Paying the price for breach of confidentiality

Paying the price for breach of confidentiality

What did the court decide in CF Partners (UK) LLP v Barclays Bank Plc and can liability arise without a written confidentiality agreement?

Original news

CF Partners (UK) LLP v Barclays Bank Plc [2014] EWHC 3049 (Ch), [2014] All ER (D) 179 (Sep)

The claimant (CFP) had approached the first defendant bank (Barclays), through a company (IVC) intending to obtain financial assistance to pursue a valuable project (Project Arctic Fox). CFP brought a claim for misuse of confidentiality and exclusivity agreements against Barclays and the second defendant company (Tricorona) in respect of the project. The Chancery Division ruled that Barclays and Tricorona had breached obligations of confidentiality by misusing confidential information for the purpose of establishing a strategic partnership between them, but had not breached the exclusivity agreements. Accordingly, CFP was entitled to compensation of €10m.

How did the issue arise?

CFP argued that it had introduced Project Arctic Fox to Barclays, subject to a duty of confidence and subject also to a contractual obligation of exclusivity. It argued that Barclays had then used that information, not to facilitate Project Arctic Fox, but to assist it to develop a strategic partnership with Tricorona, which had resulted in the acquisition of Tricorona by Barclays for its own account.

A confidentiality agreement had been made between IVC and Barclays, which imposed exclusivity obligations. However, it was common ground that those provisions could not be invoked by CFP nor relied on by Barclays. The issue was whether an equitable duty arose. The contractual arrangements did colour the issue—Barclays should be predisposed to accept that information falling within the scope of the definition of confidential information falls to be treated as confidential. The scope and content of equitable obligations are informed, but neither exclusively nor conclusively defined, by a contract, even in the case of a contract between exactly the same parties.

The following points were made regarding Barclays' handling of the information:

  • Barclays knew that the information received on Project Arctic Fox came from CFP via IVC and that both CFP and IVC considered it to be so confidential that they refused to pass over any information until a contractual agreement was in place
  • Barclays knew from the IVC/Barclays confidentiality agreement that IVC received the information, which it supplied to Barclays, in confidence from CFP
  • a compliance summary circulated within Barclays made clear that the information received post conflicts would be highly confidential
  • Barclays set up a Chinese Wall
  • the information that Barclays received from CFP in written form was marked strictly private and confidential (although a marking of confidential will not of itself confer confidentiality, it will help establish that the recipient is affected by an obligation of confidence)

What information was provided and did it have the quality of confidence?

Essentially the confidential information was the revelation to Barclays of an overlooked or unidentified acquisition target which had been undervalued.

The fact that Tricorona might be an available acquisition target was not, of itself, confidential information—a target may well be pursued, and the work done in the pursuit may be undertaken, in secret, but the identification of the target is not thereby, or necessarily, confidential.

Hildyard J found that the individual pieces of information had the necessary quality of confidentiality, although did not have great value individually (para [1060]):

  • insight and information about demand, present or future, actual or prospective, is plainly capable of constituting proprietary confidential information of considerable value
  • CFP's work and experience enabled a considerably more robust assessment of the present value of the projects in Tricorona's portfolio than was possible from the data dump. This greater insight reduced the uncertainty which was the main reason for the level of discount. Production of the final spreadsheet involved skill in the assessment of variables in respect of a difficult asset class in a new and developing market. It was time-consuming and laborious, and was needed in order to present the relevant information (whatever its derivation) in a technically robust and reliable, digestible and logical form for the purposes of its assessment by financial institutions and potential purchasers
  • expressions of interest of themselves would not have been of great value being tentative, scrappy and frail. No copy of them was provided to Barclays nor Tricorona. However, the expressions of interest cannot be discounted as being on their own entirely valueless, or lacking any quality of confidentiality because constituting little if anything more than a statement of the obvious or general. The identification of named potential buyers with a potential (even qualified) interest was confidential
  • the overall package that CFP presented and developed in Project Arctic Fox, based on CFPs insight that there was increasing demand both in and outside the Far East, was a special insight shared in conditions of confidentiality

Was the information influential and valuable?

Hildyard J decided that the litmus test both of the confidentiality of the information and its value was whether it changed Barclays' perception of Tricorona's portfolio.

CFP's work and its presentations did bring a new perspective and was a catalyst for Barclays becoming more receptive. Before the expiry of the agreed period of confidentiality, Barclays had been educated, by the information confidentially presented to it, to an understanding of the embedded value which caused it quickly to cultivate a strategic relationship with Tricorona with a view to its realisation (para [1034]).

Was the confidential information misused?

Misuse must be demonstrated. It is not enough to show that the recipient has been influenced by the confidential information. A change of outlook is not sufficient—acting upon it must be shown. It is proof of misuse which constitutes the breach.

However, subconscious use may constitute misuse, it was not necessary for CFP to show what influence individual pieces of information had on Barclays, nor that specific pieces of information suggested and resulted in some particular form of approach or activity.

Misuse may be inferred from the fact that a defendant, having obtained confidential information, is influenced by it (while it retains the quality of confidentiality) in determining and then embarking on a course of conduct otherwise than for the purposes for which it was provided.

