Excite and offend a reasonable man’s conscience

for whom the bell tollsQuiz question: pair the following quotations with the correct source:

1. Never send to know for whom the bell tolls: it tolls for thee.

2. I would not make windows into men’s souls.

3. It would plainly excite and offend a reasonable man’s conscience.

A. Ascribed to Queen Elizabeth I in relation to religious conformity, but actually a variation of a comment in a letter written by Francis Walsingham in 1590.

B. Part of a court judgment by Mr Justice Hildyard in the English High Court in 2014, on the subject of confidentiality agreements.

C. Part of a Prose Meditation by John Donne, written in 1624.

Answer: 1C, 2A, 3B.

At least, IP Draughts assumes that Mr Justice Hildyard made up the phrase at item 3, rather than quoting from someone else. No indication of a quotation is given in the case, CF Partners (UK) Llp v Barclays Bank Plc & Anor [2014] EWHC 3049. The judgment was published on 24 September 2014.

The issue that the judge was discussing when he came up with this sonorous phrase was whether a person could be simultaneously bound by a contractual duty of confidentiality and an equitable duty of confidentiality, and whether the equitable duty might be broader than the contractual one, eg by lasting longer than the contractual one. Some of his comments on this aspect appear around paragraph 130 of the judgment, and include the following text:

 

Contractual obligations and equitable duties may co-exist: the one does not necessarily trump, exclude or extinguish the other…

However, where the parties have specified the information to be treated as confidential and/or the extent and duration of the obligations in respect of it, the court will not ordinarily superimpose additional or more extensive equitable obligations…

Nevertheless, that does not preclude wider equitable duties of confidence in circumstances that are not ordinary. For example, as it seems to me, a circumstance could arise where the obligations of the parties in respect of information with the quality of confidentiality are not clearly prescribed or governed by the contractual terms but where the use of certain information would plainly excite and offend a reasonable man’s conscience. In such circumstances, as it seems to me, an equitable duty not to use the information having that quality would be recognised, even if that went further than the definition, duration or restraint prescribed by the contract.

If you want to stop misuse of confidential information, hire this chap

If you want to stop misuse of confidential information, hire this chap

This is an interesting clarification of how contractual and equitable duties of confidence might run in parallel. Later in the judgment (eg see paragraph 1308(3)) the judge decides that certain one year and two year contractual limits on the duration of confidentiality obligations did not apply to the equitable duties. But the case should not, in IP Draughts’ view, be used as a comforting thought when one cannot persuade the other party in negotiations to agree to a suitably long period of confidentiality. Rather, this is a safety valve for extreme situations, as decided by one High Court judge. See earlier posts on this blog about the terms and term of confidentiality agreements.

The case itself is an unbelievably long saga about whether Barclays Bank misused confidential information about a proposed financial transaction, breached exclusivity obligations, jumped over Chinese walls, and generally behaved in the way described in a report by Antony Salz (a former senior partner of Freshfields) on Barclays’ business practices as “institutional cleverness, taken with …edginess and a strong desire to win …which was identified as characteristic and productive of less than ideal outcomes”. The trial lasted for 34 days and the judgment extends to 1310 numbered paragraphs plus appendices. The judge reports that Barclays’ legal costs were in the region of £10 million, and that the case was “litigation on a grand scale”.

Readers who wish to understand the confidentiality aspects of the case may wish to focus on paragraph 877 onwards.

The message that IP Draughts takes from this case is not to trust people in financial institutions where large amounts of money are at stake, no matter how many compliance policies and compliance officers the institution may have. But you knew that anyway…

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Interpreting an expenses policy

expensesAt our recent partners’ meeting, Mr Pettifog was in a lather about an expenses policy. He is a committee member of an international grouping of lawyers, known as Societe des Avocats du Droit d’Oeuvres, or SADDO for short. SADDO is an agency of the United Nations, and Mr Pettifog is frequently absent from the UK on official SADDO business.

