Business Law Civil Litigation Legal Topics Litigation Strategy Practice of Law Settlement Negotiation

Fraud Has No Place in Negotiations

The “legal ethics of negotiation” can be a difficult topic. Certain issues are plain enough: An attorney cannot knowingly commit, counsel, or assist fraudulent conduct. The tougher issue is defining what counts as fraud.

The nature of most negotiations makes complete candor impossible.  Successful negotiation normally entails some bluffing, and mere puffing and hyperbole are not actionable.

It is also difficult to define when a true fact is nevertheless misleading for want of qualifying facts, i.e., when a half-truth is a whole lie. In addition, you need to determine whether the statements are “material,” i.e., sufficiently important that falsity is grounds for legal recourse, because fraud is only actionable if it related to material facts.

The law of silence on material information is perhaps the most difficult conceptual puzzle in the ethics of negotiation. It is easy enough to decree that negotiators cannot tell outright lies, but when, if ever, does silence constitute fraud? Every major treatment of the definition of fraud leaves some degree of uncertainty on this issue.

For all these difficulties, the basic rules are easy to state and do have real-world consequences: An attorney cannot commit fraud in negotiation; cannot knowingly participate in negotiations when he or she knows the client is committing fraud; and must terminate any representation that would entail a crime, fraud, or ethical breach.

Consider these five rules of fraud prevention before entering your next negotiation:

  1. Do not commit fraud or assist anyone else to commit fraud.
  2. If you know that your client intends to commit fraud or is committing fraud, advise your client against doing so and, even if the remonstration appears successful, consider whether to withdraw from the representation.
  3. If the remonstration fails and your client still intends to defraud, terminate the attorney-client relationship.
  4. If you learn of a fraud that is not yet completed, consider what steps are permitted or required to prevent the fraud from being completed.
  5. If you learn of a fraud that has been completed, consider what steps are permitted or required to mitigate or rectify the fraud.

To the extent that preventing or rectifying fraud means revealing client confidences, remember that California’s strict duty of confidentiality (Cal Rules of Prof Cond 3-100) may not permit the attorney to reveal the incipient fraud. If the attorney is governed by the ABA Model Rules, there may be more latitude to reveal confidences.

For more on ethics in negotiations, check out CEB’s program Selected Ethics Issues in Mediation and Settlement Negotiations, available On Demand.

© The Regents of the University of California, 2011. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.

4 replies on “Fraud Has No Place in Negotiations”

I found this article incredible helpful even to Australian practice. I have also found the following proverb to be a great alarm bell when dealing with such situations.

Proverbs 20:17
American Standard Version
‘The Bread of falsehood is sweet to a man; But afterwards his mouth shall be filled with gravel.’

Good News Translation
‘What you get by dishonesty you may enjoy like the finest food, but sooner or later it will be like a mouthful of sand.’

Forial Therese

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