For the half-year to 31 December 2014, the IPKat's regular team is supplemented by contributions from guest bloggers Rebecca Gulbul, Lucas Michels and Marie-Andrée Weiss.

Regular round-ups of the previous week's blogposts are kindly compiled by Alberto Bellan.

Tuesday, 19 August 2014

A penny for your thoughts? No, a pound for your breach of confidence: no richesse for Richmond

Following six days of hearings, a claimant that succeeds in pinning the defendants down with liability for breach of contract, breach of confidence and breach of statutory duty might expect to be royally rewarded for its trouble. But this is not always the case, as can be seen from the salutary suit in Richmond Pharmacology Ltd v Chester Overseas Ltd, Milton Levine and Larry Levine [2014] EWHC 2692 (Ch), a 1 August 2014 decision of Stephen Jourdan QC, sitting as a Deputy Judge in the Chancery Division of the High Court, England and Wales.

In this action Richmond, a contract research organisation, claimed damages or equitable compensation from Chester and the two Messrs Levine for losses sustained as a result of the disclosure of its confidential information. The saga starts in 2002, when Richmond entered into a shareholders' agreement whereby Chester (a British Virgin Islands company whose shares were held in trust for the Levines, who effectively controlled it) bought 44 per cent of its issued share capital. The remaining 56 per cent stayed in the hands of the three doctors who founded Richmond.  The Levines, representing Chester, were appointed directors of Richmond. While this agreement gave Chester the right of access to detailed information about Richmond's affairs, clause.13 [which is set out in full at para 37 of the judgment] required Chester to treat that information as strictly confidential, save in certain specified circumstances.

Subsequently, in 2009, Chester sought to sell its shares in Richmond and instructed New World Corporate Finance Ltd (NWCF), to advise and assist it in this task. When NWFCstarted to market the shares to third parties, Richmond asserted that, in doing so, it both disclosed confidential information and created the misleading impression that all of the issued shares  in Richmond were for sale. In result, said Richmond, it suffered a reduction in its business.

At trial, the Deputy Judge had to consider the following questions:
(i) did Chester and the Levines owe any duty of confidentiality to Richmond?
(ii) if so, had they breached any such duty by conveying confidential information to NWCF?
(iii) what information did NWCF actually disclosed?
(iv) did NWCF's disclosures to prospective purchasers constitute a breach of confidence by Chester and the Levines of their duties of confidentiality?
(v) did an estoppel arise because Richmond did not initially object to NWCF's disclosures?
(vi) did NWCF's disclosures cause any loss to Richmond?
After tiptoeing through 253 paragraphs, this Kat can report briefly as follows:

* The ordinary and natural meaning of the shareholders' agreement was that Chester had a duty not to disclose Richmond's commercially sensitive information to anybody. However, on that reading, Chester could not realistically expect to sell its shareholding without the board approving the disclosure of confidential information to potential purchasers. It could not be argued that this conclusion was contrary to business common sense, since the commercial reality was that it was always going to be virtually impossible for Chester to sell its shares without the cooperation of the three founding doctors who retained the majority of the shares.

* The Levenes, as directors of Richmond, owed the company a number of statutory duties set out in the Companies Act 2006, ss 172 [duty to promote the success of the company], 174 [duty to exercise reasonable care, skill and diligence] and 175 [duty to avoid conflicts of interest]. Since they had been nominated by Chester they could, in performing their s.172 duty, take Chester's interests into account -- but only provided that they made decisions which they genuinely considered to be in Richmond's best interests.

* In contrast, s.174 and s.175 imposed an objective test and a breach of the s.175 duty to avoid conflicts of interest did not depend on any bad faith on the part of the director, or any awareness by him that his conduct placed him in breach.

* The founders had authorised the Levines to act in a dual capacity so long as Chester complied with its contractual obligations; however, to the extent that the Levines wanted Chester to breach the shareholders' agreement, they would first need the approval of the Richmond board.

* Where there was a contractual duty of confidentiality, equity would not impose any wider, or narrower, duty of confidentiality than that stipulated by the contract. On the facts, therefore, the Levines' equitable duties were identical in scope to those imposed on Chester by the shareholders' agreement. To the extent that the Levines caused Chester to act in breach of that agreement, they would themselves be in breach.

* The Levines were entitled to disclose confidential information to NWCF, since it advised them professionally and such disclosures were specifically authorised by clause 13.2 of the shareholders' agreement. In reality, NWCF probably used that information only to make general statements about Richmond's business and it was unlikely that it had disclosed material of any substance. However, it was likely that it had given the impression that all of the shares in Richmond were, or might be, for sale: the giving of such an impression constituted a breach of clause 13 by Chester. If true, it would have been confidential information falling within the scope of clause 13 and also placed the Levines in breach of their s.175 duty, insofar as their conduct had caused Chester's breach [Merpel's not too clear as to how the impression that all the shares were for sale, if false, would fall within clause 13, but that's another matter].

* there was no estoppel by acquiescence since there was no relevant assumption made by one party which was acquiesced in by the other, where it was unjust for that other party to resile from that assumption. Silence alone was not that sort of assumption; nor had it been shown that the party relying on it had done so to a sufficient extent: the most that could reasonably have been inferred from Richmond's failure to object to NWCF's disclosures was a grudging acceptance that it could do nothing about them, but no way was it capable of being an acceptance that NWCF's conduct was lawful.

* while both Chester and the Levines had acted in breach of their obligations of confidentiality, those breaches had not caused any loss to Richmond. While the amount of business that had been placed with Richmond had decreased after the breaches had occurred, it could not be said on the balance of probabilities that that decrease in business had been caused by those breaches.

* to conclude, while the three defendants did indeed commit some breaches of their contractual, statutory and equitable duties to Richmond, those breaches caused it no loss. Provisionally, it seemed right to award nominal damages of £1 against Chester for breach of contract, and to dismiss the claims against the Levines.

Ever discreet ...
The IPKat, this case is more interesting than it may appear, as are many that deal with damages. Where there are two or more possible reasons why the injured party suffers loss following a breach of confidence, it's clearly not enough for the defendant simply to show damage: causation must be proved too. And the burden of proof remains with the successful claimant to show how the damage was caused. Apart from the difficulty of achieving this, there is also the uncomfortable prospect of having to open one's books, correspondence and records for close scrutiny by a hostile party intent on disproving causation.  Merpel says, with hindsight this was plainly not the best way to proceed; the interesting thing is to map out the best way that Chester could have put its shares in Richmond on the market in the event that the majority shareholders were (i) cooperative and (ii) uncooperative.

Richmond Hill here and here
Lass of Richmond Hill here
Pound-breach here

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