SADDO has a generous expenses policy, or so Mr Pettifog thought. However, his recent claim for reimbursement of expenses when he was on a jolly important cultural mission to Milan has been turned down. This has meant that Mr Pettfog is out-of-pocket to the tune of several thousand Euros for 5-star hotel accommodation, bottles of champagne, chauffered limousines, and so on. Not to mention tickets for the opera for himself and several members of the Milan Bar. Having failed to recover these expenses from SADDO, he has tried to claim them from our firm, but our expenses clerk and archivist, Deirdre Sprocket, rejected his claim on the grounds that the expenses were not incurred on firm business. Hence his fury.

After he calmed down a little, he asked the firm’s junior partner, Dominic d’Aubusson, if he would start an action in the English High Court for judicial review of the SADDO policy, on the basis that SADDO is a quasi-governmental agency and therefore subject to judicial review. In particular, Mr Pettifog objected to the following terms in the FAQs sections of the policy:

  1.  Question: When there are two claimants sharing a room, may the individual allowances be added together? Answer: Where two people are required to stay overnight on business and wish to share a room, claims should be made in the spirit of the policy. Claims for shared rooms should not exceed the maximum reimbursement allowance for overnight accommodation for a single member. [It seems that Mr Pettifog and his friend and fellow committee member, Edmund Longshanks QC, decided - towards the end of a very good meal at Il Luogo di Aimo e Nadia - to book a room together in Milan that cost roughly twice the amount of the hotel allowance for individual committee members. They can't understand why this wouldn't be allowed, as it cost SADDO no more than if they booked separate rooms. Mr Pettifog wants Dominic to run the argument that this refusal is based on a policy of discrimination against homosexuals, while avoiding any suggestion that he is, in fact, a homosexual.]
  2. la scalaQuestion: Can members claim for taxi journeys to collect paperwork from an office that is not their usual place of work to take to a SADDO meeting? Answer: If this is an irregular occurrence this detour en route to a SADDO meeting can be claimed. If this becomes a regular occurrence, then the costs cannot be claimed as regular occurrences may mean it becomes a commuting journey. In order to avoid this, it is respectfully suggested that members look at different methods of collecting papers. [Mr Pettifog is of the view that Teatro alla Scala, Milan, counts as his office for this purpose, in that he had left a copy of some confidential client papers in the crush bar several nights earlier and came back to collect them. Therefore, he should be able to claim for taxi journeys to and from La Scala. Surprisingly, it seems that the Secretariat of SADDO disagrees with this interpretation of the rules.]
  3. Question: Are members entitled to claims taxi fares to and from the restaurant where they are taking their evening meal? Answer: Costs will only be reimbursed if the taxi journey was milano-transportation-maptaken home / back to their hotel late at night when there is either no public transport or it would be unreasonable to expect someone to use it. [Mr Pettifog wishes Dom to argue that it would be completely unreasonable to take public transport after an evening on SADDO business entertaining foreign dignitaries. He feels it would leave a very poor impression with said foreign dignitaries. Apparently the SADDO Secretariat is suggesting that he could have caught a Metropolitan Line train from Duomo station, very near La Scala, which would have taken him directly to his hotel.]

Readers who have experience of interpreting expenses policies, or of actions for judicial review, are invited to comment on whether Mr Pettifog’s action is likely to succeed.

 

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Looking for a training contract with a specialist IP firm?

andlaw-logo1Anderson Law LLP has a vacancy for a trainee solicitor, to start later this year. Details on how to apply can be found on our snazzy new website.

This will be the 7th trainee that our firm has taken on. Five of the previous six trainees remain with the firm, and two of them are now partners.

Are you interested in doing the highest quality of transactional work in a pleasant, small firm environment where there are no billing targets, where suits are only worn when necessary, and where you will have plenty of direct responsibility for advising clients (but with plenty of support from more experienced lawyers)?

sidOr do you know someone really good (intellectually able, personable, diligent) who falls into the above category? Ideally with previous experience of science or industry. If so, please let them know about the vacancy!

