4KBW
Legal 500

News & Articles

Breach of confidentiality: the importance of a carefully drafted confidentiality clause

14-October-2014
14-October-2014 18:56
in General
by Admin

Sitting as a deputy High Court judge, Stephen Jourdan QC recently handed down a careful and detailed judgment in a claim concerning the disclosure of the claimant company’s confidential information and the duties owed by shareholders and directors of the company with respect to that information – Richmond Pharmacology v (1) Chester Overseas Ltd (2) Milton Levine (3) Larry Levine [2014] EWHC 2692 (Ch).

 

Facts

 

The claimant (“Richmond”), a contract research organisation founded by three doctors, entered into a shareholders’ agreement with the first defendant company (“Chester”), whereby Chester would purchase 44 per cent of Richmond’s issued share capital. The remaining shares were held by the founding doctors. The second and third defendants (“the Levines”) were directors of Richmond but were also beneficial owners of shares in Chester.

 

Seven years into the agreement, Chester sought to sell its shares in Richmond back to the founding doctors. When these discussions broke down, Chester engaged a company (“NWCF”) to market its shares to third-party prospective purchasers.

 

Richmond claimed that during the course of that marketing campaign, NWCF, acting on behalf of Chester, disclosed Richmond’s confidential information to third parties and created a misleading impression that all the shares in Richmond were for sale. Richmond sought damages or equitable compensation, claiming that this caused it substantial loss of business.

 

Duties of confidentiality

 

Under the agreement, Chester owed a contractual duty to Richmond not to disclose to third parties any commercially sensitive information relating to the affairs of Richmond which it had received or obtained as a result of its position as shareholder or the Levines’ position as directors of Richmond, unless that disclosure fell within one of the exceptions set out in the agreement. In addition, the Levines owed duties to Richmond as set out in ss.172, 174 and 175 of the Companies Act 2006.

 

Chester

 

Stephen Jourdan QC noted that although in disclosing confidential information to NWCF the defendants had not breached their duty to Richmond, as disclosure to professional advisers was a permitted exception under the shareholders’ agreement, the subsequent disclosure by NWCF on Chester’s behalf was in breach of the agreement.

 

Chester had further breached the agreement when NWCF informed prospective purchasers that all shares in Richmond were or might be for sale. Accordingly, Chester was liable to Richmond for any reasonably foreseeable loss suffered in consequence of that breach.

 

The Levines

 

The Levines had breached their s.175 duty to avoid conflicts with the interests of Richmond.  It was no defence to a claim for breach of that duty to say that the director acted in good faith. Nor was it a defence that the director reasonably, but wrongly, thought that he was entitled to do what he did: “the test of whether there was a breach of duty under s.175 CA 2006 was objective, and did not depend on whether the director was aware that what he was doing was a breach of his duty.” It followed that they had breached the equitable duty of confidence.

 

Loss

 

Despite his findings on breach, the Judge was not satisfied that any of the breaches had caused any loss to Richmond. He awarded Richmond nominal damages of £1.

 

Conclusion

 

This judgment is a reminder of the duties of confidentiality owed by companies and their owners and directors (statutory, contractual and equitable duties) in commercial transactions and the necessity of drafting watertight confidentiality clauses.

 

(On a side note, at para.44 of his judgment, Stephen Jourdan QC also provides a useful summary of the normal principles of contractual interpretation, which of course apply to a shareholders agreement like any other contract.)

 

The Judgment can be read here.

 

© 2014 Chambers of Lawrence Power, 4 King’s Bench Walk, Temple, London, EC4Y 7DL. Tel: 020 7822 8822.  www.4kbw.net