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Wednesday, 14 April 2010

Big award in claim for profits of pawn

It's not often that any court gets to consider the basis on which pecuniary remedies for breach of an obligation of confidentiality are assessed, which is why Vercoe, Pratt and MAS Corporation Limited v Rutland Fund Management Limited and others [2010] EWHC 424 (Ch), a decision last month from Mr Justice Sales, in the Chancery Division, England and Wales, is so gripping.

In this action Vercoe and Pratt sought compensation for breach of contract, confidence and fiduciary duty against a group of Rutland companies in respect of their acquisition of two pawnbroking companies, Harvey and Thompson Ltd and Svensk Pantbelaning (the target companies). Having identified the target companies as a business opportunity, the claimants wanted to acquire them, to join their management team and obtain equity shares. Accordingly they approached several venture capital companies about their idea, including Rutland. Before actually speaking to Rutland, they entered a disclosure agreement which provided that they would disclose confidential information to Rutland on the basis that Rutland could use it only to assess whether it was interested in the proposal. This confidential information included the claimants' business plan, which identified the claimants' proposed management roles. Rutland liked the idea and made some funding proposals, which the claimants accepted. After some negotiation the same parties entered into a further confidentiality agreement, which was signed on similar terms to the earlier one.

Subsequently Rutland agreed to buy the target companies for itself. At this juncture Rutland told Pratt that he was to have no role in the management of the target companies or any further part in the transaction. After some further and inconclusive discussions with Vercoe in which the possibility of him having some role other than that expressed in the business plan was explored, Rutland told him they wouldn't be wanting his services either. Rutland then completed the purchase, developed the business and made substantial profits when it floated Harvey and Thompson Ltd on the London Stock Exchange's Alternative Investment Market in 2006.

Vercoe and Pratt then claimed that Rutland had acted in breach of the confidentiality agreements by (i) proceeding to acquire the target companies without them and (ii) making use of confidential information in breach of obligations of confidence. They also alleged breach of fiduciary duties in relation to the information which they had imparted to them. Rutland disagreed. In its view Pratt had accepted that he should play no part in the transaction, while Vercoe had first acquiesced in Rutland's use of the confidential information for a transaction in which he was to take a lesser role, that he had then acted unreasonably and had effectively removed himself from the transaction.

Mr Justice Sales gave judgment in favour of the claimants.

The claim for breach of a contractual covenant

* Rutland was in breach of the confidentiality agreements by acquiring H&T without the claimants: it could not proceed with the acquisition without appointing Pratt and Vercoe to the roles specified for them in the business plan, or to equivalent roles.

* If Rutland wanted to proceed with a different plan, it should have asked the claimants for their consent.

* On the facts, neither Pratt nor Vercoe had waived their rights under the agreements and Vercoe had not acted unreasonably since he had a legitimate concern that his post-acquisition role would not be at an appropriate level. Accordingly, both Pratt and Vercoe were entitled to damages for breach of contract.

* The parties had agreed that damages should be assessed by reference to the sum which Rutland should have agreed to pay Pratt and Vercoe for their consent to its use of the confidential information for a purpose other than the business plan. Establishing damages for breach of a negative contractual covenant itself required assessment of a fair price for release or relaxation of the covenant. In this instance a reasonable price for buying a release from the covenant was £860,000 plus a 2.5% equity in Svensk Pantbelaning to Pratt, and £1.72 million plus a 5% equity to Vercoe.
The claim for breach of confidence

* Although Rutland had used the information about the business opportunity in breach of iits obligations of confidence, the extent of those obligations was the same as those under the confidentiality agreements and therefore merged with them.

* Where the same facts give rise to both a breach of confidence and a breach of contract, the relationship is effectively governed by the terms of the contract to which the parties have agreed, rather than to the law of breach of confidence.

* Whether an award of an account of profits was appropriate depended on whether the claimant's interest in performance of an obligation made it just and equitable that the defendant should retain no benefit from his breach of that obligation. However, where the breach was not proprietary in nature, and there was no special reason why the defendant should not have been entitled to adopt a commercial approach in deciding how to behave in relation to that right, the appropriate remedy was likely to be an award of damages assessed by reference to a reasonable buy-out fee.

* On the facts here, an account of profits was not appropriate but damages would be assessed on the same basis as for the breach of the contractual covenants.

* There was no fiduciary relationship between Rutland and the claimants since, on the facts, they were independently advised and had not reposed trust and confidence in Rutland.
The IPKat is saddened by the fact that, though the confidentiality agreements were signed in 2003 and breached in 2004, it was not until late 2009 that the trial took place, with judgment being given nearly four months later. The factual background was complex and, while the judge held the claimants entitled to wait until 2008 to commence proceedings on the basis that they wouldn't want to sue unless there was something worthwhile suing for, he observed that the passage of time meant that memories have dimmed and that he had to treat with circumspection the evidence in the witness statements -- compiled years after the relevant events -- and in the oral evidence at trial.

Rutland here
The Rutland Cat here
The Rutland Panther here
Rutland Fund Management here
Rutland Fun Management here
The Pawnbroker here

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