 

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Disclosing business secrets to share purchasers

lea and perrinsSweet, sour, salty and savoury. Balancing these basic flavours can result in delicious food. A combination of the flavours can be found in natural foods such as tomatoes (well, if you add some salt, as many people do with tomatoes) and Parmesan cheese, and in manufactured products such as Lea & Perrins’ Worcester Sauce.

Balancing the flavours of a High Court judgment can produce similar effects in the mind, if not in the taste buds. The recent case of Richmond Pharmacology Limited v Chester Overseas Limited and others [2014] EWHC 2692 (Ch) illustrates the point.

The case concerned confidential information relating to the business of the claimant, a Clinical Research Organisation (CRO) that specialises in conducting Phase I clinical trials. The defendants included the Levine brothers, who were investors and who controlled a minority shareholding in the claimant company. The Levine brothers were also non-executive directors of the claimant. The first defendant, an offshore company, was that minority shareholder. The main questions before the court were:

(a) were the defendants in breach of confidentiality obligations to the claimant, when they disclosed information about the claimant to potential purchasers of their shares; and

(b) if they were in breach, did the breach cause the claimant any loss?

The background to the case can be summarised as follows:

  1. In 2002, the first defendant subscribed for a 44% shareholding in the claimant. The remaining 56% was owned by the three founders, who ran the company. The parties signed a shareholders agreement. The Levine brothers joined the Board of Directors.
  2. In 2008, the Levines fell out with the founders over a business issue, not related to the present dispute.
  3. In 2009, the Levines appointed a company, known as NWCF, to act as a broker/adviser to sell their shares.
  4. Initially, they tried to sell their shares to the founders, ie by means of a management buyout (MBO). When that proved to be unsuccessful, they asked NWCF to contact unrelated third parties who might want to purchase their shares.
  5. NWCF disclosed non-public information about the claimant (obtained from the Levines) to prospective purchasers under the terms of written confidentiality obligations.

The shareholders’ agreement included conventional confidentiality obligations on the first defendant to prohibit it from disclosing information about the claimant to others. The judge concluded that the Levine brothers owed similar obligations of confidentiality to the company.

The shareholders agreement also included conventional terms that allowed a shareholder to sell their shares to a third party, subject to certain pre-emption rights in favour of the other shareholders.

doctor

Brian Doctor QC of Fountain Court Chambers (note fountain in background)

In court, the defendants’ counsel Brian Doctor QC presented a persuasive commercial argument for why the defendants were not in breach of confidence. In order to sell one’s shares to a third party, it would be necessary to disclose information to them about the company. Therefore the confidentiality obligation should be interpreted as an obligation to disclose information only to trustworthy potential purchasers who had entered into appropriate confidentiality obligations. If there was no right to disclose this information, the right to sell the shares to third parties would be “entirely illusory”.

The judge did not accept this argument. The terms of the confidentiality obligations were clear and did not allow disclosure to a potential purchaser. He considered that any purchaser would want to hold discussions with the founders before investing, and therefore the shareholders would need to agree a sales process. If they couldn’t agree on a sales process, the deadlock provisions of the shareholders’ agreement could be invoked. Therefore it was not necessary to depart from the ordinary meaning of the words used in the confidentiality agreement, and to interpret it in the way that Mr Doctor proposed. The judge’s interpretation of the confidentiality obligations was consistent with commercial commonsense.

This sour conclusion (from the defendants’ perspective) was then balanced by the judge’s sweet view on the amount of loss that the claimant had suffered.

The judge considered that there were two ways in which loss might have been suffered:

(a) if the disclosed information cast doubt about the financial stability of the claimant, or the commitment of the founders to the business, or its ability to operate from its key hospital sites, this might have deterred potential customers from placing contracts with the claimant; and

(b) if the disclosed information concerned the claimant’s customers, pricing or terms of business, which might have been used by competitors to win business from the claimant.

