Category Archives: Confidentiality

CDAs and liquidated damages

panicConsider the following clause, which is taken from a template confidentiality agreement that can be found quickly on the internet.

Liquidated Damages. In case of unauthorized use or disclosure of the Confidential Information, the Disclosing Party shall be entitled to liquidated damages in the amount of €10 000 (ten thousand Euro) for each such use or disclosure.

Notwithstanding the right to liquidated damages, the Disclosing Party has the right to take any measures available and to claim and receive a higher amount of compensation if the Disclosing Party can prove that the actual damage sustained will exceed the amount of liquidated damages.

IP Draughts has seen variants of this wording in a significant minority of CDAs over the last decade. Typically, the CDA has been drafted by a lawyer in a civil law jurisdiction, rather than a common law jurisdiction. The above example appears in an agreement used by a Dutch company.

To a common lawyer’s eyes (well, certainly to this English common lawyer’s eyes), the clause appears strange and inappropriate for several reasons, and would often be resisted. In IP Draughts’ experience, when the clause is resisted, the party that proposed it is, in a fair number of cases, willing to remove it from the CDA. It doesn’t seem to be a “must have” clause.

Why does the clause seem inappropriate to an English common lawyer?

First, because the traditional view of liquidated damages clauses was that they were supposed to be a “genuine pre-estimate” of the loss that the non-breaching would suffer as a result of the breach. They were specifically not supposed to be a penalty, or disincentive for breach, as this would render the clause unenforceable.

illiquidPutting the figure of €10 000 in a template agreement does not suggest that the drafter has related the amount to a pre-estimate of loss in an individual case. Rather, it appears that the figure has been included as a disincentive to breach. IP Draughts’ view was (and still is, subject to comments at the end of this article) that, if you are going to include a liquidated damages clause, some thought is required as to why the figure is appropriate in the individual case, and that it would be prudent to record the reasons for coming up with the figure in a file note. If the clause is later challenged in court, one could produce the file note to demonstrate that it was intended to be a pre-estimate of the loss and that the amount was thought to be reasonable rather than a penalty or “stick” to beat up the other party.

Secondly, because it is inherently difficult to pre-estimate loss in the case of many CDAs, particularly those which concern early-stage technology. The confidential information might be used to develop a product, and the product might be highly successful. Or it might not. The range of possible values for the information will sometimes range from zero to millions. Even if the information stands a reasonable chance of being developed into a blockbuster product, a court would typically be likely, when assessing damages, to heavily discount the amount to take account of the uncertainties, risks and time involved in taking information through to a successful product.

In the case of many CDAs, the most useful remedy for breach or anticipated breach may be to obtain an urgent injunction to stop any disclosure or further disclosure.  The likely cost of obtaining such an injunction may be several times €10 000, at least in the English legal system.

Thus, the figure of €10 000 seems to be plucked out of the air, unrelated to any measurable loss, and unrelated to the costs of enforcement of contractual rights under the CDA.

Thirdly, because the whole idea of a liquidated damages clause in the English system (and, IP Draughts suspects, in other common law jurisdictions) is to avoid the need to calculate losses at trial. The parties are agreeing in advance what the damages will be. This is what the term “liquidated damages” is supposed to mean. It is therefore misconceived to say, as the above clause does, that you can claim more than the agreed amount. It turns the clause into a “minimum damages” clause rather than a “liquidated damages” clause.

IP Draughts suspects that wording such as that quoted above reflects a misguided mish-mash of common law and civil law concepts. IP Draughts has commented before on the pervasive use of US templates in agreements that are made under non-US laws, and where the template uses US legal concepts that may not be appropriate in the jurisdiction in which the agreement is made.

penaltyIP Draughts doesn’t know what the correct Dutch law term (ie in the Dutch language) is for a damages provision such as that quoted above, nor what its English language equivalent would be. He suspects that the term might be “penalty” or its Dutch language equivalent, but that the drafter of the English language version was concerned about including this word in view of its negative connotations under common laws, and preferred the more benign, but inaccurate term, “liquidated damages”.

