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Measure of damages for breach of confidence

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Jason Rix

PSL Counsel

London

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17 May 2010

In the case of Vercoe & anr v Rutland Fund Management [2010] EWHC 424 (Ch), 5 March 2010, the claimants’ business plan relating to a target business was held to be confidential.

The business plan had been used, by venture capitalists, in breach of a confidentiality agreement by not involving the claimants in the target business (the purpose for which it had been provided).

The court awarded damages based on the value of a notional reasonable agreement to buy a release from the claimants' rights under the confidentiality agreement. The judge set out a helpful analysis of the circumstances in which various remedies for breach of confidence would be appropriate.

The claimants, Mr Vercoe and Mr Pratt, identified a business opportunity for a management buy-in of H&T pawnbroking business (H&T). They approached the defendant (Rutland), a venture capital firm, for funding. Confidentiality agreements were signed and the claimants agreed a business plan with Rutland, which stated that the claimants were to be COO and Commercial Director of the new business respectively.

The claimants were ultimately told that they could have no role. Rutland completed the purchase, floated the business and made a profit close to £30m.

The claimants sued for breach of confidence, of contract and of fiduciary duty.

Contract claim

The claimants alleged that it was a breach of contract for Rutland to buy the business without the claimants in their agreed roles, and to use confidential information for purposes other than the proposal put forward by the claimants.

In order to simplify the assessment of damages, the parties agreed that the measure of damages should be that which Rutland should be taken to have agreed to pay each of the claimants in order to obtain their consent to it using the confidential information, ie the court was invited to assess the price to be paid for them not to be involved in the transaction. This approach is the same as that applied to breach of a negative contractual covenant (a promise not to do something), sometimes known as the Wrotham Park approach, after the case of Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798.

The approach involves the court constructing a hypothetical agreement, based on what would have been a reasonable payment to make for relaxation of the covenant in all the circumstances of the case. As emphasised by the Privy Council in Pell Frischmann Engineering Ltd v Bow Valley Iran Ltd [2009] UKPC 45, both parties to this notional transaction to buy the release of the relevant contractual obligation "are to be assumed to act reasonably", and the focus should primarily be on how the notional negotiation would have taken place bearing in mind the information available to the parties and the commercial context at the time that notional negotiation would have taken place. The court will take into account:

  • the likely parameters given by ordinary commercial considerations bearing on each of the parties, ie commercial acceptability assessed on an objective basis;
  • any additional factors affecting the just balance to be struck between competing interests of the parties (such as delay); and
  • proportionality between the relief granted and the real extent of the claimants’ interest in proper performance.

In some cases, expert evidence can be useful where the notional agreement on a fair price is closely analogous to normal commercial bargains in an established market. In cases such as the present, where there is nothing equivalent to a going rate for the type of notional transaction under consideration, expert evidence is not useful.

The court found that in all probability, any commercial deal between Rutland and the claimants would have been concluded on the basis of an equity allocation to both of them because:

  • both claimants had given up paid employment in order to progress the deal. They had both shown themselves to be risk takers who believed in the profitability of the proposed transaction. They both knew that there was no other funding party apart from Rutland; and
  • Rutland was a venture capital fund which was aware of the considerable financial risks associated with the transaction. An allocation of equity, rather than cash, to the claimants would have been consistent with its attitude to spreading risk, and would cost it less.

In terms of assessing the value of the notional equity awards, the court considered the expectations of the claimants in terms of salary and positions, the claimants' valuable contributions in terms of time and effort in developing the business opportunity, the special nature of the information that they had shared with Rutland, the equity contributions offered to the managers that Rutland did actually appoint to run H&T, and Rutland's reluctance to dilute the equity holdings too much, in order to have equity available to give to the appointed managers of H&T. The court was mindful that the Wrotham Park approach assumes that neither party would have sought to extract a ransom price. It also took into account the lack of candour and "shabby treatment" of the claimants by Rutland. It awarded 2.5% and 5% to the claimants respectively. Mr Vercoe got more that than Mr Pratt as his circumstances were different (he had been promised more of a role, and was involved for longer in the transaction). This represented about £860k and £1.72 million respectively.

Breach of confidence

The court found that the information shared with Rutland was confidential. The information provided by the claimants identified H&T as a serious and attractive potential target, and it was not generally known in the market that Cash America (H&T's previous owner) might be open to an offer to buy H&T. The claimants had conducted their own research and analysis to identify objective grounds to support such a thesis and to present it in a coherent form in a Business Plan. This information was of commercial value, and the use by Rutland of it for its own purposes was a breach of confidence.

The claimants argued that, given the defendants' significant profits, they were entitled to choose an account of profits for breach of confidence. The court rejected this approach, stating that it has long been recognised that there are circumstances in which a claimant will not be allowed to choose a remedy in the form of an account of profits, and may be confined to an award based on the value of a notional reasonable agreement to buy a release from the claimants' rights under the confidentiality agreement (as per Wrotham Park). As per Lord Nicholls in AG v Blake (2001) 1 AC 268 HL, both in cases of breach of contract involving confidential information, and breach of confidence, the test is whether the claimant's interest in performance of the obligation in question makes it just and equitable that the defendant should retain no benefit from his breach of that obligation. The remedy awarded should not be oppressive and should be properly proportionate to the wrong done to the claimant.

In this case, an appropriate remedy for breach of confidence was the same as for the breach of contract claim. The court rejected the claim based on breach of fiduciary duty, finding no fiduciary relationship.

Jason Rix, Senior Associate in the Intellectual Property group, comments: This case is relevant for its discussion of damages for breach of confidence. We are often asked about damages since they are notoriously difficult to quantify. This case shows the type of damages that will be available and the basis on which they will be assessed. The message is that in the majority of cases, where the relationship is governed by a commercial contract and the information is not associated with a fiduciary duty and is not a secret design or process more akin to intellectual property, it will generally not be possible to get an account of profits. Damages will instead be assessed on a contractual basis by reference to the value of a notional reasonable agreement to buy a release from the rights under the confidentiality agreement.

See also Richard Farnhill's monthly article which looks at the options available to a claimant in deciding which measure of loss to apply to a damages claim.

Further information

This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and leglisation in commercial dispute resolution.  For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 (0)20 3088 3710.