...and should be avoided like a punch from Israel Adesanya

By Kate Duckworth

If I had a dollar for every time someone asked me for a free “standard” non-disclosure or confidentiality agreement, I could have long ago retired.

The decision of Dobson J in Creative Development Solutions Ltd v Chorus New Zealand Ltd [2019] NZHC 2959 from the High Court and issued on 13 November 2019 highlights problems with such agreements, but still indicates the importance of having them in place and ensuring they are fit for purpose.

Clients are often reluctant to enter into such agreements. Clients who are disclosing information usually want to, however they often fear the party they are disclosing to will not want to engage with them if they are expected to sign such an agreement. Clients who are receiving information are usually reluctant to do so because they want to leave themselves free to take up the idea or concept disclosed as part of the confidential information.

These issues aside, clients often believe they are standard form, one size fits all and should therefore be free. It is important that the nature of the information and what it is to be used for is well explained in such an agreement.

Background

Creative Development Solutions provides telecommunication services and had developed a product it called ‘Smart Services Infrastructure’. Chorus too provides telecommunication services.

In February 2018, Creative, along with Marlborough District Council, met with Chorus to discuss the provision of services such as an ultra-fast broadband in the area to the Marlborough District Council.

Before providing any level of detail, Creative insisted on Chorus completing a non-disclosure agreement regulating the use that Chorus might make of any confidential information. The purpose of disclosure by Creative would be to inform Chorus sufficiently for it to decide whether it was interested in any further involvement with Creative in bidding for the Marlborough District Council work.

Creative also claimed that it was important to it that Chorus did not compete with it to provide the services to the council and that it relied on that understanding when deciding whether to share its confidential information with Chorus.

Meetings took place between Creative, Chorus and the district council. After a fourth meeting in April 2018, Creative came to believe that Chorus was showing an intention to use confidential information Chorus had learned from Creative for Chorus’s own purposes, outside the Smart Services Infrastructure initiative.

In May 2018 Creative wrote to Chorus alleging a misuse of the confidential information and proceedings were issued in July 2018.

Creative claimed that Chorus had breached that non-disclosure agreement, as well as breaching its fiduciary duties and breach of an equitable duty of confidentiality and estoppel that prevented Chorus from competing on its own behalf in the bidding process for funding for the provision of services in Marlborough, which Chorus subsequently did.

Adding fuel to the fire was an email from one Chorus employee to another:

“So how is this going to play out? We’re basically going to say that we think his design sucks and would advise everyone to avoid it like the plague. AND we have done a high level design ourselves which is much better and can be contracted for immediately if MDC [Marlborough District Council] have the cash …

"To put it more politely we could say that we have adapted his design to factor in more use of our assets …”

First cause of action: breach of fiduciary duty

Creative said its relationship with Chorus was one involving trust and confidence. Creative claimed it was dependent on Chorus to respect and act in Creative’s interests, in circumstances imposing fiduciary obligations on Chorus.

The court was reluctant to overlay a fiduciary duty over the top of what was essentially a commercial relationship governed by contract, even if one party supposedly had more commercial clout than the other. This cause of action accordingly failed.

Second cause of action: breach of confidence

Both parties called expert evidence on the nature of the allegedly confidential information used by Chorus. Chorus’s expert claimed that the information shared by Creative was in the public domain or would already have been known to Chorus or had no commercial value to Chorus.

There was no evidence of direct copying Creative’s design (both parties’ experts agreed on that point), nor direct application of any confidential information.

Because important aspects of information supplied by Creative were insufficiently specific and because of Chorus’s pre-existing industry knowledge, the judge considered it relevant to establish whether the information Chorus had received from Creative had value to it. Creative argued that, at the very least, what it had supplied to Chorus, allowed Chorus to springboard off that and Chorus was then in a better position to bid for the Marlborough District Council work.

The judge considered that a collocation of information or ideas, some in the public domain and some known to Chorus, could amount to confidential information. The real question was then said to be to what extent Chorus had used that information.

Despite acknowledging that what Creative disclosed influenced Chorus, it was found to be only in a “minor incremental” way and not sufficient to characterise any use as a springboard for Chorus. This cause of action also failed.

Third cause of action: equitable duty of confidentiality

Aside from any contractual relations, equity provides relief where the recipient of confidential information has used it inconsistently with the expectations of the owner of that information.

The judge found that if Chorus did have any equitable obligations, these had to be on the same terms as the non-disclosure agreement in this case on these facts, and accordingly this cause of action failed.

Fourth cause of action: estoppel

Creative claimed that Chorus had made statements that it had withdrawn from bidding for certain funding for the Marlborough District Council work, thereby creating a belief and expectation that it would not do so, which the judge ultimately agreed with.

Creative said it would not otherwise have disclosed the confidential information to Chorus and it had suffered loss as a result. While Chorus was said to have acted inequitably and was estopped, the judge could not find any loss because ultimately, neither party was successful in bidding for Marlborough District Council’s work. The judge found Creative to have no more than a “disappointed expectation” that Chorus would not compete with it.

Being unable to make out any material detriment from its reliance on Chorus’s representation not to compete, Creative was unable to make out estoppel.

And disappointed Creative must be, having failed to make out any of the four causes of action.

Lessons learned

Where both parties have knowledge of a certain industry then it will be harder to make out a breach because the recipient will be able to claim that it relied on pre-existing and/or industry knowledge. Even though Dobson J found that the combination of Creative’s ideas presented to Chorus could amount to confidential information, because Chorus was already knowledgeable in field, it had not necessarily drawn on what Creative disclosed.

Another recurrent problem in this field is defining the scope of the information at an early stage in a relationship, or at all. Both drafting too narrowly and too broadly are problematic depending on the state of the recipient’s pre-existing knowledge and experience.

It is fair to say that this case turned on its facts, as every confidential information case will, and it certainly highlights the risks in sharing information in order to further commercial dealings and relationships.

Kate Duckworth kate@kateduckworth.co.nz is an intellectual property lawyer and registered patent and trade mark attorney in New Zealand and Australia. You can find more at www.kateduckworth.co.nz.