How much is a bank's duty of confidentiality worth to its customer?

In the recent case of Primary Group v Royal Bank of Scotland, the High Court considered the extent of a bank's duty of confidentiality to its customer and the appropriate measure of damages for breach of that duty when the customer has suffered no direct loss.

What were the main issues in this case?

The main issues in this case were two-fold:

  • the extent of a bank's duty of confidentiality to its customer, and
  • the appropriate measure of damages that may be awarded to the customer for breach of the bank's duty when the customer has suffered no direct loss

What were the facts in the case?

Primary Group (the claimant) was the parent company of a group of companies which carried on business in the insurance industry. Primary UK was a wholly-owned subsidiary of Primary Group.

Primary UK was the borrower under a senior facilities agreement (SFA) entered into with Royal Bank of Scotland (RBS), a subsidiary of The Royal Bank of Scotland Group plc (RBS Group).

At the time when Primary UK and RBS entered into the SFA, Direct Line (then called 'The Royal Bank of Scotland Insurance Ltd') was also a subsidiary of RBS Group. Primary UK expressed concern about potential conflicts arising from RBS being a sister company of Direct Line (one of Primary Group's key competitors in the insurance market). It was alleged that RBS gave Primary UK assurances that all information provided by Primary UK to RBS would be kept confidential and would not be passed to Direct Line.

Not long after the SFA was entered into, Primary UK breached some of the undertakings contained in it and reported the defaults to RBS by a compliance certificate. In response, RBS instructed KPMG to conduct an Independent Business Review of Primary UK--code-named 'Project Medway'. RBS disclosed two of the reports produced under Project Medway (the Medway Reports) to at least two employees of Direct Line without seeking or obtaining Primary UK's consent to do so. The reason RBS disclosed the reports was because it wanted 'industry expertise on Primary's business' or 'an industry view on Primary from someone at RBS Insurance'. Direct Line used the reports to advise RBS on those issues.

Primary UK argued that the facts gave rise to:

  • a breach of an actionable contractual duty of confidence on the part of RBS, and
  • a breach of an actionable equitable duty of confidence on the part of Direct Line

What did the court decide in respect of Primary UK's claim against RBS?

The High Court found in favour of Primary UK holding that RBS had breached its contractual obligation of confidence.

RBS argued that it had not given actual assurances of confidentiality to Primary UK. The High Court found that it had. RBS accepted that if it had in fact given Primary UK assurances as to confidentiality, as Primary UK claimed, then it had acted in breach of those assurances and therefore in breach of contract by disclosing the Medway Reports to Direct Line.

Notwithstanding the court's finding on this point, if no actual assurances had been given, all parties agreed that there was an implied term in the contract between RBS and Primary UK that RBS owed Primary UK a duty of confidentiality in respect of confidential information provided by Primary UK to RBS. In this respect, the court referred to a number of principles of contract law including those set out in Rainy Sky v Kookmin Bank [2011] UKSC 50, [2011] All ER (D) 19 (Nov), Attorney General of Belize v Belize Telecom [2009] UKPC 10, [2009] 2 All ER (Comm) 1 and J Evans & Son (Portsmouth) v Andrea Merzario [1976] 2 All ER 930. The court also referred to the principle that bankers owe their customers a duty of confidentiality which, according to Bankes LJ in Tournier v National Provincial and Union Bank of England [1923] All ER Rep 550 is 'a legal [duty] arising out of contract'.

Other points of law which arose

Having found that RBS had in fact given assurances of confidentiality to Primary UK, the court did not have to delve too deeply into whether RBS would have been permitted to disclose the Medway Reports if there was only an implied duty of confidentiality between the parties.

Nevertheless it set out a reminder of the principles in Tournier v National Provincial and Union Bank of England [1923] All ER Rep 550 in which four qualifications to a banker's duty of confidentiality were established:

  • where disclosure is compelled by law
  • where there is a duty to the public to disclose
  • where the interests of the bank require disclosure, and
  • where the disclosure is made by express or implied consent of the customer

The court did not have to decide whether any of these qualifications could have been invoked by RBS because the provisions in the SFA relating to permitted disclosures by the lender would have overridden them in any case. RBS did not argue that the terms of the SFA permitted them to make the disclosure (it was clear that they did not). The wording of the provision in the SFA is set out in para [63] in the judgment.

How did the court assess damages for RBS's breach?

