Surprisingly, there are circumstances when it may be fraudulent to keep your peace about an issue even if the other side does not ask about it. When does a negotiator have a duty to voluntarily disclose matters that may hurt his bargaining position? American law imposes affirmative disclosure duties in the following four circumstances:
1. When the negotiator makes a partial disclosure that is or becomes misleading in light of all the facts. If you say your company is profitable, you may be under a duty to disclose whether you used questionable accounting techniques to arrive at that statement. You should also update your prior statement if you show a loss in the next quarter and negotiations are still ongoing.
2. When the parties stand in a fiduciary relationship to each other. In negotiations between trustees and beneficiaries, partners in a partnership, shareholders in a small corporation, or members of a family business, parties may have a duty of complete candor and cannot rely on the “be silent and be safe” approach.
3. When the nondisclosing party has vital information about the transaction not accessible to the other side. In general, sellers have a greater duty to disclose hidden defects about their property than buyers do to disclose “hidden treasure” that may be buried there. A home seller must disclose termite infestation in her home, but an oil company need not voluntarily disclose that there is oil on a farmer’s land when negotiating to purchase it. This is a slippery exception; the best test is one of conscience and fairness.
4. When special codified disclosure duties, such as those regarding contracts of insurance or public offerings of securities, apply. Legislatures sometimes impose special disclosure duties for particular kinds of transactions. In the United States, for example, many states now require home sellers to disclose all known problems with their houses.
If none of these four exceptions applies, neither side is likely to be found liable for fraud based on a nondisclosure. Each party can remain silent, passively letting the other proceed under its own assumptions.
ELEMENT 3: “MATERIAL”
Suppose that an art gallery owner has been given authority by an artist to sell one of the artist’s paintings for any price greater than $10,000. Is it fraud for the gallery owner, as part of a negotiation with a collector, to say, “I can’t take less than $12,000”? In fact, she does have authority to sell the painting for anything above $10,000, so there has been a knowing misrepresentation of fact. Suppose the buyer says, “My budget for this purchase is $9,000,” when she is really willing to spend $11,000? Same thing. The legal question in both cases is whether these facts are “material.”
They are not. In fact, lies about demands and bottom-line prices are so prevalent in bargaining that many professional negotiators do not consider such misstatements to be lies, preferring the term “bluffs.”
Why? Such statements allow the parties to assert the legitimacy of their preferences and set the boundaries of the bargaining range without incurring a risk of loss. Misleading statements about bottom-line prices and demands also enable parties to test the limits of the other side’s commitment to their expressed preferences.
The American legal profession has gone so far as to enshrine this practice approvingly in its Model Rules of Professional Conduct. These rules provide that “estimates of price or value placed on the subject of a transaction and a party’s intention as to an acceptable settlement of a claim” are not “material” facts for purposes of the ethical rule prohibiting lawyers from making false statements to a third person.
There are thus no legal problems with lying about how much you might be willing to pay or which of several issues in a negotiation you value more highly. Demands and bottom lines are not, as a matter of law, “material” to a deal.
As one moves from bluffs about how much one wants to spend or charge toward more assertive, specific lies about why one price or another is required, the fraud meter goes up. One common way to back up a price demand, for example, is Sifford’s “I can get it cheaper elsewhere” argument, used by consumers the world over. Negotiators often lie about their available alternatives. Is this fraudulent?
When a shopper lies to a storekeeper that she can get an item cheaper across town, the statement is not “material.” After all, the seller presumably knows (or should know) at least as much about the value of what he is selling as the buyer does. If the seller wants to sell it for less than the asking price, who knows better than the seller what the right price is?
But suppose we switch roles. Suppose the seller lies about having another offer that the buyer has to beat? For example, take the following older, but still important legal case from Massachusetts.
A commercial landlord bought a building and negotiated a new lease with a toy shop tenant when the tenant’s lease expired. The proprietor of the toy shop bargained hard and refused to pay the landlord’s demand for a $10,000 increase in rent. The landlord then told the shop owner that he had another tenant willing to pay the $10,000 amount and threatened the current tenant with immediate eviction if he did not promptly agree to the new rate. The tenant paid but learned later that the threat had been a bluff; there had been no other tenant. The tenant successfully sued for fraud.
In another case, this time from Oklahoma, a real estate agent was held liable for fraud, including punitive damages, when she pressured a buyer into closing on a home with a story that a rival buyer (the contractor who built the house) was willing to pay the asking price and would do so later that same day.
What makes these lies different in a legal sense from the “I can’t take less than $12,000” statement by the art gallery owner or the “I can get it cheaper elsewhere” comment by a shopper? I think the difference has to do with the fact that the victims in these cases were “little people”—small businesses and consumers—who were being pressured unfairly by professionals. The made-up offers were “material” facts from the buyers’ point of view. They were specific, factual, coupled with ultimatums, and impossible to investigate.
