Legal Ethics In The Context Of Negotiations

This article was originally published in the December 2011 issue of New Jersey Lawyer Magazine, a publication of the New Jersey State Bar Association, and is reprinted here with permission."

Most of the Rules of Professional Conduct (RPCs) are drafted in the context of litigation and other contested matters, and not in the context of transactional matters and negotiations. This article examines some of the RPCs frequently encountered in the context of negotiations. In particular, the article examines a few RPCs referring to a lawyer's obligations to make truthful statements when negotiating on behalf of clients, and to disclose information to third parties to prevent certain "bad acts" of clients.

When Representing a Client, I Cannot Tell a Lie

About Material Facts

A lawyer cannot lie about material facts. RPC 4.1(a)(1) states that: "In representing a client, a lawyer shall not knowingly make a false statement of material fact or law to a third person."1 The two key terms in this rule are "knowingly" and "material facts."

RPC 1.0(f) defines "knowingly" as "actual knowledge of the fact in question. A person's knowledge may be inferred from circumstances." Thus, there is no violation of RPC 4.1(a) if the lawyer does not know that his or her statement is false. Consider the following example.

Example #1: A lawyer represents a client selling a business. In response to a buyer's request for due diligence, the client sends his lawyer unaudited financial statements with instructions to forward them to an interested buyer. The financial statements are false, and show inflated income. The lawyer is conveying false information from his client to the other party, but if the lawyer does not know the information is false, he is not knowingly making a false statement.

The term "material fact" is not defined in the RPCs. A fact is material if it has real importance or great consequence,2 one that goes to the heart of the matter.3 That is, "a fact is material when, if the representation had not been made, the contract or transaction would not have been entered into. Conversely, a representation is not material when it appears that the transaction would have been entered into notwithstanding it."4 Consider the following two examples to distinguish between material and immaterial facts.

Example #2: A buyer wants to purchase an office building for its rental income. When representing the seller of an office building, a lawyer states to the buyer that the building sits on two acres of land when she knows that the actual size is 1.90 acres. The size of the land in this context is probably an immaterial fact because the buyer seeks the rental income and the transaction would probably happen regardless of the size of the land.

Example #3: When representing the seller of vacant land, a lawyer states to the buyer that there are five acres of vacant land when he knows that the actual size of the land is 4.90 acres. The size of the land in this context may be a material fact if the buyer has indicated that he intends to develop the vacant land into five one-acre lots in accordance with applicable land use laws. The transaction may not happen, or certainly would not happen at the same price, if the buyer knew that he could subdivide the land into only four instead of five lots, or that he could subdivide the land into five lots only if he bears the additional cost of seeking applicable variances.

About the Law

RPC 4.1(a)(1) states that "a lawyer shall not knowingly make a false statement of material fact or law to a third person." The rule prohibits a lawyer from knowingly misstating the law to another person, including another lawyer, because the other person may rely on the misstatement.5 In this regard, two authorities on legal ethics have written:

[W]hen one lawyer addresses another, she must not deliberately distort what she knows to be the law, for the circumstances may be such that the other lawyer will not have an opportunity to research the point, and will make a hasty decision or forgo certain rights in reliance on such a misstatement.6

It has been observed, however, that this rule does not require one lawyer to do the work of another.7 Consider the following examples.

Example #4: A lawyer represents the seller of business assets. The lawyer representing the buyer fails to request the information necessary to submit a notice of bulk transfer to the New Jersey Division of Taxation. As a result, the buyer may become liable for any taxes the seller owes to the state of New Jersey. The seller's lawyer is not required to disclose...