Damages are not an adequate remedy: go directly to injunction

There is a clause in many confidentiality agreements that sticks out like a sore thumb.  The clause worries clients, because they don’t understand it.  It looks so different from most of the clauses in the agreement.  Some lawyers gloss over it, recognising it as a standard piece of legal verbiage.  Other lawyers, particularly in the UK, are uneasy about it, and sometimes seek to water it down.  Yet the clause persists in thousands, if not millions, of confidentiality agreements across the globe.

Some typical manifestations of the clause follow.  The first is from a UK template found on the internet that appears to be based on a PLC document…

The Recipient acknowledges that damages alone would not be an adequate remedy for the breach of any of the provisions of this agreement. Accordingly, without prejudice to any other rights and remedies it may have, the Disclosing Party shall be entitled to the granting of equitable relief (including without limitation injunctive relief) concerning any threatened or actual breach of any of the provisions of this agreement.

…while this one is from a confidentiality agreement that was the subject of a reported case (discussed below) in the Delaware courts in 2012:

Money damages would not be [a] sufficient remedy for any breach …by either party.  The non-breaching party shall be entitled to equitable relief, including injunction and specific performance, as a remedy for any such breach.

What a relief!

In other words, if a party breaches the confidentiality obligations, the other party is entitled to an injunction.

When deciding whether to grant an injunction, the court considers various factors, including whether an injunction is necessary.  If the breach can be adequately compensated with a financial award, the court might decide that an injunction is not necessary. Clauses such as those above record the parties’ agreement that an injunction is an appropriate remedy.

IP Draughts doubts whether clauses of this kind have much value under English law.  The award of injunctions forms part of what is known as the law of equity.  Equitable remedies are generally at the discretion of the court.  Clauses of this kind smack of telling the court what it must do.  IP Draughts tends to dilute wording of this kind in negotiations, eg by saying “shall be entitled to seek equitable relief”.  This change takes some of the impertinent sting out of the clause and is usually accepted by the other party.

It seems, however, that some US courts take a different approach.  The 2012 case of Martin Marietta Materials Inc v. Vulcan Materials Company concerned the interpretation and enforcement of a confidentiality agreement that included the words quoted above.  In that case, the Supreme Court of the State of Delaware upheld a decision by Chancellor Strine. In the words of Chancellor Strine at first instance in this case:

In Delaware, parties can agree contractually on the existence of requisite elements of a compulsory remedy, such as the existence of irreparable harm in the event of a party’s breach, and, in keeping with the contractarian nature of Delaware corporate law this court has held that such a stipulation is typically sufficient to demonstrate irreparable harm.

Various case law is cited both by Chancellor Strine, and by Jacobs J in the Delaware Supreme Court, in support of this contention.

According to this law firm article, the approach of Delaware state law differs from that of US federal law on this point.  The authors discuss the federal case of Riverside Publishing Co. v. Mercer Publishing LLC, No. 11-1249 (W.D. Wash. Aug. 4, 2011):

Riverside pointed to the settlement agreement’s irreparable harm clause to argue that, absent injunctive relief, Mercer’s purported breach would cause irreparable harm. The court disagreed. It first recognized that circuit and district courts have declined to presume irreparable harm based on a contract clause. Pointing to the Supreme Court’s emphasis in Winter v. Natural Resources Defense Council that movants demonstrate actual harm, the court “querie[d] whether it can give any weight to such a clause.” “At best,” the court concluded, “the clause is evidence that at the time of the Settlement Agreement, the parties predicted that breaches of [certain terms of the Agreement] would be the sort that would cause irreparable harm.”Although “[t]hat prediction is perhaps entitled to some weight,” the court held that the clause did “not relieve Riverside of its obligation to demonstrate irreparable harm.”

IP Draughts suspects that the approach of the English courts would be similar to that of the US federal courts, but he is not aware of any case law on the point.

So, it seems there is some point to these clauses after all, in some US courts.  Often, the financial losss that results from breach of a confidentiality obligation is difficult to assess or prove, and the party that “owns” the confidential information may well view an injunction as the most useful remedy for breach.  There is, therefore, a good reason for including such a clause if it increases the likelihood of an injunction being granted.

