July 27, 2017 Practice Points

How to Make Sure Your Negotiation Statements Don’t Cross the Ethical Line

There are three situations where your duty to disclose may arise.

By Stewart Edelstein

You know you can't state as a fact that your client’s tests verify that the widgets in question were not defective when you have no basis to back up that statement. But what if you know that your client has made that representation to the opposing party just before settlement negotiations? Also, can you state to opposing counsel that your client will not accept any less than $2 million when you are authorized to settle for $1.7? Where is the ethical line?

Your duty to disclose may arise in at least three situations: 1) you have previously made a false statement of material fact or a partially true statement that is misleading by reason of omission; 2) you learn of your client’s prior misrepresentation of a material fact; or 3) you learn that your services have been used in the commission of a criminal or fraudulent act by the client, “unless such disclosure is prohibited by the ethical duty of confidentiality.” Thus, the disclosure duty under Model Rule 4.1(b) is limited by the prohibition against revealing, without client consent, information covered by Model Rule 1.6.

Rule 4.1 applies only to statements of fact, not statements of opinion or those that merely reflect the speaker’s state of mind. Whether a particular statement is one of fact or opinion depends on the circumstances. Under generally accepted conventions in negotiation, certain types of statements ordinarily are not deemed statements of fact. As stated in the official comment to Rule 4.1: “Estimates of price or value placed on the subject of a transaction and a party’s intentions as to an acceptable settlement of a claim are ordinarily in this category” of statements not taken as factual.

In the settlement context, you should not exploit an opposing party’s material mistake of fact that was induced by you or your client and, in such circumstances, you may need to disclose information to the extent necessary to prevent the opposing party’s reliance on the material mistake of fact.

According to the Restatement, Sec. 98, comment c:

Whether a misstatement should be so characterized [as fact or as opinion] depends on whether it is reasonably apparent that the person to whom the statement is addressed would regard the statement as one of fact or based on the speaker’s knowledge of facts reasonably implied by the statement or as merely an expression of the speaker’s state of mind.

Factors to be considered include the past relationship among the negotiating persons, their apparent sophistication, the plausibility of the statement on its face, the phrasing of the statement (for example, whether the statement is presented as a statement of fact), related communications, the known negotiating practices of the community in which both are negotiating, and similar circumstances.

In making any such statements during negotiation, a lawyer should consider the effect on his or her credibility and the possibility that misstatements in negotiation can lead not only to discipline under ethical rules, but also to vacatur of settlements and civil and criminal liability for fraud. Model Rule 4.1, comment 2.

 

Stewart Edelstein, who taught clinical courses at Yale Law School for 20 years during his 40-year career as a trial lawyer, is the author, most recently, of How to Succeed as a Trial Lawyer, 2d ed. (ABA 2017).


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