Chapter E7

Rule 7- The Rule of Deception

Any commercial deal, as we all know, is ultimately a give and take. No one gets exactly what they want. Still, if you know what the other side wants and they know what you want, it’s possible to close a deal quickly, efficiently and to everyone’s satisfaction. That’s a win-win. The question is: how do you manage your negotiation such that you efficiently get to this win-win?

There are two ways to run any business negotiation. One way is to let your counter party know exactly what you care about, meaning what you really want from the deal. The theory behind this tactic is simple: if you counter party knows exactly what you want, they will factor it into their thinking and give you what you want without too much trouble. They will do this because they know that if they don’t, you will walk away from the deal. In the bargain, they will also hopefully tell you what they really want and you are then be able to cut through the noise and make them an offer they will accept. This transparent way of functioning makes it easy to close a deal. This is what makes for a great win-win, which is what all those self-help business books sell to you all the time.

The problem is that in the real world, deals are not pure win-wins: somebody always gets something extra over the counter party even though the deal is projected as a win-win. How do you do this? You know what you want. But if you say it the way it is, your counter party will see your easy-gives and devalue those in its negotiation tactics. Since you have revealed your hard-gives, your counter party will value those up and negotiate hard for those. In fact, if your counter party is really smart, it will convert your hard-gives in your hands as a gotta-have in its hands. So, both sides argue about your hard-gives while your easy-gives become not things you have given but something to be taken for granted. It’s as if those easy-gives have no value at all.

I am talking about weightage. If you say I will buy more from you but I must have committed timelines, your counter party immediately understands that you are under delivery pressure. It will commit to your time line but demand that you buy a much higher quantity or at a much higher price. Conversely, if you care little for the deadline but care a lot more to have a lot of quantity, it will purport to be able to deliver on time but offers you a smaller quantity except at a higher price. To put it simply, it positions your hard-gives as a deal breaker and positions everything you are willing to give as valueless stuff they don’t care about. If and when you do close the deal, you may find that you gave away more than you really would have if you had been less transparent. At that point you may also realize that in each win-win deal, there is a bit of a win-lose too, and that is often the result of deception.

We are not of course reading a book on business negotiation so we can remind ourselves that litigation isn’t a win-win at all (though settling a dispute may well need win-win deal making skills!). Litigation is a win-lose and for the most obvious reason: someone always loses. You beat up the other guy. It becomes easier to do if you are willing to engage in deception.

In a way, deception is built into every tactic we have spoken of so far. Anticipating and pre-emptying the opposition lies at the heart of litigation tactics. To win, we must be unorthodox, we must seize and control the initiative, we must control the enemy’s responses, and we must be sure not to be predictable. Each of these tactical moves entails an element of deception. War history is full of deception. Conditions for the 1971 Indo-Pak war were created because India send in its soldiers disguised as part of a home grown ‘mukti bahini’ freedom fighting force in the wake of Mujibur Rehman’s demand for independence, a masterly deception. The Pakistani army came under enormous pressure in the east eventually leading to its vivisection and the creation of Bangladesh. The Kargil war started with Pakistan sending its troops disguised as freedom fighters to occupy the heights above Kargil even as Pakistan’s PM Nawaz Shareef talked brotherhood of man and solutions to the Kashmir issue with India’s PM Atal Bihari Bajpayee in their Lahore meeting.

In the narrow litigation context, I can think of many classic occasions where deception brings incomparable benefit, indeed is probably necessary. Deception is used to set up a case, meaning to ‘construct a case’. As I have said before, a legal war begins when parties detect a conflict of business interest. In court, litigation comes much later, or the conflict may be settled long before litigation comes at all. If we are to win our legal wars, we must ‘steer’ the facts and create a story we can sell to a court if we end up there. As often as not, deception is necessary to get a suitable story.