The problem with assessing damages in this case

The court noted that this case posed the same problem as an earlier case (Force India Formula One Team v Malaysia Racing Team [2012] EWHC 616 (Ch)) in that Primary UK could not prove 'orthodox financial loss as a result of the breach of a negative contractual term (ie a term that restricts the defendant's activities in some way)'. This made calculating damages challenging.

While the court found that Primary UK had no realistic prospect of recovering substantial damages for breach, it did not consider that Primary UK was only entitled to nominal damages. The court noted that '[t]he covenant had value for Primary and something should be paid for its relaxation'.

In the Force India Formula One Team case the High Court (in fact the same judge as in the Primary Group case) noted that this problem can be addressed by the award of 'Wrotham Park damages' (named after the decision in Wrotham Park Estate Company v Parkside Homes [1974] 2 All ER 321)--also known as 'gain-based damages' and 'negotiating damages'. Such damages are assessed at the price which the defendant could reasonably have demanded as the price for agreeing to relax the contractual restriction in question.

How the court assessed damages for RBS's breach--'negotiating damages'

In assessing what damages should be awarded to Primary UK, the court looked at what sum would have been agreed by the parties had RBS been able to negotiate a relaxation of its duty of confidentiality, noting that it was irrelevant that one or both parties would not have in practice agreed to make a deal.

To reach a sum for these 'negotiating damages', the court estimated the value of the time that Direct Line employees had spent on reviewing the Medway Reports and advising RBS. This reflected the amount that RBS would have had to pay for the work to be done if Direct Line had not been a group company.

The court summarily assessed the damages at £5,000. This amount would deprive RBS of the gain it had made in breaching its duty of confidence to its customer.

What was the court's decision in respect of Primary UK's claim against Direct Line?

The High Court found in favour of Direct Line, dismissing Primary UK's claim for breach of an equitable obligation of confidence.

Principles of law which apply to a claim for breach of an equitable obligation of confidence

The court referred to the decision in Coco v A N Clark [1969] RPC 41 which contains a statement on the elements required to find an action for breach of an equitable obligation of confidence:

'First, the information itself... must "have the necessary quality of confidence about it". Secondly, that information must have been imparted in circumstances importing an obligation of confidence. Thirdly, there must be an unauthorised use of that information to the detriment of the party communicating it.'

The court in Primary Group also noted a fourth element--that the unauthorised use of information was without lawful excuse.

Why did the court find in favour of Direct Line?

The court found that:

  •  it was common ground that the Medway Reports possessed the 'necessary quality of confidence', and
  • Direct Line accepted that the Medway Reports were disclosed in circumstances which imparted an equitable obligation of confidentiality on them, but
  • Direct Line had not used the information in an unauthorised way, and therefore
  • it was not necessary to consider whether the use of the information was without lawful excuse

Direct Line had understood that the Medway Reports had been disclosed to them in circumstances which imparted an equitable obligation of confidentiality on them such that it would have been a breach of confidence for them to disclose the Medway Reports to the world. However, it believed that RBS was entitled to disclose the Medway Reports to Direct Line for the limited purpose of advising RBS and that it did not act in breach of confidence by using the information for that limited purpose. The court agreed.

The court relied on a number of earlier cases for the proposition that it should apply an objective test in determining whether Direct Line had used the Medway Reports in an unauthorised way. In case it was wrong though, it first applied a subjective test.

Applying a subjective test, the court accepted Direct Line's evidence that it believed that RBS was entitled to disclose the Medway Reports to RBS for the limited purpose of advising RBS.

Applying an objective test, the court found that Direct Line had reasonable grounds for believing that RBS was entitled to disclose the Medway Reports to them because Direct Line was entitled to believe that it was dealing with senior, professional and responsible bankers who would not breach their duty of confidentiality, particularly where the purpose of the disclosure was to enable Direct Line to advise RBS.

Why is this case interesting?

This case is interesting for three reasons.

Firstly, because it shows that damages in contract are not always narrowly confined to recoupment of financial loss. They can be, as in this case, 'measured by the benefit gained by the wrongdoer from the breach'.

Secondly, because it demonstrates the extremely hypothetical nature of 'negotiating damages'--in particular, the fact that in assessing them, it is not necessary to consider whether one or both parties would even have agreed to make a deal.

And thirdly because, while it is also a useful reminder of the scope of a banker's duty of confidentiality to its customers, the court ultimately had to put a price on the value of that duty.

First published on LexisPSL Banking & Finance. Click here for a free trial.

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