Footnote: IP Draughts is not sure what legal principle is being referred to by Chancellor Strine in his use of the phrase the “contractarian nature of Delaware corporate law”.  IP Draughts is not familar with the word contractarian.  Some US lawyers with whom IP Draughts has discussed similar issues (eg see the recent debate on Adams on Contract Drafting here) seem to consider that agreeing to a remedy in a contract sets up some kind of estoppel.  From IP Draughts’ reading of the English laws of estoppel and waiver, it is not immediately obvious that any of these laws is directly applicable to this type of situation.  However, the law in this area is not clear or simple (and some of the leading English cases were decided the late Lord Denning who liked to stretch the law, and was not always followed by more conservative judges).

“No-one ever litigates the wording of an NDA”: wrong!

Some people regard the signing of confidentiality agreements (sometimes known as non-disclosure agreements, or NDAs) as symbolic – merely a gesture of good faith.  According to this view:

• What matters is that a document called an NDA is signed.
• The detailed wording of the NDA is not important.  For instance, it doesn’t matter that the NDA includes strict conditions on the confidentiality obligations, eg a requirement to confirm orally-disclosed information in writing within 30 days of the oral disclosure.  It certainly isn’t worth negotiating the wording, even though no-one is planning to keep detailed notes of the confidential discussions and send those notes to the other party as evidence of what has been disclosed.
• The court will ignore the wording of the agreement and give effect to the general business intention that the information should be treated confidentially.
• Anyway, who goes to court over the obligations in NDAs, and how often do those cases turn on the detailed wording of the NDA?

IP Draughts has long wondered where this world-view comes from, for it is one with which he profoundly disagrees.

Experience tells him that some courts, particularly the lower-level courts such as the English County Court, are not always as concerned with the applying the letter of contractual obligations as they should be, when deciding business disputes.  IP Draughts reconciles this in his mind with the thought that many judges in the lower courts have no real experience of drafting or advising on commercial contracts.

In the higher courts, where the sums at stake at large, one can expect a greater attention to the details of what the parties have actually agreed in their contracts.  Thus, in the Chancery Division of the High Court, where many business disputes are litigated, one might expect the judge to cast a forensic eye over the language of an NDA that the disputants have signed, before deciding on their confidentiality obligations.  But what of the view, summarised above, that in a business context NDAs are rarely litigated, and no-one ever litigates over the detailed wording of an NDA?

Can you keep a secret?

It is true that much of the case law involving confidentiality obligations arises in a non-business context.  Famous cases in this area in the English courts started in the 19th century with Prince Albert (the husband of Queen Victoria) seeking to protect his etchings; memorable cases in recent years include one in which the UK Government sought to prevent disclosure of Government secrets in an ex-spy’s memoirs – the Spycatcher case; and one in which Michael Douglas and Katherine Zeta-Jones protected photos of their wedding from publication in a celebrity gossip magazine.

There have been cases in the English courts concerned with the disclosure of business information, but many of the leading cases seem to have been concerned with obvious wrongdoing, eg the chicken salesman in the Faccenda case, who took his employer’s customer lists with him when he left his employment and set up on his own.  In such cases, the detailed wording of the NDA has not always been a matter of primary importance in the dispute.

It is with some relief, therefore, that IP Draughts can point to a recent case in the Court of Appeal in which the detailed wording of an NDA has been the central matter under discussion.  This enables IP Draughts to put on his best “I told you so” expression, and to pepper the conversation with German words that he pretends to understand like angst, schadenfreude and zugzwang.

The case is called Dorchester Project Management Limited v BNP Paribas Real Estate Advisory and Property Management UK Limited [2013] EWCA Civ 176.  It was decided on 7th March 2013 and it is reported here.

