Clause of Confidentiality: The Consequences in a Commercial Contract

Can a pre-existing relationship determine the confidentiality of information?

This clause is known to protect the original work from it being misused by unauthorised persons it not only intends to protect the rights of the parties but also encourages free flow of the information under guise of protection provided by this clause under the contract. The study intends to showcase the manner in which a clause should be drafted so as to avoid interpretative mistakes of which the receiving party can take advantage of. The study devises a fine study of what kind of information can be construed and claimed as confidential information. It also examines that the right of breach of confidence is an individual right.

“The equitable jurisdiction in cases of breach of confidence is ancient; confidence is a cousin of trust[2]”. Confidence origins from a Latin word fidere which means to trust. The Warren-Brandeis model, in the 1890s, was the first model to give birth or so to say they were the “inventors” to the concept of privacy[3]. Earlier to this, it was merely an ethical issue with a little judicial wisdom but then it was embedded into awhole new chapter in the books of law[4].

To recognise any information as confidential, the confidant should have the knowledge, in any form, for the information being confidential[5].India has acquired the fundamentals of confidentiality from the English law. The English law did not recognise the general right to privacy but instead focused on delineating the actionable breach of confidence[6]. In the year 1859, first of such case arose in the United Kingdom, where a print shop was entrusted with a responsibility to print a catalogue of royal enticing but were illicitly distributed by him[7]. The English court ruled that it was a clear breach of trust, confidence and contract[8]. Therefore, when one person shares any material information, which is not available in the public domain, and does not intend to share it with any third person, then such information can be construed as confidential and if any hint of such information is dropped or leaked by the confidant of the information, then there shall lay a breach.

When two or more persons materialise a contract with a promise to not disclose the information shared between them to any third party, then there comes into being a confidential relationship. In such type of relationships, one party shares an important piece of information to the other party beholding a trust on them that the shared material will not be disclosed to any third party. This makes the sharer of the information vulnerable to various types of risks[9]. It gives birth to a fiduciary relationship, rendering an obligation on both the parties to only work in the best interest of the parties involved. Thomas M. Cooley has defined confidential relationship as, “relations formed by convention or by acquiescence, in which one party trusts his pecuniary or other interests to the fidelity and integrity of another, by whom, either alone, or in conjunction with himself, he expects them to be guarded and protected”[10].And, so to protect the vulnerability of the parties, a backing of law was requiredinorder to impose liability for such breach of confidence. As early as in the 18^th century, in Duke of Queensberry v. Shebbeare, the court of equity held that a restraint could be imposed to share the manuscript given for publication to any other party[11].

Further, to understand the concept of confidentiality in commercial terms, one must understand that confidentiality is subjective in nature. But the subjectivity does not change the fundamentals of the concept. When a contract is formed containing clause of confidentiality, and then if there is a breach, the contract will stand as evidence against the breach. However, when a party who has developed a confidential relationship without entering into a contract, the vulnerable party does not lose the right to claim damages for the breach of confidence[12].

For an information to be recognised as confidential in nature, following traits must be observed[13]:

• It should be a specifically identified information.
• It should contain the quality of confidence.
• It should be entrusted on the defendant as the obligation to maintain secrecy of the shared information.
• There lies an actual misuse of the information.

Things covered in the clause

Confidentiality, as envisaged in earlier times, was interpreted from a pre-existing relationship and the obligation to keep the relationship confidential essentially arose from the kind of the relationship shared[14]. When there lays no contract, the relationship “shared” gives meaning to the information and thereby imposing an obligation on the party to not share or disclose the information to third party.

Before entering into the contract, the party beholding the confidential information must clarify the intention to the contracting party to not share the information expressed as confidential with any outsider. The clause can be divided into six parts viz. a defining clause, the purpose of the clause, the information termed to be confidential, the geographical information, the time-limit for the operation of the contract and the rights and obligation of the party. The contract must have a separate confidentiality clause or a non-disclosure clause. The clause should define the term confidentiality either in the definition section or in the clause itself, if construed differently than the general meaning.

First, the defining part should clarify the meaning of the term confidentiality only if they are intending to use it in a manner contrary to the regular standards used in the general term. Not all the information amounts to a trade secret, but only those which has commercial soupçon imbibed. A trade secret can be between artificial persons, or between natural persons, or between employer and employee, etc.

