Is it unethical to lie during contract negotiations? How about deceptive negotiating tactics? Are they unethical? Business people do it all the time—they hide their true intentions or stretch the truth in order to win. The United States Court of Appeals recognizes that “both sides presumably try to get the best deal” and that “no particular demand in negotiations could be termed dishonest” (Shell, 1991). If everyone is doing it, what is the problem?
According to an article published by Richard Shell (1991), business people commonly use some form of deceptive behavior when negotiating a contract. For example, the seller might impose some form of deadline in order to attempt to pressure the buyer into signing an agreement. Or, the buyer might deceptively communicate she will not budge on an issue, in essence lying about her true intentions. Many would question the ethics of these business practices, but Shell raises a greater concern: the courts might consider some unethical behavior or statements as fraudulent.
The Fraud Litmus Test
A statement is fraudulent when “the speaker makes a knowing misrepresentation of a material fact on which the victim reasonably relies and which causes damages” (Shell, 1991, p. 1). The definition provided by Shell appears straightforward. However, expanding on the four key areas, knowing, misrepresentation, material and fact, will help a negotiator better see and understand the fine line between unethical and fraudulent negotiating tactics.
Knowing
If a negotiator makes a statement that he knows to be untrue, this behavior can meet the first criteria for fraudulent negotiating tactics. In addition, even if the statement is not a direct lie but is a conscious disregard for the truth, Shell indicates that the courts have stretched the definition of knowing to include these reckless statements. However, the knowing test is not restricted to statements made by the negotiators. If the negotiator selects to ignore internal information in order to avoid sharing undesirable information, the courts could treat this as if the person knowing made a false statement.
Misrepresentation
According to Shell (2001), “the law requires the speaker to make a positive misstatement before it will attach liability for fraud.” In other words, in order to misrepresent information, one of the parties must ask or raise an issue and the other party must respond with inaccurate or incomplete information. However, misrepresentation also extends to situations where one party has information vital to the negotiation and knowingly withholds disclosure of the information. Shell (2001) notes that the “legal test of disclosure is whether equity or good conscience requires that the fact be revealed.”
Material
Knowingly misrepresenting information is not enough to quality as fraudulent behavior. In addition, the information that is knowingly misrepresented must be material to the contract. Shell (2001) defines material as “information that is essential to making decisions during negotiations” For example, if one party fabricates the involvement of a competitive vendor in order to create price leverage, information about the involvement of a competitor is material to making decisions during negotiations.
Fact
Shell (2001) defines fact as “any information that one of the parties represents as true and accurate.” If the information is false, this negotiating tactic could meet the fact criteria for fraudulent behavior. In addition, if one of the parties makes a statement about his intentions but does not truly intend to do what is stated, the courts could consider this as fraudulent behavior. Shell (2001) points out that “the courts consider it fraudulent when statements are made that are designed to conceal a set of facts detrimental to the negotiator’s position.”
Applying the Criteria
The University of Phoenix provides a class on Procurement and Risk Management. Two of the objectives of the class are to identify contract award criteria and to analyze ethical issues related to the contracting process. As part of the assigned reading for the class, Huston (1996) outlines recommendations for contract award criteria. In order to create pricing leverage, Huston recommends negotiating with at least two vendors. In addition, organizations should develop an evaluation matrix that is used to compare objectively vendor Request For Proposal (RFP) responses.
Through the use of award criteria and the evaluation matrix, Huston states that the buyer should award the contract to the vendor with the highest score. However, what if a company negotiates with more than one vendor to create cost leverage while they fully intend to award the contract to a preferred vendor? Is this behavior unethical? Does this behavior meet the requirements for fraudulent negotiating tactics?
The Network Negotiation
The situation described recently happened during a network contract negotiation at my company. We were building a new office in the Los Angeles area. They had contacted three vendors and asked for responses to a network cabling RFP. However, based on a glowing review from the local contractor working on the project, my company intended to award the contract to the vendor recommended by the contractor. By continuing to involve the other two vendors, my company was able to leverage the competitive nature of the negotiations to drive the preferred vendor’s cost down.
If the preferred vendor was unable to meet the RFP requirements, my company would have awarded the deal to one of the other vendors. However, if all three vendors met the requirements and were within a small cost margin, they intended to award the contract to the preferred vendor. The negotiators did not communicate their intentions to the other vendors. Some might view this behavior as unethical while others would consider it a savvy approach. However, does this behavior meet the criteria for fraudulent negotiating tactics?
Knowing
The negotiators at my company clearly knew about their intentions to award the contract to the preferred vendor. In addition, if the negotiators selected to ignore this internal information in order to avoid sharing undesirable information, the courts could treat this as if the person knowing made a false statement. In this area, the intentions toward the preferred vendor could meet the first criteria for fraudulent negotiating tactics.
Misrepresentation
As mentioned earlier, the vendors did not ask the my company negotiators about its intentions. As a result, my company did not directly misrepresent the information about its preferred vendor. However, misrepresentation also extends to situations where one party has information vital to the negotiation and knowingly withholds disclosure of the information. Had my company disclosed their intentions to award the contract to the preferred vendor, that information might have directly impacted the negotiations of the other vendors. In this area, the intentions toward the preferred vendor could meet the second criteria for fraudulent negotiating tactics.
Material
All three vendors were aware of their competition during the RFP process. From the vendor’s perspective, knowledge of the preferred vendor might have been essential to making decisions during negotiations. With that knowledge, one or both of the vendors might have decided to reject the RFP and focus their energy on other opportunities. In this area, the intentions toward the preferred vendor could meet the third criteria for fraudulent negotiating tactics.
Fact
As previously stated, Shell (2001) defines fact as “any information that one of the parties represents as true and accurate.” My company did not communicate any inaccurate information regarding its intent toward the preferred vendor. In addition, the negotiators did not make any statements that inaccurately represented its intentions. Furthermore, my company did not make any statements that were designed to conceal any facts related to the preferred vendor. As a result, the intentions toward the preferred vendor do not meet the fourth criteria for fraudulent negotiating tactics.
Conclusion
Is it illegal to lie during contract negotiations? Are deceptive negotiating tactics illegal? As outlined above, if the tactics meet certain criteria, the courts might rule them as fraudulent. However, is the legality of negotiating tactics of most importance? A tactic that is legal is not necessarily ethically right. H. Ross Perot is quoted as saying, “Do not govern your life by what is legal or illegal; govern it by what is right or wrong” (Shell, 1991, p. 9). If a negotiator focuses on what is ethically right during contract negotiations and avoid what is wrong, the negotiator probably will not need to worry about the legality of the negotiation tactics.
References
Huston, C. L. (1996). Management of Project Procurement. The McGraw-Hill Companies, Inc.
Shell, R. G. (1991). When Is It Legal to Lie in Negotiations? Sloan Management Review , 9.
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