Generally, in commercial transactions, there is no duty on contracting parties to disclose all material facts which will likely influence the other party in coming to a decision regarding the transaction so that the parties to the contract may be alert to undisclosed facts concerning the transaction. The Latin maxim for this principle in contract of sale is “caveat emptor” meaning “let the buyer beware.” Some transactions in this category include contract for sale of goods, credit-sale, bailment, conditional sale, etc.
However, there are exceptions to the caveat emptor rule. This is in respect of certain commercial transactions where one of the parties possesses most of the material facts regarding that transaction. In such situations, the law imposes on him the duty to disclose those facts to the other party with utmost good faith and the failure to do this would constitute constructive fraud. The maxim for this is “uberrima fides”. In these transactions, the duty of disclosure is imposed not because of the relationship between the parties but because of the nature of the contract. Contracts where this duty exists include:
- Contract of insurance
- Contract to purchase shares in companies
- Contract for sale of land
- Contracts in which fiduciary relationships exist.
Fiduciary relationships exist where a person places complete confidence in another with regards to a particular transaction or general affairs. The relationship is not necessarily formally or legally established as in a declaration of trust but can be one of moral or personal responsibility due to the superior knowledge of the fiduciary.
In all cases of fiduciary relationships, the law assumes that one party is superior to the other party and the trust of that other person is reposed in him and therefore, the superior party is in the position to take advantage of him. The cases of London General Omnibus company v. Holloway (1912) 2 KB 72 and Tate v. Williamson (1886) LR 2 CH. APP. 55 are relevant in this regard.
While caveat emptor exists generally in commercial transactions, some of the transactions that require utmost good faith as a result of fiduciary relationship include contracts between partners (partnership), principal and agent (agency), owner and hirer (hire-purchase), sureties, solicitor and client, etc.
We shall now examine fiduciary relationship in three main commercial transactions; namely: contract for sale of goods; hire-purchase, and agency.
[Click on each button below to reveal more text!]
Section 1(1) of the sale of Goods Act 1893 defines a contract for sale of goods as a “contract whereby the seller transfers or agrees to transfer the property in goods to a buyer for a money consideration, called the price.”
A sale of goods contract is quite different from other commercial transactions that involve exchange of good for consideration. In a sale of goods transaction, the buyer is expected to be alert and specific as regards his choice of goods because the seller is not under any obligation to disclose all the material facts regarding goods to be sold and this non-disclosure of certain facts may not constitute misrepresentation owing to the fact that there is need to abide by the principle of caveat emptor when dealing with things referred to as “goods” in section 62(1) of the Sale of Goods Act 1893. The relationship between a buyer and a seller in a contract of sale of goods is not a fiduciary one because there is no requirement for utmost good faith.
Also, the Sale of Goods Act 1893 is drawn to govern the buying and selling transaction; thereby, protecting both buyer and seller and thus controlling the likelihood of exploitation of one party of the contract for sale by the other party.
A hire-purchase transaction is a financing arrangement that enables somebody to take possession of an expensive item while making regular installments on it, with legal ownership transferred only after it is paid for eventually.
The relationship between a hirer and an owner is a fiduciary one which requires the owner who is the superior party to disclose all the material facts relating to the transaction to the hirer who is the weaker party (section 6 of the Hire-Purchase Act, Cap. H4, Laws of the Federation of Nigeria 2004). This arises from the fact that the agreement between both parties is drawn by the owner subject to the acceptance and satisfaction of the hirer (section 8 of the Hire-Purchase Act, Cap. H4, Laws of the Federation of Nigeria 2004). This therefore puts the hirer in a position where he may be exploited or fraudulently misrepresented by the owner. For this reason, the law requires disclosure of all material facts by the owner to the hirer, else, when liability arises as a result of non-disclosure of a material fact, the owner will be held liable.
Therefore, the Hire Purchase Act governs the excesses of the owner by affixing necessary terms and conditions (implied terms) by virtue of Section 4 of the Hire-Purchase Act, Cap. H4, Laws of the Federation of Nigeria 2004 to the hire-purchase agreement between the parties when they have not been included and striking out ostentatious and extreme terms (prohibited provisions) by virtue of section 3 Hire-Purchase Act, Cap. H4, Laws of the Federation of Nigeria 2004 which will be detrimental to the hirer. A case in point is Bentworth Finance Company v. De Bank Transport Ltd. (1986) ALR Comm. 52.
In so far as the hirer continues to pay his installments and follows conditions stipulated in the hire-purchase agreement, any liability which arises as a result of an undisclosed fact by the owner will be borne by the owner.
Agency is a legal relationship where one party (the principal) expressly or impliedly authorizes another party (the agent) to occupy his legal position in transacting with a third party. Where any remuneration or liability is incurred by the services of the agent, they will be considered that of the principal.
The relationship between these two parties is a fiduciary relationship which is based on trust and confidence which the parties must have for each other. It follows that the agent must obey the lawful instructions of the principal, exercise reasonable care, diligence and skill, give full account to the principal, act in person when transacting with third parties and must act in good faith owing to the fiduciary nature of their relationship. Since the agent will be taking the legal position of the principal, when there is a breach of the agency agreement, the principal may terminate his agreement, sue the agent for damages, rescind the contract with third party and cause the agent to be prosecuted for stealing. Some of the various ways by which the agent may be in breach include:
- Taking bribe detrimental to the principal’s transaction
- Making secret profits on transactions
- Placing himself in conflicting positions with the principal
- Negligently disobeying lawful instructions from the principal.
The principal also has duties which he owes the agent. This includes the duty to remunerate the agent, indemnify the agent, and disclose all the material facts relating to the transaction so as to save the agent from risk which he may not foresee at the time of entering into the contract. When the principal is in breach of his duties, the agent has some rights. They include:
- Right of lien. This is the right the agent has to withhold the property of the principal where the principal fails to give him his remuneration or acknowledge his commission.
- Sue the principal to bear liability where he (agent) was acting on his behalf and incurred liability but the principal is refusing to indemnify him.
It can therefore be seen that while some transactions are of fiduciary nature, others are not, but rather, based on the principle of caveat emptor. Where a fiduciary relationship exists, there is complete trust and confidence. In such situations, utmost good faith is not only a legal requirement, but also a personal requirement and liabilities which arise as a result of non-disclosure of material facts to the weaker party will be borne by the superior party in the fiduciary relationship.