A non-disclosure agreement (or NDA) is often the first step towards a commercial relationship. Before two parties can get down to brass tacks and talk turkey, they need to be sure that the confidential business information that they are about to share will not be disclosed or misused. There are many circumstances where an NDA is used. You may be considering a sale of the company; before the prospective purchaser carries out any due diligence you will want to ensure that the information is protected in case the deal does not go ahead. Or you may be looking to license your confidential information and other intellectual property; again, if the deal does not go ahead, you need security in case the prospective licensee decides to “go it alone”. But what happens if the other party breaches the NDA; what remedies will you have?
The High Court (in Vercoe v Rutland Fund Management Ltd) has recently considered the remedies for breach of confidentiality. In that case V had told RFML about a possible acquisition target. The information was disclosed under an NDA. RFML then breached the NDA by going ahead with the acquisition without involving V. V argued that, in view of the significant profits that RFML made from the acquisition, V was entitled to an “account of profits” rather than an award for “damages for breach of contract”. If an account of profits were ordered, V would receive very much more money than the sum payable as damages for breach of contract (often be assessed by reference to the value of a notional reasonable agreement to be released from the NDA).
V argued that they should be able to choose between compensation assessed by reference to their loss of the transaction and claiming an account of profits. Alternatively, if the court had the power to choose between these remedies, V argued that it should order an account of profits.
The judge rejected these submissions. In relation to a claim based on breach of confidence there are circumstances in which the claimant will not be allowed to choose a remedy in the form of an account of profits and may be confined to an award of damages.
The test is whether the defendant should retain any benefit from his breach of obligation. This is to ensure that the remedy awarded is proportionate to the wrong done.
Because an NDA can be used in a very wide range of situations, the remedy can differ from one case to another. Sometimes the nature of the obligation of confidentiality will be similar to a fiduciary obligation so it may be appropriate for remedies to be available similar to those for breach of fiduciary duty. Sometimes the nature of the obligation may be similar to the obligations which protect intellectual property and therefore a remedy commonly used in intellectual property disputes may be appropriate. In other cases the obligation of confidentiality may arise out of a contract and so a remedy analogous to a breach of contract remedy may be suitable. Finally, the law of confidence may be used to address use of private information obtained by a stranger and therefore a relevant analogy may be drawn from the law of tort.
In this case, the judge considered that an award of an account of the profits made by RFML would not be an appropriate remedy for V’s breach of confidence claim. There was no fiduciary relationship between RFML and V. Nor did V provide RFML with information about a secret design or process analogous to forms of intellectual property. Rather, the relationship between them was based on a contractual relationship, in which each side bargained at arm’s length to define the obligations to be accepted by RFML in respect of the business idea or opportunity which V had identified.
The case is a useful reminder of the importance of having an NDA in place before any confidential information is disclosed, and also to bear in mind the remedies that may be available (or not available) in the case of breach of the NDA. Possibly, the remedy for breach could be spelled out in the NDA itself to avoid future argument and also to deter breach.