Once a court case begins, deception may also be necessary to make one’s story stronger, or it may be necessary to weaken the defense. For instance, you can position your case in a way where it is difficult for your enemy to understand where the pulse of your case lies, till it is too late. This works better in arbitration than it works in court not least because arbitration runs faster than Indian court cases. All the witnesses get to testify one after the other so there is little time to plug a gap in your defense which you failed to spot because you were deceived into thinking the pulse of the case was elsewhere.

Let us first look at the role of deception in constructing the narrative of a case. To do so, we return to a case we discussed in the first chapters of this book.

The Weizmann case

Recall the Weizmann case, a global engineering major who entered India on the back of a joint venture with promoter Gupta. It then acquired a large stake in a sick company under the protection of BIFR. Shortly after making its investment, Gupta disclosed that the actual losses in the company were four times what had been represented to BIFR, to lenders, to public shareholders and to Weizmann too. When Weizmann investigated this accounting fraud, it realized that Gupta had faked sales volumes, inflated inventory, booked bogus expenses, and diverted both employee loans and creditors payments to himself.

It was obvious that Weizmann had to remove Gupta as Managing Director. In Indian law, removing a director is always difficult. The larger problem was that Gupta controlled the factory, the management, labor, and he had complete control over both the local and the regulatory environment. Any attempt to take away his executive power through corporate due process would be stonewalled through BIFR intervention and court injunctions. Weizmann knew that it needed to perform a commando type operation. If possible, it needed Gupta, or one of his executive directors to admit to this fraud. Weizmann needed to lure Gupta into complacency, have him admit to the essential facts and then hang him for it.

As the strategy unfolded, Weizmann informed Gupta that these ‘losses’ could not be repressed any longer. While disclosure would have to be made, Gupta was free to provide an appropriate explanation to the Board of Directors. Gupta didn’t understand the point of this Board procedure. Why did Weizmann need him to admit anything? Why couldn’t the company simply reconcile accounts and inventories and then write off what wasn’t there to keep? Weizmann remained calm but politely firm. In a public company, even a write off had to be justified. Weizmann need to complete its paperwork. It needed the previous management to defend its position. Could Gupta please provide an Explanatory Note for the Board to consider?

Gupta was deceived by the soothing words in which Weizmann wrapped its request. Maybe it’s just how these foreigners work, he thought. Weizmann invited the Director (Finance), another Gupta nominee director, to help frame this Explanatory Note to the Board.  To be fair, the Director (Finance) did a fine job of explaining away the huge hole in the balance sheet. He could not, and did not, deny the essential facts, but he put out a slick defense of it. Weizmann faxed this note back to Gupta. Gupta now tinkered with it some more to further vindicate his actions but yet again, the basic ingredients of the accounting fraud were accepted as a fact. In culmination, this Explanatory Note arrived back on Weizmann’s desk, duly signed by both MD and Director (Finance)! Thus, through a simple deception, Gupta and his associate were persuaded to freely admit to an accounting fraud in the company.

‘This set the stage for a coup d’etat, but there was another deception to unfurl yet.  Obviously, the company could not have an agenda item in the next Board meeting telling the world that Weizmann was going to remove Gupta. Doing that would most certainly invite a stay order from a court.  Instead, Weizmann inserted this Explanatory Note as part of the “consideration of the accounts of the company”. Gupta agreed to help the Directors better understand the Explanatory Note at the Board Meeting.

That Gupta was stripped off his executive powers is a story we have already heard. What is relevant here is for us to understand that the battle was won because Gupta was deceived into signing a confession. This damaged his legal position irretrievably. Would Weizmann have succeeded in doing all that it did if Gupta did not believe that the Explanatory Note was merely a sugar-coated bitter pill designed to create a story around a very hefty write down?  

The Weismann case shows us how to construct the narrative of a legal case so that the facts support you when you go to court. Even after a court case has begun, deception remains a major part tactic in your arsenal. Here is an illustration of the use of deception as a central tactic in court to compel victory over the enemy.

