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It pays to read your NDAs

Author
Charlie Grainger

Associate

London

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09 August 2021

When assessing whether a non-compete is an unlawful restraint of trade, express or implied non-contractual intentions can be used to evidence legitimate interests and therefore reasonableness. 

By signing an NDA he had not read, a partner at law firm Harcus Sinclair gave another law firm, Your Lawyers, an undertaking not to act in the Volkswagen group action about diesel emissions. After a short process of informal but genuine collaboration, Harcus Sinclair proceeded to promote and lead the very competing group action claim that Your Lawyers said the NDA aimed to prevent.

The relevant provision said “The Recipient [Harcus Sinclair] further undertakes not to accept instructions for or to act on behalf of any other group of Claimants in the contemplated Group Action without the express permission of the Discloser [Your Solicitors].”

There was relatively little argument about what the provision prohibited. The real question was whether it was in Harcus Sinclair’s “legitimate interest” to do so.

The Court of Appeal, held that the legitimate interest could only be determined on the basis of the actual provisions of the NDA. This meant the legitimate interest was the protection of Your Lawyer’s confidential information provided so that Harcus Sinclair could give legal advice. The non-compete was not reasonably necessary to protect that legitimate interest.

However, the Supreme Court held that the intended informal collaboration of the parties, assessed objectively at the time the contract was made, could be considered when assessing whether an undertaking was deemed reasonable. The fact that the NDA had not made provision for a collaboration agreement did not mean that Your Lawyers’ legitimate interests could not be protected.

As a result of this broader view the Supreme Court sided with Your Lawyers in agreeing that the six-year non-compete did not go beyond what was necessary to preserve these interests. The firm was entitled to be protected until Harcus Sinclair were statute barred from the group action claim, rather than the six-month “head start” that Harcus Sinclair suggested might be more legitimate.

Applying the well-established tests for restraint of trade to the undertaking the Supreme Court also confirmed that there was no public policy argument against a law firm undertaking not to act for a specific client, whilst acknowledging that there was a public interest in firms being able to rely on the court to uphold a reasonable non-compete undertaking.

Judgment: Harcus Sinclair v Your Lawyers

[Ed: there are a couple of additional geeky contract points: one FYI; the other potentially more alarming.

  • The Supreme Court analysed this NDA as a unilateral contract: “Neither party was promising to do anything merely by signing the contract. The agreement was rather that, if Your Lawyers were to provide confidential information to Harcus Sinclair, Harcus Sinclair would be bound by the non-disclosure and non-compete undertakings.”
  • It also stated, “Although not a direct parallel, it may be regarded as relevant that, in interpreting contracts, the law has shifted from any historically narrow focus on what lies within the “four corners of the contract” to taking into account the factual matrix. That is, the accepted modern approach to interpreting a term in a contract is to ask what the term (viewed in the light of the whole contract) would mean to a reasonable person having all the relevant background knowledge reasonably available to the parties at the time the contract was made.” This sounds rather like a return to the vagaries contextualism when we had been edging more towards literalism.]

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