Confidentiality Agreement

Why do I need a Confidentiality Agreement?

It can be vital to have a properly drafted confidentiality agreement (or deed of confidentiality) for several reasons:

1. If you have an idea which is new or innovative, it’s worth protecting.

In our current information and digital age, new and interesting ideas are a rare commodity and can be extremely valuable.

There are a lot of people that may say that it is all about the execution of those ideas, but it’s extremely important to protect those ideas at the outset from a legal perspective.

2. A written document will show that you are serious about protecting the confidentiality of your information or ideas.

It will set up your intention and your relationship with them right from the beginning.

It will mean that they are less likely to breach that confidentiality if it’s in writing (just like all legal documents).

3. Formalising and identifying the confidential information.

It makes sense to formalise that confidentiality and identify information which should not be disclosed before you tell them or implement any other documents or come to an agreement to work more together.

If they don’t agree to terms, you want to make sure that they can’t then go and disclose that confidential information further after negotiations fall through.

That is, that the provisions relating to confidentiality survive the termination of the agreement.

4. Certain information you share must remain confidential.

The digital age has also brought with it many scam artists, plus fraud and identity theft, so it is important that the other party is alerted to that fact that certain information you share must remain confidential.

You can limit who they are allowed to disclose it to within an organisation as well or just their legal and financial advisors and in what circumstances they can disclose, but that they need to notify you first or obtain your approval.

When should I use a Confidentiality Agreement?

There are some situations in which a Confidentiality Agreement may be used.

1. Commercial Confidentiality Agreement

Any commercial situation involving collaboration on projects, business ventures, mergers, investments, business due diligence or the like, where either one or both parties are sharing commercially sensitive information or ideas.

For example, working with an app developer or web developer where you would need to disclose confidential information before working out whether they can in fact do the task and in order to provide a scope and quote for the work.

2. Staff confidentiality agreement

If you are a company or business and are employing staff, the last thing you want is for staff to divulge your sensitive data, finances or operational procedures to other people.

You should ensure your staff understand the consequences of disclosing confidential information to competitors, customers or any other person may be a breach of their employment agreement.

If you are business that carries a lot of trade secrets or confidential data, a separate Confidentiality Agreement will be useful to highlight staff obligations.

3. Contractor Confidentiality Agreement

If your business is hiring a contractor, you are most likely disclosing a lot of information about your business or project.

There is a real risk that the contractor will share this information with other people in their industry (or worse, your industry) when they go on to work for a similar business.

Cases

Mckenna Freight Lines Pty Ltd v Toll Holdings Ltd & Anor [2005] WASC 57 (13 April 2005)

This is a classic scenario of where one company is considering selling its business and another company signs a Confidentiality Agreement for the purpose of conducting due diligence.

In this case, McKenna Freight gave the Toll entities information, documents and records relating to the plaintiff’s past, existing or future business or strategic plans to enable the first defendant to investigate the feasibility of acquiring some or all of the plaintiff’s business”.

The court found that Toll had not breached the Confidentiality Agreement by later using the confidential information for purposes other than the ‘permitted purpose’, namely the operation of the Toll business, because the information ceased to be confidential once Toll had entered into the sale agreement.

APT Technology Pty Ltd v Aladesaye [2014] FCA 966 (5 September 2014)

This was a Federal Court case in which an employee of APT (who was in a managerial position) dealt with clients and used the Company’s confidential information in order to develop a new business in direct competition with ATP.

The employee had signed a Confidentiality Agreement and taking the company’s property was a breach of this Agreement.

An injunction was granted to stop the employee from using his APT’s information and dealing with its clients for a period of 2 years.

What key points should a Confidentiality Agreement include?

a) A Confidentiality Agreement should clearly define who is providing the confidential information and who has an obligations to keep that information confidential – (although for an example of where the Court enforced confidentiality obligations despite this being unclear, see Futuretronics.com.au Pty Limited v Graphix Labels Pty Ltd [2007] FCA 1621 (29 October 2007));

b) The Agreement should set out the approved purpose for which information is being disclosed to the other party;

c) The Agreement should accurately identify all of the information which is to remain confidential;

d) The circumstances in which information must be kept confidential and the circumstances in which an exception may apply should be listed;

e) It is useful to set out how the confidential information should be handled and any particular security measures to be imposed;

f) The Agreement should set out the term for which the confidentiality obligations will be enforceable and the circumstances in which the Agreement may be terminated (if any);

g) There should be a provision about what happens to the confidential information on the termination of the Agreement and whether there are any obligations to destroy or return documents or other information;

h) Both parties should give warranties about their authority and capacity to enter into the Agreement;

i) Preparation of this Agreement gives the parties a good opportunity to consider whether they want to impose any other obligations such as a non-export or no reverse engineering clause;

j) The Agreement should note that damages may be an insufficient remedy for breach;

k) The Agreement should contain indemnities by the party in breach to cover any losses suffered by the other party. These can be extremely powerful.

What are the risks of not using a Confidentiality Agreement?

Nobody likes having their ideas stolen. It’s even worse if the person you disclosed your confidential information to goes away and uses it to their own advantage or financial gain.

After a matter in the United Kingdom was heard about a person who misused information obtained in confidence to gain an unfair advantage, this became known as the ‘springboard principle’ – Terrapin Limited v Builder’s Supply Company (Hayes) Limited [1967] RPC 375. Without a Confidentiality Agreement, it may be difficult to prove that the information which was taken was of a confidential nature or originated from you.

That is, it’s difficult if not impossible to assert a breach of confidentiality if you don’t have something very clear and in writing, agreed prior to the breach.

We have been approached by many individuals and businesses in the past who have lost their competitive advantage or suffered damage to their business because confidential information was disclosed or leaked.

In most of the circumstances, a lot depends on whether they had a very robust confidentiality agreement or deed of confidentiality in place and the specific wording of that, including definitions, purpose and the relevant parties.

Many that have approached us had inferior documents in place thinking that they would be covered, when unfortunately the “devil was in the detail” and the relevant section wasn’t clear enough and had the appropriate wording to cover them.

What if my Confidentiality Agreement is being breached?

The answer to this will partially come down to the wording in your Confidentiality Agreement. Once signed, the document will be a binding contract. In some cases, it may specify what happens on breach. There may also be indemnities which will be relevant if they breach the agreement and suffer losses.

Firstly, you should first contact a lawyer immediately to write to the disclosing party and put them on notice that they have breached the agreement. This can be done by way of a cease and desist letter or similar. For a serious breach, you lawyer may even recommend that you file for an urgent injunction in Court to stop the disclosure.

If you have suffered actual loss from the breach, you should speak to a lawyer about the prospects of potentially bringing litigation proceedings against the party who breached the agreement in Court.

Example

An example of significant litigation which ensued over a breach of a Confidentiality Agreement was the case between Amber Harrison (a formed executive assistance at Channel 7) and Channel 7.

Harrison had been involved in an affair with the CEO of Channel 7 at the time and had been suspected of misusing the company credit card.

Harrison was paid a sum of money to not disclose confidential information and not disparage the organisation, which she breached.

See: Seven Network (Operations) Limited and Anor v Amber Harrison [2017] NSWSC 405 (12 April 2017).