The claimants did not produce convincing evidence of either of these alternatives, and therefore, in the judge’s view, the claimant had not suffered any loss. The Levines were conscious of the risk that marketing the shares might damage the claimant’s business and “took considerable care to avoid any such damage occurring”.

one poundFinally, the written judgment records the judge’s provisional view, subject to hearing submissions from counsel, that the proper order to make was to award nominal damages of £1 against the first defendant, and to dismiss the claims against the Levines.

Some salt and spice are added to the judgment by the judge’s comments on the reliability of the witnesses’ evidence (he seems to have preferred the Levines over the founders).

Comments

Several points interest IP Draughts in this judgment:

  1. The judge was not prepared to stretch the interpretation of the confidentiality obligation in the way that the defendants’ counsel proposed. Stick to the natural meaning of the words used. If it doesn’t say that you can disclose the information to prospective purchasers of your shares, you are not permitted to do this.
  2. And yet, at a commercial level, Brian Doctor QC was right: if you can’t disclose information to a prospective purchaser, how can you sell your shares? IP Draughts is not entirely convinced by the commerciality of the argument that the shareholders are supposed to agree a sales process and, if they can’t, the deadlock provisions of the shareholders’ agreement can be invoked. This seems like after-the-event rationalisation.
  3. It is sometimes tempting to treat the question of breach of contract as the primary issue, with the question of the amount of damages as something to be calculated at a later point. This judgment reminds us that the two issues run in parallel and, except for the question of legal costs (which are usually borne by the loser), neither is more important than the other.

IP Draughts has previously commented on this blog about the practice of business people when negotiating corporate transactions. Due diligence packs are typically prepared, which enable the purchaser to view and assess the company’s assets. Those assets may include contracts (eg a licence agreement or a clinical trial agreement between the target company and a hospital or CRO), and the contracts may include strict confidentiality obligations that prohibit their disclosure to third parties. There is not usually an exception for disclosure to potential purchasers of the business. In IP Draughts’ experience, parties sometimes include contracts of this kind in due diligence packs, despite the confidentiality restrictions set out in the contracts. In practical terms, this may be necessary for the corporate transaction to happen, and the disclosure may not cause the other contracting party any loss, particularly if the the selling party is careful about its process. Nevertheless, it has long seemed to IP Draughts that there is a strong element of “skating on thin ice” about such arrangements.

jourdanThe other issue that this case raises in IP Draughts’ mind is also one that he has raised before on this blog. It is the practice of the courts, when allocating cases to judges, to ask deputy judges to hear cases that involve the interpretation of contracts. The judge in this case was a practising barrister, Stephen Jourdan QC, sitting as a Deputy High Court judge. In IP Draughts’ view he did a competent job, even though IP Draughts doesn’t entirely agree with his reasoning.

Other examples in recent years that IP Draughts recalls, where a significant case on contractual interpretation was decided by a deputy judge at first instance, include the case of Rhodia vHuntsman (Julian Flaux QC, later a High Court judge; meaning of reasonable endeavours) and Oxonica v Neuftec (Peter Prescott QC; upheld on appeal; interpretation of a definition of Licensed Product in a licence agreement).

Why do the courts sometimes give important questions of contractual interpretation to deputy judges and not to proper (ie full-time) judges? Is it because:

  1. Most judges have little professional experience of drafting and negotiating commercial contracts, and therefore there is no real advantage in giving such a case to a full-time judge. This is unlikely to be an acknowledged reason (!)
  2. Such cases are not considered particularly significant by the judge in charge of the list, as they are considered to raise few questions of public importance. Contracts are mostly private matters for the parties. Therefore they can be delegated to a deputy judge. In IP Draughts’ view, the present case has some public importance in the context of parties’ obligations in mergers and acquisitions, which are a significant part of the commercial life of the country.
  3. Such cases are easy to manage and decide, and therefore suitable for deputy judges. Sometimes the deputy judge is being assessed for his or her suitability for promotion to a full-time role (as happened in the case of Julian Flaux and could well happen to Stephen Jourdan) and cases of this kind are good tests of judicial calibre.

In the interests of transparency, it would be good if a listing judge (past or present) would comment on this issue.

 

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