a Seller pleads the AIWI clause and does not share details about a lis pendens involving the property, then later upon discovering the lis pendens the Buyer could end up out-of-the-money and out-of-property.

While it is relatively easy to search for court orders and decrees involving a particular property thanks to search engines and free judgement reporting sites, it is more difficult to search for ongoing proceedings. Not all courts and tribunals report such proceedings online. Even for the ones that do, the Buyer would need to have some details beforehand such as complainant or respondent name, case number etc. to even retrieve the data.

Potential Claims

The last danger is that of potential claims.

For example, a Buyer purchases a house which was previously owned by the heirs of a Hindu intestate. However, what the Seller did not reveal, and was under no obligation to reveal, was that he had previously received a letter from a person who claimed a right over the property as an heir to the intestate under section 20 of the Hindu Succession Act. This section protects the rights of an unborn child in the womb.

Such a letter is not a legal claim through a suit or petition. But it does have the potential to become a legal claim if the letter’s author acts on it. It is not immediately clear whether this constitutes a material defect that the Seller ought to disclose. The Buyer would certainly consider it a material defect. But the Seller may receive countless spam messages purporting to show an interest in his property – would he be obliged to share each one with the Buyer?

Socialism Where Art Thou?

The AIWI clause and its apparent protection under section 55 of TOPA is frustrating. There does not seem to be any good reason for such a protection in a country such as India which prides itself on socialist and welfare values. The information asymmetry is clearly against the Buyer.  The balance of risk is also against the Buyer when his hopes of recompense are at the mercy of a creaking legal system.

There are only two possible justifications for the statutory protection available to Sellers against mandatorily disclosing material defects to Buyers:

1. Any Seller who has become the Seller by virtue of a statutory process for example arising out of SARFAESI Act or out of the Insolvency and Bankruptcy Code (IBC), would not have a complete idea about the state of the property and would be constrained by in discovering material defects in the property.
2. In exchange for a heavily discounted sale price, the Buyer waives any action against the Seller for failing to disclose material defects.

However, both reasons are suspect in practice. We have already seen that most cases revolving around the interpretation of AIWI clauses are those in which the Seller is operating under the ambit of the SARFAESI Act or the IBC. However, neither Act is foolproof. Under the SARFAESI Act many sellers do not even take possession of the property before completing the auction and taking the winning bidder’s money! Under the IBC, a resolution plan or liquidation cannot waive any proceedings under special laws such as the PMLA.

Moreover, as the benchmarks in the real estate market are often dubious, a clever Seller may get away with selling a shoddy property at near market price regardless of the AIWI ‘discount’.

If the Seller were to list out the material defects, he is aware of or not aware of, as is the norm in parts of the US, it would not hurt a fair negotiation process. Both parties would be entering the negotiation knowing that the Buyer will seek a heavy discount assuming that there may be serious defects. Therefore, a fair discovery process doesn’t negate the negotiation substantively, it can only hurt an unscrupulous Seller trying to market an illusory ‘discount’.

Lis Pendens Pendens

We had discussed the dangers of lis pendens in the previous section. The Government is not oblivious to the dangers of the current regime. The Law Commission has reviewed the provisions of the Transfer of Property Act many times. In fact, in 1998 the Law Commission issued its 157^th Report [12] specifically examining the provisions of the section 52 of TOPA i.e., lis pendens. The Commission had noted the very flaws that we have covered here as well. It had offered a simple solution to the issue – any time a suit is admitted into any court or tribunal where the subject matter is a property, a notice of such suit would have to be registered under a modified Registration Act for that property. This would mean that a potential Buyer doing ordinary due diligence would encounter all such pending litigations. It would also automatically put the onus of disclosure on the purported Seller. Unfortunately, the recommendation of the Law Commission has never been adopted. Only Maharashtra, by a state amendment to the Registration Act, has added such notice of lis pendens as an optionally registrable document.

The Prudent Buyer

Assuming that there is no categorical decision against AIWI clauses by the Supreme Court or by Parliament, what precautions can a property Buyer take when it comes to AIWI clauses?

