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Thursday, 20 June 2013

Confidence preserved: a concrete ruling on an abstract contract

Orr-Adams (trading as Applied Concrete Systems, a Partnership) v Bailey (trading as G Bailey Services) [2013] EWPCC 30 is a Patents Count Court decision of Katfriend and long-time IP enthusiast Miss Recorder Amanda Michaels last Tuesday, 19 May. It is a curious case, involving a good deal of implication of contract terms in order to put flesh on the bones of an oral contract.

Applied Concrete and Bailey struck an oral deal in July 1996: Applied Concrete was to develop cement formulations for Bailey in return for payment of a proportion of the profits on their sale. The disputed formulations were the last in a series that Applied Concrete had developed and which Bailey supplied to customers. This agreement terminated in August 2010, following which Applied Concrete alleged that -- both in breach of confidence and in breach of contract -- Bailey continued to use the formulations and to supply cement products after termination without making any payment to it. For good measure, Applied Concrete threw in a copyright infringement claim too, in respect of the copying of explanatory documents and quality manuals.

Recorder Michaels held for Applied Concrete, adding that it was appropriate for an order to be made that would maintain the confidentiality of the formulations. Why?
  • The production of the formulations involved skill and creative input by Applied Concrete, being truly the product of the skill of the human brain and thus capable of being protected as confidential information.
  • While Applied Concrete had included that information in documents which it sent to Bailey without marking it "confidential", it would have been known and understood by both parties that it was confidential and should be treated as such. Having invested time and effort in developing these formulations, the parties had a shared interest in maintaining confidentiality. Accordingly, any disclosure by Applied Concrete to Bailey was made on the basis that Bailey would maintain that confidentiality. This understanding remained unaffected by the fact that base formulations might be in the public domain.
  • No confidence in the formulations was lost by their being sent to a third party company for blending: an obligation of confidence would be imposed on that company and confidentiality would be maintained.
  • The formulations were not put into the public domain at the point at which they were tested, since the company involved did not know what was in the formulations and anyone who became privy to any details was subject to an implied duty of confidence since the commercially valuable nature of the formulations was plain, as was the fact that they were not being released into the public domain.
  • While Applied Concrete had included parts of the formulations in the annex to the particulars of its claim, it must have been clear to Bailey that this had been done by mistake, so its obligation to maintain the confidence of those formulations was not terminated -- there being no public dissemination of the information which was sufficient to destroy its confidentiality.
  • Since Bailey was not in a position to supply new formulations for at least four months after termination of its contract with Applied Concrete. Accordingly, any products supplied during that period would be taken to be made according to the formulations in issue. Since Bailey was not entitled to exploit those formulations after termination, it had to pay for any unauthorised use.
  • Bailey's "clean-room" defence -- that new formulations had been derived without any reference having been made to the disputed formulations -- was rejected.
  • Bailey only required a licence to use the copyright works with its sales of the formulations, for which it had to pay the appropriate licence fee. Any copies of the works supplied with products made using the formulations in dispute and for which no payment was made were issued to the public in breach of the terms of the licence. Alternatively, if there been an assignment rather than a licence, Bailey was still obliged to pay Applied Concrete for use of the copyright works in question.
  • The obligation to pay fees was one of the few express terms of the contract, which also contained an implied term that Bailey could continue selling products made to the formulations either for a limited period after termination, or indefinitely. In either case, those sales carried an obligation to continue making payments to Applied Concrete.
  • Even if Bailey had commissioned Applied Concrete to produce the formulations and was therefore the only party entitled to the confidential information and to continue using it after termination, it was axiomatic that the contractual right to payment for such use would continue. Bailey's use of the formulations without continuing to pay Applied Concrete was therefore a breach of contract.
Says the IPKat, it's strange how, where there's a written contract, if the parties leave anything out the contract is then in substantial risk of being held void for uncertainty. However, if the parties make an oral contract, the court will go to such great lengths to infer the existence of even uncertain implied terms in order to give that contract a degree of commercially meaningful content.

Concrete and Clay here (earworm warning)
Concrete Angel here (tissue warning)

2 comments:

Isaac said...

Regarding the observation in the final paragraph, this is not strange to me at all. In fact it's necessary if courts intend to give weight to an oral contract. By their very nature, oral contracts are more informal than written ones, and therefore would be expected to leave out a detail or two (particularly if the parties feel that they agree on the issue and nothing needs to be said).

Laura | Dutch Law Firm said...

Very interesting article, always nice to read about litigation in different jurisdictions. Especially breach of contract litigation is very interesting. All cases are different, and good litigation in such cases comes (in my jurisdiction) with both a waterproof legal paragraph, and a good presentation of the facts.

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