Attorney Davies is representing a client in a real estate transaction. During negotiations with the unrepresented seller, Davies states, 'My client is prepared to pay up to $500,000 for the property.' In reality, Davies's client has authorized Davies to pay up to $550,000. Davies makes this statement to gain a more favorable price for the client. Is Davies's statement ethically permissible?
- ANo, because Davies has a duty of candor to all parties involved in a transaction, regardless of representation.
- BYes, provided Davies believes the statement is in the best interest of the client and does not constitute outright fraud.
- CYes, because statements about acceptable prices in negotiations are generally considered acceptable puffery.
- DNo, because Davies made a false statement of material fact to an unrepresented person.
Show answer & explanationAnswer & explanation
Correct answer: C. Yes, because statements about acceptable prices in negotiations are generally considered acceptable puffery.
Model Rule 4.1 generally prohibits a lawyer from knowingly making a false statement of material fact or law to a third person. However, the comments to Rule 4.1 clarify that certain statements, such as estimates of price or value, a party's intentions as to an acceptable settlement of a claim, and the existence of an undisclosed principal, are ordinarily not taken as statements of material fact. These are considered negotiation ploys or 'puffery' and are generally permissible.
Why the other options are wrong
- A. A lawyer's duty of candor under Rule 4.1 applies to 'material facts.' The statement about the client's maximum offer is generally not considered a material fact in this context.
- B. While the statement might be in the client's best interest, the permissibility hinges on whether it's a 'statement of material fact,' not just on whether it's 'outright fraud' or 'best interest.'
- D. While it is a false statement, the comments to Rule 4.1 specifically carve out statements of price or value in negotiations as generally not being considered 'material facts' for the purpose of this rule.
Puffery in Negotiations
Statements regarding acceptable prices, settlement values, or a party's intentions in a negotiation are generally considered 'puffery' or negotiation ploys, and not false statements of material fact under Rule 4.1.
- Rule 4.1 prohibits false statements of material fact.
- Comments to Rule 4.1 define what is NOT a material fact.
- Price estimates, settlement intentions are examples of permissible puffery.
Memory trick: Negotiation talk can inflate, if it's not a material state.