Second, comes the purpose of inserting the clause into the contract. The purpose gives latent support to the definition used to define confidentiality. The purpose of the clause is to uphold the originality of the work of the party who is sharing the information with the other party in confidence. It protects the vulnerability of the party who shares the information from unauthorised usage of its original work. The consenting party portrays the intention to not share the information which is shared in confidence to any unauthorised person and so at the time of dispute, the party cannot question the status of confidentiality of the information.

Third, the information. It is the most important part of the clause as it articulates the information that is to be kept confidential. This information should be clearly delineated and not vague. Any ambiguity will only amount to great loss of original work once leaked in the public domain. It is upon the vigilance of the consenting party to be able to distinguish the work which is termed as original from the work which is readily available in the public domain. The information which is shared should contain the exact numbers, types, and contents of the variety of the documents that are shared in lieu of the confidentiality clause. The clause, when interpreted, shall construe only one meaning from all the possible permutations. The court shall be able to interpret, prima facie, that the information shared is intended to be kept as confidential.

Fourth, the geographical location. The importance of the clause underlines that the information should not be limited to only one country or a state or a city but to the world at large. The confidant should not disclose or misuse the confidential information in any other country as well. The public domain does not only cover the people of a country but the people of the world. Such small details tightens the clause without leaving any loopholes in it. Insertion of such clause promotes free communication without the barrier of it being exploited. But also, in order to protect the interest of the public following will be treated as exceptions[15]:

• If there is a wrong doing involved.
• If the public is being misled.
• Matters relating to public concerns.

Fifth, the time period for the operation of this clause. There are certain information which remains important during the currency of the contract. But there are information which remains important even after expiration of the contract, in such circumstances the clause may specify that the clause of confidentiality will survive the termination clause of the contract and will remain operative and binding even after the contract is terminated.

Sixth, the rights and obligations of the parties must be defined crisply. It is to ensure that both the parties are aware about their position and the information being held them. A party to the contract must not use the confidentiality clause against the other, wherein both have consensually agreed to share and keep it confidential. A defined obligation enhances the responsibility of the parties, individually and, also aids in tracking down the mistake committed by them.

This part of the contract is very essential to the vulnerable party as it puts utmost good faith and trust on the other by simply signing a contract in a hope that the vulnerability will not be misused and important information will not be exposed.

Do’s and Don’ts of the clause

It is an accepted fact that not all information gives birth to confidentiality but it is also an accepted fact that confidentiality needs protection. While drafting the clause of confidentiality one must look beyond the information provided by the client. The draft should portray the information in a way that when challenged, the bare reading should characterise the information as confidential in nature.

Confidentiality is a sensitive issue, the contents of the clause should be crafted only after weighing the balance of convenience of both the parties[16]. Section 27 of the Contract Act, 1872 declares a contract to be void if it is made for restraining the trade or business of a person. It is a common practice in law that a confidentiality clause may survive the contract, subject to the nature of the information. But this information shall not adversely affect the rights of the confidant to operate any business or trade. A negative covenant shall not be unconscionable or excessively harsh or unreasonable or one sided[17].

When a secret holds a commercial value it can be construed as a trade secret[18]. Trade secret may include formulae, technical know-how or a peculiar mode or method of business adopted by the employer which is unknown to others[19]. And therefore, just as the confidential information, the important factor for enforcement is the actual secrecy[20].

Irrespective of the mode of communication, if the information is communicated in such circumstances which attracts inevitable protection, then it is an information be held in confidence. Therefore, when there is no express contract protecting the confidential information or when the clause is ambiguous and vague then court shall factor in the following elements[21]:

• The extent to which the information is known to the outside world.
• The extent to which the information is known to the employees of the company.
• The valuableness of the information to the business and its competitors.
• The amount of safeguard taken by the business to protect sensitive information.
• The ease of availability of the information.

No person can be held liable under the contract if it is not party to it and no person can be made a party to the contract in the anticipation that a breach can be committed by them. When the party who is sharing the information wants to save the clause from a third party, who can derive, retrieve or disclose the information, cannot make them a party to the contract. There should lie a prima facie relationship between the parties which establishes that there lies a fiduciary relationship or otherwise to protect the information from being misused. Though the vulnerable party can claim for such breach of confidence arising out of a third party as the breach of confidence is independent of any other right[22].