In reported decisions in which contracts are interpreted, the judge sometimes make disparaging comments about the drafting.  This can cause IP Draughts’ hackles to rise, particularly when the comment does not seem to be justified, or where IP Draughts doubts whether the judge’s drafting would have been any better.  See, for example, Arnold J’s comments, in the Codemasters case, that an indemnity clause was “not felicitously drafted”, discussed here.

In the present case, in the words of Arden LJ: “The judge noted that the [NDA] was badly drafted”.  IP Draughts is happy to see such a comment, as the NDA was mediocre, to say the least. It included the following wording (colouring added by IP Draughts):

4.1 BNPPRE will not circumvent DORCHESTER, by seeking to make contact in any way with any third parties introduced to each other in relation to the Opportunity, or their agents, except as where previously agreed for the purposes of collating information, due diligence material and matters essential for the purposes of progressing the Opportunity.

4.2 DORCHESTER and BNPPRE agree to keep – and to procure to be kept – secret, all Confidential Information which may come to each of their knowledge as a result of their relationship hereunder.

4.2.1 BNPPRE may disclose such Confidential Information as is necessary to any directors, employees or professional advisors of BNPPRE, and (subject to DORCHESTER’s prior written consent) any third party providing funding or ancillary services for that Party’s involvement in, or in relation to the development of, the Opportunity. BNPPRE will procure that those third parties are bound by similar obligations of non-disclosure and non-circumvention contained herein, and they shall be responsible for any unauthorised disclosure, whether by it or any third Party to whom disclosure is made.

One of the issues that the court had to decide was whether clause 4.2.1 made BNPPRE liable for “circumvention” by a third party to whom BNPPRE had disclosed information.  The judge at first instance had decided that BNPPRE was not liable.

In the Court of Appeal, counsel for Dorchester argued that, under clause 4.2.1, BNPPRE was bound to procure that the third party enter into a back-to-back agreement containing “similar obligations of non-disclosure and non-circumvention” to those imposed on BNPPRE by the NDA. “Similar obligations” are those which transmute the obligations which the deed imposes on BNPPRE into obligations of the receiving party under the back-to-back agreement. [On the wording, IP Draughts agrees with this submission.]  Counsel argued that the first-instance judge’s interpretation was defective because it failed to give full effect to this obligation.

Counsel for BNPPRE naturally favoured the first-instance judge’s interpretation. In his submission, clause 4.2 imposed the obligation of confidence and then clause 4.2.1 provided a safe harbour from that prohibition. On that basis, he submitted it was no great step to read the rest of clause 4.2.1 as limited to protecting Dorchester from the risk of the non-disclosure of confidential information provided by BNPPRE to the third party, or at least restricting liability to Dorchester to loss caused by non-disclosure of that information.  He submitted that the only provision curbing circumvention was clause 4.1, and that the responsibility provision was limited to liability for unauthorised disclosure of information supplied by BNPPRE to the third party. Therefore there is no sanction for failure to obtain a non-circumvention agreement from the third party.

IP Draughts can sort-of-see what counsel for BNPPRE is saying, in that the first part of the highlighted sentence uses the phrase “non-disclosure and non-circumvention”, while the second half of the sentence makes BNPPRE responsible for “unauthorised disclosure” without mentioning non-circumvention.  However, it seems to IP Draughts that the first half of the sentence, which uses the word “procure”, is enough to make BNPPRE liable for its failure (as was the case here) to get the third party to sign an NDA that contained non-circumvention terms.

Arden LJ, in the Court of Appeal, favoured Dorchester’s interpretation (as does IP Draughts).  The other two judges in the Court of Appeal agreed with her conclusions.  IP Draughts has attempted to simplify the arguments and focus on a couple of key points; Arden LJ’s judgment covers many more points and requires some careful reading.

At one level, this is a relatively minor case that hinges on the fine detail of how a particular clause in a badly-drafted NDA should be interpreted.  IP Draughts would not be bothering you with it, except to make the point that parties do fight over the detailed wording of NDAs, and it is important to draft them carefully, if you don’t want to end up litigating in the High Court, getting one decision,  and then, as in this case, getting the opposite decision in the Court of Appeal.