1. There is no reason whatsoever to accept an AIWI clause when buying from a person who is selling the property at his discretion and not by a statutory process. In fact, in such a situation the AIWI clause should be a major red flag for the Buyer and he should evaluate his own assumptions including the discount he has factored in.
2. When the sale is by virtue of a statutory process or by court order, the Buyer should:
   • Share a comprehensive list of interrogatories (a fancy legal way of saying pointed factual questions), about the Property and about the Seller’s knowledge of the Property, with the Seller.
   • This list should be shared ideally via email such that the record is maintained on a third-party server as evidence if needed.
   • It is likely that an institutional Seller will not reply to such interrogatories or shall point the Buyer to the AIWI clause.
     • To tackle the former, the Buyer should expressly deem the Seller’s silence on his questions as equivalent to a statement that there are no defects to the Seller’s knowledge.
     • To tackle the latter case, (i) the Buyer should point out that the AIWI clause does not waive the Seller’s statutory duty to disclose material defects in the property and (ii) the Buyer should also convey his impressions about the condition of the subject property based on what the Seller has informed him. This is so that the Buyer retains the right to later argue that there was no meeting of minds in the sale process should the property turn out to be significantly impaired.
   • In the list of interrogatories, the Buyer should also specifically ask whether the Seller is aware of any correspondence from any third persons claiming to have some interest over the property as well as any lis pendens.
3. The Buyer must conduct a thorough physical inspection of the property when he is allowed to do so including with a structural engineer and/or architect if possible.
4. The Buyer must also necessarily do all such normal due diligence as is advised when purchasing properties. This is not just for the value of the due diligence itself but also to show that the Buyer has been alert to his rights and responsibilities.

The Consensus Ad Idem Gambit

If all else fails and a Buyer is bamboozled by an AIWI clause, we have a suggestion for a litigation strategy that to our knowledge has not been attempted yet in AIWI cases. An enterprising advocate might proceed like this:

1. Property rights are a bundle of rights (domnium). The right to alienate (including the right to sell) is one such right.
2. The rights under the domnium are severable and can be dealt with and disposed of separately from each other.
3. If a purported vendor does not possess the right to sell the property due to some defect in title or order of the court or provision of a law etc. then he cannot sell the property at all. The opposing side might argue that the vendor has the right to sell the property except the right to sell itself. But by that logic the right to sell loses its meaning entirely. The purported vendor could sell only the rights to use or enjoy the property but that would then be a lease not a sale of the property and any representation of such a conveyance as a sale would be a form of fraud as under section 17(1) of the ICA or misrepresentation under section 18(3) of the ICA.
4. From the previous points the advocate shows that the AIWI clause cannot possibly be deemed to cover all eventualities. If the purported vendor does not have the right to sell the property to begin with, the AIWI clause cannot cover up a missing right.
   • To illustrate this point, let us say that person A ‘sells’ a property to person B even though he doesn’t have the right to sell the property. The sale agreement includes an AIWI clause. After transferring the sale amount, B realises that the property cannot be conveyed since A was unable to transfer it to begin with. If the AIWI clause was all-encompassing, B could not successfully sue A because the Court would be compelled to hold that the presence of the AIWI clause covered up A’s inability to sell the property to begin with. In essence, the AIWI clause could cover up all manner of wrongs.
   • While this illustration may seem far-fetched, it is in fact a sad and infuriating reality at least in so far as what Sellers have tried to argue.
5. If the AIWI clause is inherently limited in its scope then as per the consensus ad idem requirement of a contract, both parties must agree on the exact scope of the clause at the outset.
6. If the Court accepts the propositions so far, then the only hurdle an aggrieved buyer would need to cross is whether the AIWI clause is a fact that is essential to the agreement. If a bold judge holds the AIWI clause to be essential to the agreement (which he ought to), then the Buyer can assail the Agreement on the grounds of both parties being under mistake as to matter of fact as per section 20 of the ICA. This would mean that the judge could hold the agreement void.

A Word on Drafting

In a previous article, we had said that the temptation is to write general clauses to cover all eventualities. However, we had argued that this temptation leads to problems later on if there are disputes. It is better to be clear and detailed about rights and responsibilities so that the courts are left with little discretion in interpretation. Lawyers for sellers should take heed of Indian judgements and advise their clients that while the AIWI clause may be expeditious, in substance it is not the proper way to proceed. Luckily for Indians, our courts still largely look for the spirit of the thing.

Co-author: Nakul Gupta

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References

1. 2023 SCC OnLine Cal 136
2. “LopusChandler – EngLegalHist – TWiki.” Moglen.law.columbia.edu, moglen.law.columbia.edu/twiki/bin/view/EngLegalHist/LopusChandler.
3. 885 S.W.2d 783 (1994)
4. 573 S.W.3d 224 (Tex. 2019)
5. Lazarus Estates Ltd. v. Beasley [1956] 1 QB 702
6. 2006 SCC OnLine SC 869
7. 2022 SCC OnLine SC 1601
8. 2017 SCC OnLine Mad 4570
9. 2017 SCC OnLine Del 10258
10. (2012) 8 SCC 197
11. (2013) 5 SCC 470
12. Fifteenth Law Commission of India. Section 52:Transfer of Property Act, 1882 and Its Amendment. Law Commission of India, 1998.