But I do not think a court would have reached the same result if both parties had been consumers or both sophisticated professionals. Nor would I expect to see results like this outside a wealthy, consumer-oriented country such as the United States. Still, it is worth noting that such cases exist. They counsel a degree of prudence on the part of professional sellers or buyers when dealing with the public.
ELEMENT 4: “FACT”
On the surface, it appears that only misstatements of objective facts are occasions for legal sanctions. Businessmen seeking to walk close to the legal line are therefore careful to couch their sales talk in negotiation as opinions, predictions, and statements of intention, not statements of fact. Moreover, a good deal of exaggeration or puffing about product attributes and likely performance is viewed as a normal aspect of the selling process. Buyers and sellers cannot take everything said to them at face value.
The surface of the law can be misleading, however. Courts have found occasion to punish statements of intention and opinion as fraudulent when faced with particularly egregious cases. The touchstone of the law of fraud is not whether the statement at issue was one of pure fact but rather whether the statement succeeded in concealing a set of facts the negotiator preferred to keep out of sight.
Suppose you are borrowing money from your uncle and tell him that you plan to spend the loan on college tuition. In fact, you are really going to buy a fancy, new sports car. Fraud? Possibly.
In the memorable words of a famous English judge, “The state of a man’s mind is as much a fact as the state of his digestion.” Lies regarding intention even have a special name in the law: promissory fraud. The key element in a promissory fraud case is proof that the speaker knew he could not live up to his promise at the time the promise was made. In other words, he made the promise with his fingers crossed behind his back. If you are the victim, you must also show that the other side’s intention going into the deal went to its very heart—that is, that the statement of intention was
“material.”
What about statements of opinion? Self-serving statements about the value of your goods or the qualifications of your product or company are the standard (legal) fare of the negotiating table. However, when negotiators offer statements of opinion that are flatly contradicted by facts known to them about the subject of the transaction, they may be liable for fraud. In one New York case, for example, the seller of a machine shop business opined to a prospective buyer that the buyer would have “no trouble” securing work from his largest customer. In fact, the seller was in debt to his customer, intended to pay off this debt from the proceeds of the sale to the buyer, and had virtually no work there due to his reputation for poor workmanship. The buyer successfully proved that the sale had been induced by the seller’s fraudulent statement of opinion and collected damages.
What seems to matter in these cases is unfairness. If a statement of intention or opinion so conceals the true nature of the negotiation proposal that a bargaining opponent cannot accurately assess an appropriate range of values or risks on which to base the price, then it may be fraudulent.
ELEMENT 5: “RELIANCE”
Negotiators who lie sometimes defend themselves by saying, in effect, “Only a fool could have believed what I said. The other party had no business relying on me to tell him the truth—he should have investigated for himself.”
As we saw in our discussion of lies about other offers, this defense works pretty well when both sides are on roughly the same footing. But when one side has a decided advantage, as does a professional buyer or seller against a consumer or small business, American courts are more sympathetic to the idea that the victim reasonably relied on the lie.
In addition, courts are sympathetic to those who, in good faith, rely on others to treat them fairly in the negotiation process and who have that trust violated by more powerful firms trying to steal their trade secrets and other information. There have been a number of cases, for example, allowing recoveries to independent inventors and others who disclosed trade secrets in the course of negotiations to sell their discoveries. The prospective buyers in these cases are typically big companies that attempted to use the negotiation process as a way of getting something for nothing. The prudent negotiator, however, always secures an express confidentiality agreement if secret information or business plans must be disclosed in the course of the information exchange process.
One trick that manipulative negotiators use to avoid liability after they have misstated important facts or improperly motivated a transaction is to write the true terms and conditions into the final written agreement. If the victim signs off on the deal without reading this contract, he will have a hard time claiming reasonable reliance on the earlier misstatements in a fraud case later on.
For example, suppose you negotiate the sale of your company’s principal asset, an electronic medical device, to a big medical products firm. During the negotiations, the company assures you that it will aggressively market the device so you can earn royalties. The contract, however, specifically assigns it the legal right to shelve the product if it wishes. After the sale, it decides to stop marketing your product and you later learn the company never really intended to sell it; it was just trying to get your product off the market because it competed with several of its own.
In a case like this, a court held that the plaintiffs were stuck with the terms of the final written contract. The lesson here is clear: Read contracts carefully before you sign them, and question assurances that contract language changing the nature of the deal is just a technicality or was required by the lawyers.