Example of mistakes in the clause

An ambiguous, vague or imprecise information, however fundamental in nature, can demolish its essence. It is an unprecedented fact that confidential information should not be drafted in a broad manner[23]. When the sharer of the information is communicating with the receiver of the information, the communication should be made in a manner and under such circumstances that shall impart obligation on the receiver to not disclose the information[24]. The sharer of the information cannot, under no circumstances, can bring a claim that the receiver may decode the valuable information and hence use it as its own, in such scenarios the court has made it clear that when an information is decoded, by the receiver, than the skills used are of the defendant and so the claimant cannot restrict the use of it, as it has become the defendants work[25].

A confidentiality clause cannot restrict the use of the information which is readily available in the public domain. The design of the clause shall very specifically specify the information that is to be kept in confidence. By merely stating, “information regarding the related products/ business operation shall not be disclosed”, such a clause will only operate against the sharer of the information as it has impliedly given the freedom to disclose every information other than the product or the business operation[26].

There lies a fundamental difference when the contract imposes restraint during the subsistence of the contract and when the restraint extended for a lifetime. The validity of such restraint can only be understood by scrutinising the purpose of such restriction. The negative covenant which is operative during the contract are not generally held violative of Section 27 of the Contract Act, 1872 as its purpose is to fulfil the contract but when the restriction is extended even post the termination of the contract that restriction turns into a restraint of trade, business or profession which becomes violative of Section 27[27]. If the clause is to survive the contract as whole then the purpose of such survival shall be thoroughly reflected in the clause and shall be explained to the receiver of the information in the same context, so as to avoid litigation and to protect the information.

In Danieli Corus BV v. SAIL[28], the parties to the petition entered into a contract on 2.10.2008 to install Blast Furnace No. 5 at Rourkela Steel Plant of the respondent. The petitioner had shared drawings, documents, and other information with the respondent, which were confidential in nature. To uphold the purpose of maintaining confidentiality, the parties incorporated relevant clauses and sub-clauses in the agreement. The confidentiality clause highlighted that the drawings and other confidential material provided were strictly to be used for the purpose of the present contract only and shall not be shared or used for any other purpose or with any third party. The agreement also stated that the clause will survive the termination of the contract.

The petitioner claimed that such drawings which were confidential in nature were shared by the respondent with the third party in various “Online Competitive Bidding Events” held in the years 2015, 2017 and 2018, and hence breaching the confidence. The respondent based its arguments on two points, first, that various drawings were produced by the petitioner over the currency of the contract and of which some drawings were only General Arrangement Drawings which cannot be held as confidential in nature, merely by an insertion of the disclaimer clause, and second, about 17,000 drawings were produced by the petitioner and some of which were already available on the public domain and therefore, cannot be held as confidential in nature.

The High Court of Delhi ruled in favour of the petitioner, affirming that when the parties to the agreement have treated certain drawings to be confidential in nature then both the parties are bound to it, notwithstanding the fact that the law permits the parties to claim confidentiality or not. A party to such a contract cannot challenge the validity of the clause after taking benefit from it. And ordered the petitioner to file statement of claims with ICC within 30 days, as the contract contained an arbitration clause.

In Anindya Mukherjee v. Clean Coats (P) Ltd.[29], the petitioner challenged the award of the sole arbitrator where the petitioner was penalised with an amount of Rs 9,40,167.50. The petitioner was appointed as a senior sales executive and was later on promoted as the Manager Project and Sales in the Marketing Department. The respondent entered into an employment agreement with the petitioner which contained the clause of confidentiality, wherein it was expressly stated that the petitioner will not share the confidential information of the company with any third party. Further, it was stated that the petitioner will not indulge into or start a similar business as that of the respondent for a minimum period of 24 months from the date of resignation or termination of the petitioner. It was duly attested by both parties to the agreement.

The petitioner contended that the agreement was null and void as it was prejudicial to him. The respondent argued that the agreement was not coerced upon the employee, the terms were to protect the confidential information of the company from it being misused as it held competitive advantage.