The Metro Cable case

Recall that Metro Cable was a large Indian cable company which purchased 51% equity in a joint venture called AP Cable with a local strong man in the fragmented cable TV business at that time. Metro Cable then leased to its own subsidiary AP Cable all equipment required to set up a satellite signal receiving Head End. The 49% partner, Reddy, became the Managing Director of AP Cable and its local face. As time went by, he alone came to know the customers (i.e. the cable operators). In this way, he controlled the revenue stream and was able to leverage his numerous local contacts. In time, Reddy grew richer while AP Cable continued to bleed and Metro received little if anything by way of lease rentals for the Head End.

Over the years, Reddy also allowed dues from cable operators to run into arrears while he loaded a lot of luxury spend on AP Cable. He purchased luxury cars, took expensive business trips, financed a range of office equipment purchases and generally threw money around, thus practically emptying out all of AP Cable’s bank accounts. He then started talking to Metro’s competitors. Rumor had it that he offered to move all ‘his’ cable operators to the competition if they paid him a substantial sum of money. Metro needed to get back into the company. To nail Reddy, it also needed to seize the accounts files, take control of the Head End, take over the cable operators and run Reddy out of AP Cable. How this was achieved is a good illustration in deception.

AP Cable’s Board at that time had three directors – Reddy and two Metro nominees – but Reddy had complete authority to run the company as he pleased. AP Cable’s accounts were entirely controlled by Reddy: all Tally statements were fed into his personal desktop computer alone. It was impossible for Metro to access any accounts data without grabbing this computer. Reddy had rented A.P.Cable’s business premises in his personal name, then sub leased them to AP Cable at a higher rent! He was the only authorized signatory of all AP Cable Bank accounts.  He had excellent contacts with bureaucrats and cops.  

To get into the Company, Metro needed to control four areas of AP Cable’s business: (1) Operational control, i.e. the Board of the Company; (2) Finance, i.e. access to its accounts; (3) Cable Operators i.e. the revenue stream; and (4) Head End, i.e. its factory. Lawyers spend much thinking about how to orchestrate this, finally coming up with a strategy that would transfer this control to Metro in a single shot. Embedded in this strategy were large elements of surprise.

In planning the physical ‘capture’ of the company, Metro put together a ‘commando’ team of technicians and security boys. At the same time, the Directors were briefed on the script they would run at their Board Meeting. Metro now called this Board Meeting at a local hotel, far from the Company’s office. On the appointed day, Reddy swaggered in, confidence writ large on his face, primed for a screaming solo performance. To give the Metro commandoes enough time to capture the office, the meeting began with a leisurely coffee session, peppered with local political gossip. Meanwhile, the commandoes entered the Head End and physically took control of all assets including Reddy’s computer. They fished out the accounts sheets and quickly emailed them to the Directors.

Metro directors now started their meeting, moving quickly to a discussion on accounts. Before Reddy could come to grips with the emerging reality, Metro’s nominee directors changed tack, placed the accounts sheets before Reddy, and demanded explanations about the large holes in the accounts. Reddy was belligerent, claiming these accounts were not accurate and that many of the expenses were justified. It made no difference. The Board rejected his explanations, and eventually stripped him of his executive powers. They cancelled all Powers of Attorney granted to him and appointed a committee to look at all allegations of financial impropriety. Simultaneously, they co-opted another director, appointed him as the CEO and empowered him to operate bank accounts. While Reddy was still shouting at the illegality of it all, the new CEO occupied Reddy’s office and started working. Deception won the day.

Deception again was at the heart of Metro’s success in keeping control over the last mile cable operators.  Within hours of taking over, the CEO invited all cable operators for a joint meeting. At the meeting, he asked to be paid old outstanding. What old outstanding? They had all paid Reddy already. They could provide signed cash receipts. The CEO asked to see these receipts. Within hours, he received proof that Reddy had indeed been diverting AP Cable funds into his own pocket.

