By Nicholas Kyriakoudes and Peter Bahlmann
Ordinarily, information does not constitute property and therefore there is no restriction on what a person may do with information they hear, read, or otherwise obtain.
This becomes problematic with respect to certain information such as trade secrets, recipes, clients lists, or the contents of certain settlement agreements, where it is desirable to maintain the secrecy of the information. The law provides ways which special or commercially valuable information can be protected.
So naturally, the question then becomes how does one protect information?
The first and most easy way to safeguard ideas and information is to not disclose them. A secret is safest when no one knows. However, in many circumstances people will disclose or discuss their ideas such as for feedback, to share with friends, or in the case of trade secrets, with employees. In these circumstances, if the information is worthy of protection then it may be appropriate an agreement for its protection and non-disclosure.
Confidentiality agreements
A confidentiality agreement (sometimes referred to as a non-disclosure agreement) will give the confider (the person who discloses information) the ability to control what the confidant (the person to whom disclosure is made) may or may not do with that information. By setting restraints in the agreement, the confider can ensure that information relating to an idea they share cannot be used contrary to the terms of the restraint. For example, a confidentiality agreement may limit use of information about an idea for certain purposes or for certain lengths of time. In the case of trade secrets, a contract may set out that the trade secret of a company can only be used by an employee during the term of their employment and not after they have left the company.
A confidentiality agreement may prohibit the disclosure or use of protected information at any time. This may be practical in circumstances where the confider wishes the confidant to not use the idea for their own benefit at all (for example a trade secret or recipe). Confidentiality clauses are common in agreements for the settlement of disputes or litigation. In such cases a confidentiality agreement (or a confidentiality clause within a deed of settlement) can enable the parties reaching agreement to prohibit the other party from sharing details of their settlement to the public. That way details which may cause embarrassment, shame, or impact the public image of a party cannot be disclosed.
A confidentiality agreement can also set out the consequences for misuse of information. As there is no guarantee that a confidant will abide by the terms of an agreement a liquidated damages clause may be included in the agreement setting out the amounts of damages payable in the event of disclosure or misuse by the confidant of the idea or information protected under the confidentiality agreement.
In addition to the above, the benefits of drafting a confidentiality agreement are that such contracts do not require the confider to show the elements of an equitable obligation of confidence on the part of the confidant. It does not need to be shown that the protected information is by its nature inherently confidential. The confidentiality clause or agreement is construed according to ordinary contractual principles.
An obligation of confidence may also be owed as an implied term in a contract. Typically, this occurs in certain types of employment. Though, the duty of confidentiality owed by an employee never extends to the employee’s “know-how” acquired as it were as a skill-set in the course of their employment. The employee is entitled to use such “know-how”.
Equitable obligation of confidence
An alternative way to protect ideas is through the cause of action of an equitable obligation of confidence. The elements of the cause of action were set out by Megarry J in Coco v AN Clark (Engineers) Ltd 1969:
- The information must have the necessary quality of confidence about it.
- The information must have been imparted in such a way to import an obligation of confidence.
- The plaintiff must show that there is unauthorised use of that information to the plaintiff’s detriment.
Protection of ideas and information in this way is less certain than in a confidentiality agreement as the elements of the cause of action must be proven. Further, the confider has less control over what information they can protect from disclosure as in a confidentiality agreement specific information, even if the information lacks a confidential nature, may be deemed and designated as confidential. Under an equitable obligation of confidence, a confider needs to show that the information they shared was in fact secret and not just asserted to be secret. Whether information has a qualify of confidence about it is determined by the “reasonable person test”. Therefore, the action is limited strictly to information which has a secret element to it as opposed to information which can be protected in contract which has no necessity for secrecy.
Unlike a confidentiality agreement the confider must share the information to the confidant in a manner that implies an obligation to keep the information private and secret. However, as a confidant is not obliged to accept the disclosure of information this duty cannot be forced upon them. There are still benefits to the equitable action, however. This includes that the claim provides an alternative method to protecting ideas which can be pleaded as an alternative claim, as well as providing an available method to injunct the disclosure of information despite the parties having no contractual relationship.
Confidentiality in negotiations
Perhaps the most useful and frequent application for a confidentiality agreement is in the context of negotiations for business deals, joint projects, proposed business acquisitions and the like.
For example, when considering the acquisition of shares in a company it is critical for the purchaser to conduct due diligence in relation to the affairs of that company, its performance and viability. This can only be done satisfactorily if all relevant information about the affairs of the company is disclosed to the purchaser so that the purchaser can make a properly informed decision about the acquisition. The company should not disclose such information to the prospective purchaser without adequate protection of its information, most especially because the sale and purchase may not ultimately proceed. The necessary protection is to have in place a confidentiality agreement between the parties to those negotiations.
Please contact our team at Hansons Lawyers on 42 222 666 or by email at hansons@hansonslawyers.com.au who can arrange to draft a confidentiality agreement or advise you in relation to obligations of confidence.