The court ruled in favour of the respondent, and directed the petitioner to pay a legal injury of Rs 1,00,000 as compensation to the respondent. The court expressed the view that the relationship of employer and employee contains the element of commerce and business. And so, any breach of confidence committed by the employee will amount to misconduct and the employer will hold a right to take actions against it.

In Zee Telefilms Ltd. v. Sundial Communications (P) Ltd.[30], the plaintiff was a company engaged in the business of video programming, television programming, etc. developed a concept which was initially titled as “Kanahiya” and was registered with the Film Producer’s Association in the year 2002. The plaintiff intended to further develop the idea and broadcast the concept as a television show. And, therefore they approached the defendant and explained the concept through various concept notes, pilot plots, audio-visual presentation of the concept, etc. There was clear understanding between the parties that the work of the plaintiff was an original work and that the defendant should not breach the confidence of the plaintiff by sharing or using the material. Subsequently, the plaintiff approached other broadcasting agencies with the idea as the defendant was stalling them for over a period of time and ultimately not form a contract with them. Lateron, the defendant started working on the same line of idea and developed their own show based on their concept.

The plaintiff claimed that there was a clear breach of confidence and infringement of their copyright. The defendant took the defence, firstly, of the copyright law stating that it does not cover abstract ideas or concepts, and secondly, that the idea of the plaintiff was not original or novel and so doesn’t attract the law of confidence.

The court held that the rule of confidence is broader than that of copyright, as claim towards copyright can only be held when the work has been reduced down to a permanent form and not otherwise. The concept of copyright is good against the whole world but confidence is operative when the information is shared to a particular person in good faith, either in an oral or written form of communication. The court was of the view that even if it does not fall within the ambits of the copyright law, it clearly is a breach of confidence and so ruled in favour of the plaintiff.

Conclusion

 “A duty of confidence will arise whenever a party subject to the duty is in a situation where he either knows or ought to know that the other person can reasonably expect his privacy to be protected”[31]. Over a period of time the judicial approach to determine information to be confidential was squarely dependent upon the pre-existing relationship between the parties. As the principle laid on the fact that a party may claim equitable remedy against the party who has committed breach of confidence on the account of the relationship shared by them[32].

This contention was diluted over a period of time as it posed a limitation on the party to hold a person liable who does not hold a direct relationship, whether actual or otherwise. Lord Goff of Chieveley in Attorney General v. Guardian Newspaper Ltd. (No. 2)[33], who had observed: “a duty of confidence arises when confidential information comes to the knowledge of a person…..in circumstances where he has notice, or is held to have agreed, that the information is confidential, with the effect that it would be just in all the circumstances that he should be precluded from disclosing the information to others”. He was further of the opinion that confidential information is not something which is available in the public domain or is in the knowledge of the public. The term confidentiality propagates inaccessibility, and therefore irrespective of the mode in which the confidentiality is retrieved by the receiver, he shall be held in breach. A secret does not cease to remain a secret when one selects to share it with the intended one, and yet it remains secret for the rest of the world. In here, the expectancy of confidence is rooted only to the receiver of the information and not the public at large.

By weighing to the above views, it can be fairly concluded that an information to be construed as confidential shall have three elements, first, the nature of the information shall be confidential, second, the circumstances under which the information is shared must impose an obligation of confidentiality and, third, an authorised use of such information shall be there[34].  And, therefore it is a futile practice to establish a pre-existing relationship between the parties as it limits the scope of information that is to be construed as confidential.

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 * Advocate, Soni Associates, Ahmedabad.

[2]Coco v. A.N. Clark (Engineers) Ltd., 1968 FSR 415

[3] James H. Barron, Warren and Brandeis, The Right to Privacy, 4 Harv. L. Rev. 193 (1890): Demystifying a Landmark Citation, 13 SUFFOLK U. L. REV. 875, 877 (1979) (there is “near unanimity among courts and commentators that the Warren-Brandeis conceptualisation created the structural and jurisprudential foundation of the tort of invasion of privacy”); Ruth Gavison, Too Early for a Requiem: Warren and Brandeis Were Right on Privacy vs. Free Speech, 43 S.C. L. REV. 437, 438 (1992) (Warren and Brandeis “single-handedly created a tort”); Irwin R. Kramer, The Birth of Privacy Law: A Century Since Warren and Brandeis, 39 CATH. U. L. REV. 703, 703-04 (1990).

