- The legal and ethical implications of bluffing have been around for eons.
Back in 1968, Albert Carr published a paper called the “Is Business Bluffing Ethical?” in the Harvard Business Review.
He argued the more a businessman respects the truth, the more respect
he deserves. Yet bluffing, he added, is not morally offensive because
it’s an acknowledged strategy in the negotiating process.
To crudely paraphrase his point (and that of Henry Taylor, whom he cites with authority): You’re not really lying when no one expects you to be telling the truth.
So what about the law? Is it legal to bluff when you’re negotiating a contract?
The law addresses this question from several angles. One of these is the “duty of good faith” — an obligation that binds the parties to act in a way that does not defeat the object or purpose of a contract. The law tells us that while you’re entitled to act in your own self-interest, you must also be honest and candid when negotiating or implementing anything in an agreement that goes to the purpose and objective of the deal.
I think the law lines up with the Carr position: Bluffing is fair when no one expects the truth, lying is out-of-bounds when people expect full disclosure.
That might answer the question for judges and lawyers, but I’m not sure the legal approach easily translates into a checklist of Dos and Don’ts that would satisfy the practically minded. You can let your moral compass guide the way, but entrepreneurs aren’t ones to opt for the safest route in every instance.
There are some areas of law, such as labour and insurance, where “good faith” becomes part of every contract, even if those words are absent from a written deal. But even when “good faith” is not a specific term of a contract, it can become the focus of a lawsuit over how a deal was negotiated or implemented. One of the legal problems is whether the existence of “good faith” creates a basket of identifiable rights the parties can rely on.
A recent example of this is an Ontario case called SCM Insurance Services Inc. v. Medisys Corporate Health LP. These companies had a deal in which SCM was granted what the judge called a “right of first negotiation” should a particular Medisys division come up for sale. This happened. The two sides held negotiations but couldn’t reach a deal.
SCM then challenged whether Medisys had actually negotiated in “good faith.” When the talks failed, Medisys struck a deal with a third party. SCM argued that “good faith” meant it should have been given a right to match the offer from the third party buyer. The judge disagreed. The duty to negotiate in good faith was satisfied when Medisys gave SCM a reasonable opportunity to buy the business, the judge said, adding that it doesn’t include the creation of rights that weren’t specifically included in the deal.
But remember that case law looks backward at past events. The SCM case is how one judge applied the notion of “good faith” in one case. A future judge may find that acting in “good faith” triggers some specific acts or behaviours.
“This case is a good reminder that, in certain circumstances, courts may be prepared to imply duties of good faith into commercial arrangements, even where the parties are at arm’s length,” wrote Larry Lowenstein, Laura Fric, Robert Carson of Osler, Hoskin & Harcourt LLP in a note on the SCM case.
This is an area where the law will always be ambiguous. Case law might provide some clarity. But if you’re looking for a bright-line test, you’ll have to rely on your own sense of whether you’re doing the right thing. Even if you think you’re onside with the law, enough ambiguity remains on the table for legal disputes to arise.
Financial Post
dhasselback@nationalpost.com
twitter.com/legalpost
Source: http://business.financialpost.com/2014/09/22/drew-hasselback-pinning-down-a-legal-definition-of-good-faith/
To crudely paraphrase his point (and that of Henry Taylor, whom he cites with authority): You’re not really lying when no one expects you to be telling the truth.
So what about the law? Is it legal to bluff when you’re negotiating a contract?
The law addresses this question from several angles. One of these is the “duty of good faith” — an obligation that binds the parties to act in a way that does not defeat the object or purpose of a contract. The law tells us that while you’re entitled to act in your own self-interest, you must also be honest and candid when negotiating or implementing anything in an agreement that goes to the purpose and objective of the deal.
I think the law lines up with the Carr position: Bluffing is fair when no one expects the truth, lying is out-of-bounds when people expect full disclosure.
That might answer the question for judges and lawyers, but I’m not sure the legal approach easily translates into a checklist of Dos and Don’ts that would satisfy the practically minded. You can let your moral compass guide the way, but entrepreneurs aren’t ones to opt for the safest route in every instance.
There are some areas of law, such as labour and insurance, where “good faith” becomes part of every contract, even if those words are absent from a written deal. But even when “good faith” is not a specific term of a contract, it can become the focus of a lawsuit over how a deal was negotiated or implemented. One of the legal problems is whether the existence of “good faith” creates a basket of identifiable rights the parties can rely on.
A recent example of this is an Ontario case called SCM Insurance Services Inc. v. Medisys Corporate Health LP. These companies had a deal in which SCM was granted what the judge called a “right of first negotiation” should a particular Medisys division come up for sale. This happened. The two sides held negotiations but couldn’t reach a deal.
SCM then challenged whether Medisys had actually negotiated in “good faith.” When the talks failed, Medisys struck a deal with a third party. SCM argued that “good faith” meant it should have been given a right to match the offer from the third party buyer. The judge disagreed. The duty to negotiate in good faith was satisfied when Medisys gave SCM a reasonable opportunity to buy the business, the judge said, adding that it doesn’t include the creation of rights that weren’t specifically included in the deal.
But remember that case law looks backward at past events. The SCM case is how one judge applied the notion of “good faith” in one case. A future judge may find that acting in “good faith” triggers some specific acts or behaviours.
“This case is a good reminder that, in certain circumstances, courts may be prepared to imply duties of good faith into commercial arrangements, even where the parties are at arm’s length,” wrote Larry Lowenstein, Laura Fric, Robert Carson of Osler, Hoskin & Harcourt LLP in a note on the SCM case.
This is an area where the law will always be ambiguous. Case law might provide some clarity. But if you’re looking for a bright-line test, you’ll have to rely on your own sense of whether you’re doing the right thing. Even if you think you’re onside with the law, enough ambiguity remains on the table for legal disputes to arise.
Financial Post
dhasselback@nationalpost.com
twitter.com/legalpost
Source: http://business.financialpost.com/2014/09/22/drew-hasselback-pinning-down-a-legal-definition-of-good-faith/
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