We're now ready to look at an especially important issue relating to preparing for a negotiation and that is the question of how you should handle ethical issues. There's probably no other situation in business or in life that will challenge your ethical standards like a negotiation. So it's important to think about the standards that you will use before you begin negotiating. In answering this question, how should I handle ethical issues, there are two clusters of standards to consider. First of all there's a cluster of standards that are based on legal principles and then there are general ethical standards that go beyond the law. One way to visualize this difference is to think of this in terms of two overlapping circles. And what we're focusing on here when we're talking about law based ethical standards is the overlap situation, where the legal principal is also an ethical principal or an ethical standard. We can all think of situations which would be in the left-hand part of the law circle, where we law has nothing to do with ethics or morality. For example, the law in England says that you have to drive on the left-hand side of the road, England and many other countries. Does that mean people in England are immoral and unethical? Well, of course not its simply a rule of convenience. But on the other hand, there are many legal principles that are also ethical standards. Thou shall not kill is one of the great moral principles around the world and it is also a legal principal. So, when we look at law based ethical standards, there are three standards that are especially important in negotiation. First of all, we'll be talking about fraud, which is defined as false representation of a material fact that is relied on by the other side. Second, we'll look at fiduciary duty, which is a high duty of trust and loyalty. And third, one of the most uncomfortable words in the English language, in fact, if you type out this word, you'll probably get a spell check warning, but it's unconscionability. And that is conduct that violates principles of good conduct. So, let's start with fraud. And let me ask you this question, would you ever deliberately commit fraud during a negotiation? Would you ever deliberately lie to the other side during a negotiation? Please write down, yes, I would deliberately lie, or, no, I wouldn't deliberately lie. And for those of you who said no, let's do a quick test. Let's assume that you are the seller in this situation. You have offered to sell your house for 300,000 to the buyer. Let's also assume that your reservation price is 250,000. That is, you would be willing to sell to the buyer for as low as 250,000. During the negotiation, the buyer asks you, are you willing to sell your house for 250,000? And you say to the buyer, no, absolutely not. Now, have you committed fraud? There's no question here. You've told a lie, and you've told a deliberate lie, because under our assumed facts, we've decided that you are willing to sell the house for 250,000. And you're lying to the buyer when you say you aren't willing, you're bluffing, in other words. So, is that fraud? Is that illegal? Take a look at the definition of fraud again and try to answer that question. Have you committed fraud when you lie about your reservation price? The answer to that question, although it might be a close call, is that even though it's a deliberate lie, it is not fraud in the legal sense of the word. Yes, you have made a false representation. You've lied. Yes, it's a material fact that's an important fact to the buyer. But, is that the kind of representation that is relied on by the other side? And the answer to that piece of it is no. No buyer in this scenario should rely on your statement that you're not willing to budge on price. Everyone should know that's part of the negotiation game, that's what people do in negotiation, they bluff. And so, not fraud in this scenario. Okay, let's move on to fiduciary duty. High duty of trust and loyalty. In other words, when you're in a unique situation with the other side. Let's say you're an employee negotiating something that affects your employer. You owe the highest duty of trust and loyalty to your employer. An employee owes a fiduciary duty to the company where he or she works. So let's look at a couple of examples of fiduciary duty. Here's a situation based on an actual case where a real estate developer hired an agent and asked the agent to try to find a $10 million loan for a real estate development. The agent was successful. The agent went to an insurance company and arranged for the $10 million loan. It was just what the real estate developer wanted. The real estate developer by the way promised to pay a $50,000 commission to the agent for coming up with the loan. So, the real estate developer was happy with the loan. The insurance company was also very happy and decided to pay a finder's fee to the agent. So the agent, then, went to the developer and said, okay, I'm ready for my $50,000. And the developer said, I've decided not to pay you. Now, what would be the logical result in this case? Should the agent be allowed to recover the $50,000 commission? Please write down your answer, yes or no. The court decided, correctly in my opinion, that the agent was not entitled to the $50,000 commission, because agents owe a fiduciary duty to their principals, in this case the real estate developer. And by accepting