When Is It Legal to Lie?

Although a major focus in the ethics of negotiation is on the morality of using deception in negotiation, it also behooves the effective negotiator to be familiar with the legality of doing so. Richard Shell, a lawyer and professor who writes about and teaches negotiation, offered an interpretation of U.S. law in his article “When Is It Legal to Lie in Negotiation?”

Shell starts with a basic “common law” definition of fraud: “a knowing misrepresentation of a material fact on which the victim reasonably relies and which causes damage”.

A closer look at the meaning of the key (italicized) words in this definition brings legal issues involving lying in negotiation into focus.

A misrepresentation. An affirmative misstatement of something.

A knowing misrepresentation. Shell says a misrepresentation is “knowing” when you know that what you say is false when you say it. Does this mean you can skirt liability by avoiding coming into contact with the knowledge involved? Shell says no – courts would regard that as reckless disregard for the truth.

A fact. To be illegal, in theory, the thing being misrepresented generally has to be an objective fact. But in practice, Shell points out that misstating an opinion or an intention can get you into trouble if it builds on factual misrepresentation or is particularly egregious – especially if you know the falsity at the time you make the statement or promise.

A material fact. Not all “facts” are objective or material. Shell says that by the standards of legal practice in the United States, demands and reservation points are not regarded as “material” to the deal, so it is not actionable fraud to bluff about them. He cautions, however, that lying about alternatives or other offers or other buyers can get you into trouble. It’s not clear that these are always material, but this kind of thing may be left up to a jury to decide if a claim of fraud went to trial.

Reliance/causation. For a deceptive statement to be legally fraudulent, the receiver must prove that he or she relied on the information and that doing so caused harm.

Does this mean that illegal deception always involves affirmative statements that are false? Will silence protect you from legal liability? Shell says no: There are conditions under which you are legally bound to share truthful information. For instance, you are obligated to disclose in these situations:

If you make a partial disclosure that would be misleading.

If the parties stand in fiduciary relationship to one another.

If the nondisclosing party has “superior information” that is “vital.”

In cases involving certain specialized transactions, such as insurance contracts.