The importance of keeping secrets

Wednesday, 01 May 2013

Sylvia Fernandez photo
Sylvia Fernandez

    Sylvia Fernandez highlights the dangers of any unauthorised use or exploitation of confidential information.

    In commercial dealings, it is not only contractual and statutory obligations to which companies and their directors need to pay attention. Equitable obligations, such as duties of confidence and fiduciary duties, are beginning to emerge as equally important weapons to bind parties to their promises.

    This is especially so for the duty of confidence that, put simply, is an equitable obligation owed by one party (the confidant) to the other (the confider) to keep shared information confidential.

    For the duty to arise, the information must be confidential and the imparting of that information must take place in circumstances where it was apparent to a reasonable person that it could not be disclosed.

    If the confidant breaches the duty of confidence by disclosing or exploiting the confidential information in an unauthorised manner, the confider may pursue equitable remedies against the confidant, such as taking an account of profits generated by the breach of confidence or claiming equitable compensation, which is a similar, although not identical, remedy to damages for breach of contract.

    Duties of confidence can arise in contractual settings between commercial parties. Indeed, even in circumstances where the contract expressly provides for obligations to protect confidential information, an equitable duty of confidence can co-exist with the contractual duty. It can also have a broader scope to any parallel contractual duty.

    This introduces risks and rewards for contracting parties. To the confidant who has carefully sought to limit, by the terms of the contract, the scope of its contractual obligation to protect the other party’s confidential information (or the extent of its liability in the event of breach), there is a large risk that actions that might otherwise not amount to a breach of contract (or if they do, not give rise to substantial damages) may amount to a breach of confidence. To the confider who has been the victim of the unauthorised disclosure or exploitation of its confidential information, there can be rewards, as the scope of remedies available to redress the breach will be far greater than those available for breach of contract alone.

    A duty of confidence will often arise in commercial settings that involve one party entrusting valuable information, such as trade secrets, client lists, know-how or technical specifications, to another party. A typical example is the relationship of an owner of intellectual property (IP) with a manufacturer and supplier.

    Under most manufacturing and supply agreements, the owner of the IP will license the use of the IP to the manufacturer and supplier. Along with this, the owner will often provide the manufacturer and supplier with the technical information and know-how necessary to enable it to assemble the product to specification. To protect such information, these agreements often contain comprehensive confidentiality clauses. However, in addition to the contractual duty of confidentiality, these circumstances may attract an equitable duty of confidence flowing from the manufacturer to the owner.

    This outcome occurred in the case of City of Sydney v Streetscape Projects (Australia) Pty Ltd and Moses Obeid [2011] NSWSC 1214, where the owner of IP in a multifunction pole, the City of Sydney, licensed its IP to a manufacturer and supplier, Streetscape Projects, for the purposes of mass-producing and selling the product in Australia, New Zealand and Spain. In this case, the IP primarily consisted of copyright in drawings of the multifunction pole contained in a technical manual. This manual also contained detailed manufacturing and engineering instructions that were necessary to follow to assemble the multifunction pole according to specification.

    Under the terms of the written agreement, the City of Sydney gave over custody of the technical manual to Streetscape. Three years after the agreement was signed, the City discovered its multifunction pole was being sold outside of the permitted territories by an entity associated with Streetscape. It promptly began proceedings against Streetscape alleging, among other claims, breach of contract and breach of confidence. These claims relied on an inference that Streetscape unlawfully transferred the City’s confidential information to the associated entity.

    The court ultimately found in the City of Sydney’s favour. It held that in addition to the contractual duty to keep the technical manual confidential, Streetscape owed the City a duty of confidence not to disclose or use the information in the manual in an unauthorised manner. The basis for this determination was that, in the circumstances in which the technical manual was entrusted to it, and having regard to the commercial value and importance of the manual to the City, Streetscape ought reasonably to have known the information in the manual was confidential and was to be kept confidential. The same finding was made against Moses Obeid, the sole director of Streetscape, in his personal capacity, and equitable compensation was ultimately awarded against both parties in an amount exceeding $12.1 million.

    As the case shows, it is crucial for commercial parties to be alert to the risk that equitable duties, such as the duty of confidence, may overlay contractual duties, particularly where one party entrusts the other to use its IP or confidential information in a particular manner or for a particular purpose. Any unauthorised use or exploitation of that information may result in the owner having a viable suit in equity, even in circumstances where the ordinary suit for breach of contract is limited or excluded by the terms of the contract.

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