19 April 2013
It is often said that confidentiality clauses have no teeth. Frequently agreed, but then difficult to enforce. It can be tricky to show a breach and, even then, what loss has been caused? Perhaps that is why they are rarely tested in court.
A recent court of appeal decision (Dorchester v BNP Paribas 7 March 2013), though, is a reminder that such agreements are contracts to be enforced like any other. They can have some draconian effects particularly where – as is commonly agreed – a party agrees to procure confidentiality from any third party to whom they pass on the confidential information.
The dispute in Dorchester related to a property deal. Dorchester disclosed to BNP confidential information about a development opportunity which BNP could then disclose to IKEA, a potential funder. BNP signed a “non-disclosure and non-circumvention deed” with Dorchester, the effect of which was that BNP agreed to procure that any party receiving confidential information was bound by similar non-disclosure and non-circumvention obligations.
BNP passed information to IKEA but had failed to enter into a back-to-back confidentiality agreement. Dorchester also passed on information to IKEA direct thinking BNP had ensured IKEA was bound by the non-disclosure and non-circumvention terms. IKEA made its own successful bid for the development site, ousting Dorchester. Dorchester then sued BNP for failing to ensure that IKEA kept the information confidential and did not “circumvent” Dorchester by contacting the seller direct.
The ruling hinged on the construction of the – ambiguous – provisions in the agreement, which stated that BNP would procure that third parties were bound by “similar obligations of non-disclosure and non-circumvention”.
That was an objective test, looking at the meaning of the words and the “objective aim of the transaction”. On this, the Court of Appeal disagreed with the judge and decided that the aim of the agreement was to protect Dorchester against the risks of unauthorised disclosure and circumvention by a party receiving the confidential information. The reference to non-circumvention had, said the Court of Appeal, to be given some meaning. If BNP had failed to ensure that back-to-back agreements were in place with IKEA, it had to take the consequences of IKEA’s conduct.
The case is an application of the usual rules of contractual interpretation, and another illustration of two courts coming to different conclusions on the “objective aim” of a transaction.
But perhaps more importantly it is an illustration of the potential consequences where a party receiving confidential information agrees to procure that third parties sign up to equivalent terms. Failure then to put in place back-to-back agreements which properly reflect the confidentiality obligations in the original contract can be costly.