Once (a) the continuing confidentiality of the relevant information, (b) its provision to Barclays, (c) its relevance in whole or part to an assessment by Barclays of a transaction or a counterparty, (d) the likelihood of it or some part of it having influenced the approach of Barclays in its dealings in that transaction or with that counterparty within the period or currency of confidentiality, and (e) dealings likely to have been so influenced are demonstrated, use is likely to be inferred and breach established.

What did the court decide?

The court ruled:

  • it was settled law that a duty of confidence related to the protection of information which had the necessary quality of confidentiality. An obligation of exclusivity restricted the person bound in his dealings with others. The one did not necessarily connote or impose the other, although each might reinforce the other. Even in the absence of a contractual relationship and stipulation, and in the absence of an initial confidential relationship, the law imposed a duty of confidence whenever a person received information he knew or ought to know was fairly and reasonably to be regarded as confidential
  • to found a claim, whether in law or equity, actual misuse adverse to the claimant of information which still retained the quality of confidentiality, had to be established or inferred. One of the conditions of a claim for breach of confidence was that the relevant information had to, objectively, have the necessary quality of confidence about it. Misuse of confidential information had to be demonstrated
  • it was not enough to show that the recipient had been influenced by the confidential information. A change of outlook was not sufficient, it had to be shown that the information had been acted upon. Misuse might be inferred from the fact that a defendant, having obtained confidential information, had been influenced by it, while it retained the quality of confidentiality, in determining and then embarking on a course of conduct otherwise than for the purposes for which it was provided (paras [118], [120], [138], [891] [982], [984])
  • CFP had (in circumstances that had given rise to a duty of confidence in respect of its use) provided to Barclays and Tricorona some valuable information, having the necessary quality of confidence about it, which had influenced Barclays in its perception of Tricorona and which Barclays had used for purposes other than those for which the confidential information had been provided to it
  • both Barclays and Tricorona owed to CFP duties of confidence. In the case of Barclays, its duties were informed but not defined by the IVC/Barclays confidentiality agreement. In the case of Tricorona, its equitable duties were parallel to but co-extensive with its contractual duties under the CFP/Tricorona confidentiality agreement
  • those duties could only subsist for so long as the information thus provided retained its quality of confidentiality (but were not limited by the one year limit appearing in the confidentiality agreement)
  • both had both misused that confidential information for the purpose of establishing a strategic partnership between them. It followed that CFP was entitled to compensation for its misuse (paras [878], [1308])
  • Barclays and Tricorona were in breach of obligations of confidentiality. A figure of €10m was justified and proportionate to compensate CFP in the round (paras [1308], [1309])
  • however, there was no breach of exclusivity and Barclays did not induce Tricorona to breach the confidentiality agreement

What are the remedies?

In exercising its discretion, the court will identify the appropriate remedy for the circumstances of the wrongdoing to make the remedy fit the tort (see Walsh v Shanahan  [2013] EWCA Civ 675, [2013] All ER (D) 180 (Jun)).

Usually the court will only compensate the claimant for his loss rather than strip the defendant of his profit. But that may still (indeed usually will) reserve some benefit to the defendant—the benefit may exceed the wrong done to the claimant. In some circumstances that may be offensive, and fail to recognise the true extent of the claimant's interest in performance of the obligation in question (again, whether contractual or equitable) while rewarding the defendant for his indifference or a self-interested and calculated breach (para [1169]).

Here, the value of what Barclays took from CFP should be determined by reference to what Lord Denning described in Seager v Copydex (No 2)[1969] 2 All ER 718 as the value as between a willing seller and a willing buyer, a process which has been elaborated in the decision of Brightman J in Wrotham Park Estate v Parkside Homes [1974] 2 All ER 321, and further explained in Blake [2000] 4 All ER 385, Experience Hendrix LLC v PPX Enterprises [2003] EWCA Civ 323, Pell Frischmann Engineering v Bow Valley Iran [2009] UKPC 45,Vercoe [2010] All ER (D) 79 (Jun) and Force India [2013] EWCA Civ 780 (para [1195]).

Under the Wrotham Park approach, the objective is to establish what sum of money might, in a hypothetical negotiation between them, reasonably have been demanded by the claimant from the defendant in return for the release of the relevant contractual obligation, or, as Sales J put it in Vercoe at [292], the fair price for release or relaxation of the relevant negative condition (para [1196]).

The purpose of the hypothetical negotiation is to fix what consideration might reasonably have been demanded by CFP from Barclays in return for permitting the use (past and future) of the confidential information for some other purpose than the evaluation and implementation of Project Arctic Fox.

Hildyard J concluded that these negotiations would in very broad terms have resulted in an ultimately agreed figure of €10m.

What does this mean in practice?

This case acts as a stark warning that even if a written confidentiality agreement is not entered into, parties may still owe an equitable duty of confidentiality. When this is breached, the consequences can be costly (here, running into tens of millions of Euros) and practitioners should remind their clients about the risks of misusing confidential information.

Further reading

If you are a LexisPSL Subscriber, click the link below for further information:

Practice Note: Key elements of confidentiality agreements (Subscriber access only)

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First published on LexisPSL Restructuring and Insolvency

Kathy Stones, solicitor in the Lexis®PSL Restructuring & Insolvency team.

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About the author:
Kathy specialises in restructuring and cross-border insolvency. She qualified as a solicitor in 1995 and has since worked for Weil Gotshal & Manges and Freshfields. Kathy has worked on some of the largest restructuring cases in the last decade, including Worldcom, Parmalat, Enron and Eurotunnel.