ELEMENT 6: “CAUSATION AND DAMAGES”
You cannot make a legal claim for fraud if you have no damages caused by the fraudulent statement or omission. People sometimes get confused about this. The other negotiator lies in some outrageous and unethical way, so they assume the liar’s conduct is illegal. It may be, but only if that conduct leads directly to some quantifiable economic loss for the victim of the fraud. If there is no such loss, the right move is to walk away from the deal (if you can), not sue.
Beyond the Law: A Look at Ethics
As you may have noticed, the legal rules that govern bargaining are suffused with a number of ethical norms. For example, professionals with a big bargaining advantage are sometimes held to a higher standard when negotiating with amateurs and consumers than they are when they approach others as equals. Parties that stand in special relationships to each other, such as trustees or partners, have heightened legal disclosure duties. Lies protecting important factual information about the subject of the transaction are treated differently from lies about such things as your alternatives or your bottom line. Silence is unacceptable if an important fact is inaccessible to the other side unless you speak up.
Did Sifford commit legal fraud when he lied to the salesman about the price he could get from a catalog? Clearly not. He told a lie, but it was not a material fact within the context of his transaction. And the shop had no right to rely on Sifford for this sort of information. It could easily have investigated this information had it thought catalog prices were important.
Yet we saw above that the same lax legal standard might not apply had the store lied to Sifford about having another buyer. The real estate broker, recall, had to pay damages when she lied to a customer about having another bid when there was none.
Conclusion: Sifford is legally in the clear; the salesman might be on slightly thinner ice. Are your legal obligations the end of the story as far as ethics are concerned? The answer to that question depends on your attitude to bargaining as an activity in your life.
Sifford put bargaining into a special category, one that included allowable lies. He wrote that “stretching the truth” was “the way to play this game.” With more experience (remember, this was his first haggle), he might have taken a different view. He might have decided that lying was OK in some situations but not others. Or he might have determined that an honest life requires a single set of ethical standards across the board.
I want to challenge you to identify what your beliefs are. To help you decide how you feel about ethics, I will briefly describe the three most common approaches to bargaining ethics I have heard expressed in conversation with literally hundreds of students and executives. See which shoe fits—or take a bit from each approach and construct your own.
As we explore this territory, remember that nearly everyone is sincerely convinced that they are acting ethically most of the time, whereas they often think others are acting either naively or unethically, depending on their ethical perspective and the situation. Thus, a word of warning is in order. Your ethics are mainly your own business. They will help you increase your level of confidence and comfort at the bargaining table. But do not expect others to share your ethics in every detail. Prudence pays.
Three Schools of Bargaining Ethics
The three schools of bargaining ethics I want to introduce for your consideration are (1) the “It’s a game” Poker School, (2) the “Do the right thing even if it hurts” Idealist School, and (3) the “What goes around, comes around” Pragmatist School.
Let’s look at each one in turn. As I describe these schools, try to decide which aspects of them best reflect your own attitudes. After you figure out where you stand today, take a moment and see if that is where you ought to be. My advice is to aim as high as you can, consistent with your genuinely held beliefs about bargaining. In the pressured world of practice, people tend to slide down rather than climb up when it comes to ethical standards.
THE “IT’S A GAME” POKER SCHOOL
The Poker School of ethics sees negotiation as a “game” with certain “rules.” The rules are defined by the law, such as the legal materials we covered above. Conduct within the rules is ethical. Conduct outside the rules is unethical.
The modern founder of the Poker School was Albert Z. Carr, a former Special Consultant to President Harry Truman. Carr wrote a book in the 1960s called, ap
propriately enough, Business as a Game. In a related article that appeared in the Harvard Business Review, Carr argued that bluffing and other misleading but lawful negotiating tactics are “an integral part of the [bargaining] game, and the executive who does not master [these] techniques is not likely to accumulate much money or power.”
People who adhere to the Poker School readily admit that bargaining and poker are not exactly the same. But they point out that deception is essential to effective play in both arenas. Moreover, skilled players in both poker and bargaining exhibit a robust and realistic distrust of the other fellow. Carr argues that good players should ignore the “claims of friendship” and engage in “cunning deception and concealment” in fair, hard bargaining encounters. When the game is over, members of the Poker School do not think less of a fellow player just because that person successfully deceived them. In fact, assuming the tactic was legal, they may admire the deceiver and vow to be better prepared (and less trusting) next time.
We know how to play poker, but how exactly does one play the bargaining “game”? Stripped to its core, it looks like this: Someone opens, and then people take turns proposing terms to each other. Arguments supporting your preferred terms are allowed. You can play or pass in each round. The goal is to get the other side to agree to terms that are as close as possible to your last proposal.
Bargaining for Advantage Page 26