Protecting Commercial Information: Confidentiality Agreements and the Duty of Confidence

Introduction

Confidential information may not be something that most people associate with ordinary business. However, most businesses deal with information that demands a certain degree of confidentiality. That information may not necessarily relate to daily operations either. Sometimes, confidential business information arises in the course of commercial transactions or supplier agreements. Other times, confidential information arises in the course of data collection, storage, or distribution. Irrespective of its source, confidential commercial information requires greater protection than ordinary business information. Fortunately, the law has responded to that requirement. To protect confidential information in business dealings, two avenues are available: confidentiality agreements, and the equitable duty of confidence. So let’s take a look at what distinguishes the two, and why they are both important for protecting sensitive commercial information.

Confidentiality Agreements: The First Defence of Commercial Information

In the course of business dealings, it is often necessary to disclose confidential information to third parties. However, disclosure under such circumstances does not entitle the recipient of confidential information to use it as he or she likes. When confidential information is disclosed to a party, it may be used only for an agreed purpose. That purpose is established, and enforced, by confidentiality agreements. In essence, confidentiality agreements are a contract between two or more parties. The contract controls how each party may deal with certain confidential information. That includes when, and to whom confidential information can be disclosed. It also includes a number of other factors, which are discussed below. The value of confidentiality agreements lies in their deterrent effect, and their enforceability. Confidentiality agreements have clear terms, which means that a breach is unlikely. Most breaches that do occur are easily proven, which improves the enforceability of the agreement.

Unilateral and Mutual Confidentiality Agreements

Confidentiality agreements can be either unilateral, or mutual. Unilateral agreements are used where one party is disclosing confidential information to another. In such agreements, one party distributes information to another, and the receiving party agrees not to share that information. Mutual agreements are used when two parties are disclosing confidential information to each other. In those agreements, both parties agree to maintain the confidentiality of the information they receive from one another.

Confidentiality Agreements Vary in Layout, But Most Include These Features

It is important to remember that confidential information is disclosed for different reasons. Those reasons depend on the nature of a business, and the nature of the information. As a result, confidentiality agreements often differ in their substance and layout. However, the general purpose remains the same: to set out the parameters of when, how, why, and by whom confidential information may be used. To give effect to that purpose, most agreements outline the following:

• All parties to the agreement
• The specific information that is the subject of the agreement
• The duty to maintain the confidentiality of that information
• Any exceptions to that duty
• The parameters of how the relevant information can be used
• Any consequences of a breach

The Equitable Duty of Confidence Also Protects Business Information: Here’s How

Confidentiality agreements are vitally important for protecting information, but there’s another safeguard too: the equitable duty of confidence. This duty exists in any situation involving confidential business information, even businesses without confidentiality agreements gain some protection. However, there are stringent requirements to be met before the equitable duty of confidence arises. Those requirements find basis in an area of law known as equity.

A Quick Overview of Equity in the Law

Equity is quite a complex area of law. However, the principles on which it is founded are relatively simple. Equity recognises situations where businesses or individuals are entitled to rely on certain assurances, and seeks to enforce those assurances. Confidentiality, in some circumstances, is one such assurance. If an equitable duty is breached, the law can intervene by imposing consequences on the breaching party, and awarding damages to the aggrieved party. However, only the Court can enforce equitable rights. Therefore, the consequences of any equitable breach are at the discretion of the Court. The Court will consider all the facts when ruling on a breach, but it may choose to award limited damages, or even no damages at all.

Equity and Confidentiality

Over time, equity has evolved to protect businesses from the adverse effects of a breach of confidence. It does so by identifying business dealings in which one party is entitled to the confidentiality of another. But that entitlement exists only if the relevant information meets the right criteria. These criteria are quite extensive, and they are established in the case of Coco v A N Clark (Engineers) Ltd. The fundamental criteria among them is the necessary quality of confidence. To satisfy that criterion, the information at the centre of the breach must not exist in the public domain, and it must not be public knowledge. Information that meets that standard can qualify as confidential. It can then be protected by the equitable duty of confidence.

Choosing a Path: Even With the Equitable Duty, Confidentiality Agreements are Vital

With two separate legal mechanisms protecting confidential information, choosing a path can appear confusing. Fortunately, it is not necessary to choose between the two; the equitable duty of confidence exists in all business dealings. In fact, most confidentiality agreements contain a clause to confirm that the equitable duty applies concurrently. No confidentiality agreement can override the equitable duty of confidence, but that duty may not extend to all sensitive information. Consequently, both confidentiality agreements and the duty of confidence can work together to protect a broad spectrum of sensitive commercial information.

Well drafted confidentiality agreements give businesses greater control over the information they disclose to other parties. They also act as an effective deterrent. That reduces the likelihood of expensive litigation, which is the only way to enforce an equitable right. If there is a breach of a confidentiality agreement, it is generally much easier to demonstrate than an equitable breach. For those reasons, confidentiality agreements are an economically attractive option in the long run. Effectively, they minimise a business’s chance of having to enforce its rights in court, and they do so without affecting that business’s equitable rights.

By Finian McGrath