payment from the other side, the agent reached this fiduciary duty. The agent was being paid by both sides, whereas the duty of loyalty should've been only to the real estate developer. Now, think about this for a second. If you're ever in a situation, if you're an agent or in the position of the agent, and this situation arises, how could you arrange to be paid the $50,000 and also be paid the finders fee? Think about that for a second and write down your answer. What the agent could have done in this situation is, number one, before accepting the finders fee, he could've gone to the developer and explained the situation and ask permission to receive the finders fee. No problem there. Or second, the agent could have acted as a true finder. In other words, rather than being an agent for either party, which involves a fiduciary duty, the agent could have been independent of both parties, in which case the agent could receive a fee from both parties. Let's try another scenario. And here's the situation, again, based loosely on an actual case. Let's say that you work for a mining company. And your company has made a huge discovery of a valuable mineral in a remote area. You want to keep the discovery quiet so that you can buy up mineral rights and real estate in this area. So, the discovery is secret. On behalf of the company, you then enter into a contract with a local farmer, where you basically buy the farmers land, which includes the mineral rights. So that's contract number one that you make in April. In May, you make another contract on behalf of yourself. You buy stock in your company from another shareholder. In June, your company finally decides to disclose the discovery. And the stock price in the company doubles. Any problems here with these two contracts that you've made? Contract number one, you bought the farm from the farmer and the mineral rice from the farmer without disclosing the minerals. And number two, you bought stock in the company from another shareholder without disclosing the discovery of the minerals. Think about that for a second. Write down your answer. No problem with the first contract in April. With that contract, you're dealing at arms length with the farmer. And there's no general duty. Although in certain cultures, certain countries, you might discover there is a duty, but generally no duty to disclose the discovery. This person is a stranger. Big problem with the purchase of the stock. Because you're an employee of the company, you are buying stock from one of the company owners, you owe a fiduciary duty to the company and to that owner. And you have breached your fiduciary duty by buying the stock without disclosure. So, this is a breach of fiduciary duty. And this breach of fiduciary duty has been included in legislation in most countries of the world, and the legislation is known as insider trading laws, which you have done here. Buying the stock is to violate insider trading laws. So those are illustrations of how the concept of fiduciary duty works. The final law-based ethical standard is unconscionability, conduct that violates principles of good conscience. And as you might guess, this is somewhat of a loose concept, difficult to define. However, in defining unconscionability, courts focus on two questions. First of all, is there so called, procedural unconscionability? Does one party have an absence of choice because of unequal bargaining power? And second, they look for so-called substantive unconscionability. Are the terms of the contract unreasonable? So what that means when you put it together, is that when you are a very powerful party dealing with a very weak party, who really has little choice but to deal with you. And when you force unreasonable terms on that party, a court might overturn the contract or overturn those terms on the principle of unconscionability. Here's an example. We have a restaurant in the United States called Hooters. And Hooters initiated what they called an ADR program, alternative dispute resolution program, which basically said that if you work for Hooters you have to sign a document stating that you agree not to sue Hooters. Instead, if you have a claim against Hooters, the claim would go to arbitration rather than to the courts. Well, a waitress at Hooters had a sexual harassment claim. She wanted to go to court and she did not want to go to arbitration. And so, she filed her suit in court and challenged this arbitration agreement. And the court had to decide, is this agreement unconscionable? Is it a case of a large corporation, powerful corporation, forcing terms on an employee who might have very little choice. And are those terms fair? This is what the arbitration agreement provided. It provided, first of all, that employees in the arbitration had to provide notice of claims, not Hooters. Hooters could select the arbitration panel. Presumably, they could select their own managers are arbitrators. Hooters could record the arbitration hearing. Employees could not record the hearing. Hooters could cancel the agreement to arbitrate, at any time, not employees. Hooters could change the rules of the arbitration at any time, perhaps even in the middle of the arbitration, not employees. Guess what the court decided? This arbitration agreement is unconscionable and void, and this decision was affirmed by a federal Court of Appeals. So, that concludes our look at law-based ethical standards.