For most of IP Draughts’ career, English lawyers have focussed on trying to ensure that a clause providing in advance for a financial payment of this kind was a liquidated damages clause rather than an unlawful penalty. Many lawyers have even thought it desirable to include in such a clause a statement such as “The parties acknowledge that this amount is a genuine pre-estimate of the anticipated loss that will result from a breach of clause X.” This statement was designed to echo the words used by one of the judges in the leading English case on liquidated damages clauses, the 1915 House of Lords case of Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd. IP Draughts has always found this wording rather self-serving, and likely to be ignored by the court in the event of dispute.

English lawyers’ certainties about liquidated damages clauses were shaken last year, with the decision of the UK Supreme Court in a pair of cases that, in the interests of brevity, IP Draughts will call the ParkingEye case [2015] UKSC 67.

The Supreme Court decided that the Dunlop case had been misunderstood. The justices in the Supreme Court each gave slightly different reasons for their decision, but a common thread was that a penalty could be enforced if:

  1. it protects a legitimate business interest; and
  2. the amount is not extravagent, exorbitant or unconscionable.

parkingeyeMoreover, in commercial contracts between parties  of comparable bargaining power, there was a presumption that the parties were the best judges of what is legitimate, and the court should not strive to find an unlawful penalty.

In light of this important decision, IP Draughts is less concerned about the enforceability of a pre-determined damages clause of €10 000, as this is not a huge amount in the context of commercial litigation or for most business clients. However:

  • He will probably continue to use the term liquidated damages rather than penalty, if that is what the clause is.
  • He will be less concerned about demonstrating that the amount is a genuine pre-estimate of loss, and more concerned with whether there is a good reason for the clause, whether the parties are of comparably bargaining power, and whether the amount seems proportionate.
  • He will continue to recommend that clauses of the kind quoted above are resisted, as being unnecessary and inappropriate in many cases.

 

 

2 Comments

Filed under Confidentiality, Contract drafting

Agreeing injunctions is for teuchters

rangersIP Draughts won’t claim this as a full blog posting. The subject – clauses in which parties agree that an injunction may be obtained for breach of a confidentiality obligation – has been discussed in detail already in an earlier blog article. That earlier article is the most popular there has been on this blog, with over 26,000 viewings.

One of IP Draughts’ hobby horses (hmm… says Mr Pettifog, with unusual restraint) is that these clauses are largely pointless in the English courts, as the judge will not be interested in being told how to apply his discretion on the granting of an injunction.

What music it was, then, to IP Draughts’ eyes, to see the following statement by Mr Justice Peter Smith in a case reported last week. The case was partly about confidentiality undertakings given by the owner of Glasgow Rangers Football Club in favour of the owner of Newcastle United Football Club. A lot of balls, then. Although the judge was not being asked to interpret the undertakings, he couldn’t resist commenting as described them, pointing out that they were unilateral and that no consideration seemed to have been given for them. This stream-of-consciousness approach seems typical of Peter Smith J. What particularly caught IP Draughts’ eye was the following observation:

  • Paragraph 2 has an express statement that the Undertakers agree “that monetary damages may not be adequate compensation…. and accordingly any member of the SD Group shall be entitled to seek equitable relief including interdict, injunction and specific performance in the event of any actual or threatened breach to the provisions of this letter.”
  • I pause to observe that that self serving clause cannot in my view be used to override the principles which the courts apply when asked to grant such relief.

It is tempting to say, I told you so. But Mr Justice Peter Smith has a long record of shooting from the hip. It would have been better if a more mainstream judge had said this. But as the bard of Dartford said, you can’t always get what you want, but you get what you need.

13 Comments

Filed under Confidentiality, Contract drafting

A book you can keep under your hat

Untitled-1Nestling in IP Draughts’ inbox this morning was an email from Law Society Publishing, inviting him to purchase the recently published, third edition, of a book, Drafting Confidentiality Agreements. Written by some lawyers called Anderson and Warner, apparently.

It is a small book, so it may fit under your hat, or in your loved one’s Christmas stocking.

Details here.

Leave a comment

Filed under &Law Updates, Confidentiality

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…

2 Comments

Filed under Confidentiality