[4]Alpheus Thomas Mason Brandeis: A Free Man’s Life, 70 (1946) (Citing Roscoe Pound).

[5]Attorney General v. Guardian Newspapers Ltd. (No. 2), (1990) 1 AC 109, 281.

[6]Government Committee Report, Committee on Privacy, (Report 9-12-1972)

[7] Prince Albert v. Strange, (1849) 1 Mac & G 24 : 41 ER 1171.

[8]Ibid.

[9] Neil M. Richards and Daniel J. Solove, Privacy’s Other Path: Recovering the Law of Confidentiality, 96 Geo. L.J. 123 (2007), available at <https://scholarship.law.gwu.edu/cgi/viewcontent.cgi?article=2078&context=faculty_publications> last seen on 13-4-2020.

[10] Thomas M. Cooley, The Law of Torts, 508 (1st edn., 1888).

[11] (1758) 2 Eden 329 : 28 ER 924.

[12]Rijutha Mohanty, Issues Faced in Cross Border Trade Secret Licensing Agreements: An Insight into Trade Secret Licensing between India and USA, [2017] 6.1 NULJ 1, Supreme Court Cases, available at http://www.scconline.com/DocumentLink/56a9aUXa.

[13]Michael Bryan, Simone Degeling, Scott Donald and Vicky Vann, Breach of Confidence, Cambridge University Press, available at <https://doi.org/10.1017/CBO9781107445499.013> last seen on 13-4-2020.

[14]Central Public Information Officer, Supreme Court of India v. Subhash Chandra Agarwal, (2020) 5 SCC 481: 2019 SCC OnLine SC 1459.

[15] Central Public Information Officer, Supreme Court of India   v. Subhash Chandra Agarwal, (2020) 5 SCC 481: 2019 SCC OnLine SC 1459.

[16]Sandhya Organic Chemicals (P) Ltd. v. United Phosphorous Ltd., 1997 SCC OnLine Guj 23.

[17]Weiler International Electronics (P) Ltd. v. Punita Velu Somasundaram, 2002 SCC OnLine Bom 1006.

[18]D.S. Sengar, Protection of Trade Secrets and Undisclosed Information: Law and Litigation, 53 JILI (2011) 254

[19]American Express Bank Ltd. v. Priya Puri, 2006 SCC OnLine Del 638 : (2006) 110 FLR 1061.

[20]Estee Lauder Companies Inc. v. Batra, 430 F Supp 2d 158 (SDNY 2006).

[21]D.S. Sengar, Protection of Trade Secrets and Undisclosed Information: Law and Litigation, 53 JILI (2011) 254

[22] Duchess of Argyll v. Duke of Argyll, 1967 Ch 302 : (1967) 2 WLR 790.

[23]Double Eagle Hotel & Casino v. National Labor Relations Board, 414 F 3d 1249 (10th Cir 2005).

[24]Beyond Dreams Entertainment (P) Ltd. v. Zee Entertainment Enterprises Ltd., 2015 SCC OnLine Bom 4223.

[25]Exegesis Infotech (India) (P) Ltd. v. Medimanage Insurance Broking (P) Ltd., 2015 SCC OnLine Bom 3797.

[26]Villa Moda General Trading Co. WLL v. Chordia Fashions (P) Ltd., 2005 SCC OnLine Bom 110.

[27]Taprogge Gesellschaft MBH v. IAEC India Ltd., 1987 SCC OnLine Bom 345 : AIR 1988 Bom 157.

[28] 2017 SCC OnLine Del 12327.

[29] 2010 SCC OnLine Bom 1670.

[30] 2003 SCC OnLine Bom 344.

[31]A v. B Plc., 2003 QB 195 : (2002) 3 WLR 542 : (2002) 2 All ER 545.

[32] Central Public Information Officer, Supreme Court of India   v. Subhash Chandra Agarwal, (2020) 5 SCC 481: 2019 SCC OnLine SC 1459.

[33] (1990) 1 AC 109.

[34]Coco v. A.N. Clark (Engineers) Ltd., 1968 FSR 415.