That was not the end of Metro’s deception tactics. Reddy was expected to go to court and he did. He wanted to get back control of AP Cable. He was its Managing Director and 49% shareholder. There was a good chance the court would give it to him. Metro now unfolded another act of deception. While the drama unfolded in court, Metro set up a parallel head End in another property and moved all Cable Operators to that company, complete with freshly signed contracts. Metro also terminated the AP Cable Head End lease contract. The story about the fight for control of AP Cable has already been told in these pages. The battle lasted seven months but when Reddy eventually got his court orders, he had been fighting for the corpse of an empty shell with no business to its name.

In a way, the last element of Metro’s deception demonstrates a particularly variation on the rule of deception. Here, Metro led Reddy to believe that he should fight for AP Cable when AP Cable was not worth fighting for because the cheese had moved. It meant that even if he won, Reddy would still lose. This particular tactic has many imaginative variations. At its simplest, you can frame your case and project it as something other than what it is, while hiding your real objective. Thus, you can fool your enemy into fighting a mirage.  If you succeed, your enemy cannot understand your agenda and ends up fighting for something you don’t care about. Here is an example we have already studied in these pages.

The E&D Case

Recall that back in the 1980’s, a large Indian corporation notified a global tender. They wanted a contractor to build a hydro power project in the remote Himalayas. The project needed the contractor to build a long tunnel. The tender specified that the area to be tunneled was stable. Based on this representation, E&D bid low and won the tender.

To build the tunnel, E&D imported a bespoke tunnel-boring machine, commonly called a ‘TBM’. TBM’s are truly large – the length of three railway coaches – and are built to project specification. They are assembled on site and are very expensive. Because they are project specific, after the project is delivered, they are generally sold for scrap.

The Project ran into trouble during construction of the headrace tunnel. The TBM struck a vast field of sub soil mud. By itself, this is not a problem. It’s possible to bore through a vast mud field by cladding the tunnel walls with steel as one bores. If E&D had known about the mud, it would have changed the specifications of the TBM to include cladding abilities. E&D had relied on the information given to it by the project owner and that was its undoing. A sea of mud filled the tunnel early during construction, burying the TBM one kilometer under the earth and killing several workmen. Work came to a grinding halt. It was a disaster. The mud could not be removed by hand but worse, E&D would need a different TBM to get through the mud reservoir. Who would pay for the equipment and the delay these changes would cost?

When E&D’s lawyers read the contract, the legal risk was not that clearly specified. You could say the owner was responsible and you could say the contractor was responsible. What was E&D to do. If it completed the project, it would suffer colossal losses. E&D needed to get out of the project, but how? If it refused to complete the project, it would spend years in litigation, perhaps decades. In the end, E&D decided that its only objective was to cut its losses and exit. How to do that was a whole different can of worms.

This is when fate and fortune played its hand. Political insurgency flared up in the area and a spate of violent incidents created an environment of fear and neurosis. Extremists blew up infrastructure around the project, the workers camp came under sniper fire and several villagers were killed in the neighborhood. Since E&D had already decided to exit, this ‘Political Force Major’ was a godsend. E&D issued notice suspending performance of the contract till these conditions improved. It was all nonsense of course. Isolated events are not the same as true war like conditions. Even E&D knew that it was perfectly capable of constructing the project. In fact, fifty miles to the north, another international consortium was constructing another hydroelectric project at the same time. Both projects faced the same insurgency problem but the other one never declared Force Major.

E&D’s deceptive tactic completely changed the rules of the game. Suddenly, the legal issues between parties because the question whether E&D could declare Force Major or not. This story too has been told before. The Indian owner decided it would cost too much time and money to fight this case in a global arbitration and the results would never be certain. The owner thought it made more sense to get E&D out of there, finish the project somehow and make money selling electricity instead of spending it on lawyers.  The owner offered a no-strings exit to E&D which was just as quickly accepted. Thus, E&D extracted itself from the situation without engaging in costly annihilation.

The E&D case is not just a great example on how to deceive the enemy on what the fight is about. It is also a great illustration how to select the right ‘terrain’ in litigation. Armies always choose where to fight and this is true for litigation as well. If the owner had known what E&D was trying to do, it could have kept the pressure on E&D and the result could well have been very different.