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"[T]he liar's punishment is, not in the least that he is not believed, but that he cannot believe anyone else." - George Bernard Shaw1
The double liar dilemma is a perplexing issue that courts face when shaping the law that governs contract negotiation. In essence, the dilemma is whether a lie by one party to a business contract should excuse a lie by the other party.
The dilemma arises when, for example, a buyer negotiates the purchase of a business from a seller. During contract negotiations, the seller makes representations concerning the financial condition of the company. At the same time, the buyer agrees to include in the contract of sale a clause stating that the buyer has not relied on any representations made by the seller during the negotiations or in the contract.
Following the purchase, the buyer learns that the seller misrepresented the company's financial condition and sues to rescind the contract. The seller argues that, even if the seller's representations were false, the court should not allow rescission because the buyer's statement that it did not rely on any representations is now also untrue. The court must interpret the contract either in favor of the buyer who lied in stating that there was no reliance or in favor of the seller who lied about the company's financial condition. In this scenario, a decision in favor of the seller means that the buyer whose contractual statements are untrue is not entitled to rely on seller representations.
This scenario involving double liars (buyer and seller) raises an important public policy concern relating to fraud and freedom of contract. The issue is whether "public policy intervenes to trump contractual freedom . . . That public policy argument [against fraud] continues a longstanding debate within American jurisprudence about society's relative interest in contractual freedom versus establishing universal minimum standards of truthful conduct for contracting parties."2 This issue is especially significant because both principles - freedom of contract and the encouragement of truthful conduct - lie at the heart of the American legal system that frames the business environment.
Analysis of the double liar dilemma requires consideration of multifaceted legal and ethical concerns that are explored later in this article. Two questions are especially important. First,...