The Court of Final Appeal gave its judgment in the Nam Tai Electronics v PricewaterhouseCoopers case on 31 January 2008. In a unanimous decision, the CFA concluded that PwC had breached its duty of confidentiality to Nam Tai, a former client. However, only nominal damages of HK$100 were awarded against PwC, with the issue of costs still to be determined.

Background

The underlying facts were relatively straightforward but gave rise to a number of complex legal issues. PwC had previously acted as Nam Tai’s auditors. They had also undertaken a due diligence review on Nam Tai’s behalf in respect of Albatronics (Far East) Co Ltd, in whom Nam Tai wanted to invest up to HK$70m. The due diligence report questioned both the integrity of Nam Tai’s management and the wisdom of proceeding with the intended acquisition. Nam Tai disagreed with the review’s findings.

Notwithstanding PwC’s adverse recommendation, Nam Tai proceeded to acquire a controlling interest in Albatronics. However, despite attempts to restructure the company, its board resolved in mid-1999 to put Albatronics into voluntary liquidation. PwC, along with several other accountancy firms, sought appointment as liquidators of Albatronics. At that time, PwC was advising Sony, one of the principal creditors of the troubled electronics manufacturer. In the light of PwC’s earlier due diligence review of Albatronics, Nam Tai objected to PwC’s appointment on the grounds of conflict of interest. It communicated its objection to Albatronics’ creditors.

PwC actively sought appointment as liquidators of Albatronics. In answering Nam Tai’s assertion that PwC had a conflict arising out of the due diligence review it had conducted for Nam Tai, PwC disclosed confidential information. While the fact that PwC had conducted the due diligence review was in the public domain, it was not generally known that PwC had recommended that Nam Tai should not to proceed with the acquisition of Albatronics. In the event, individuals from another firm were appointed as liquidators of the company.

This formed the background to the litigation between Nam Tai and PwC. PricewaterhouseCoopers claimed that its disclosure of confidential information fell outside the scope of its duty of confidentiality (and was therefore justified) because it was made in order to counter Nam Tai’s objection to PwC’s appointment as liquidator on the grounds of conflict of interest. Both Mr Justice Waung and the Court of Appeal accepted PwC’s argument, but Nam Tai appealed to the Court of Final Appeal.

Scope of duty of confidentiality

Mr Justice Ribeiro, who gave the main judgment in the Court of Final Appeal, acknowledged that the case concerned the limits of PwC’s accepted duty of confidentiality. In particular, the court had to decide whether PwC’s disclosure was required to protect its own interests or was made with Nam Tai’s express or implied consent.

Consent

It was a question of fact whether Nam Tai had consented to the disclosure, thereby waiving the duty of confidentiality. An objective approach was required in determining whether there had been any express or implied waiver. One way of tackling the question was to ask whether the conduct of the client was inconsistent with maintaining confidentiality in respect of the disputed communication. In cases of implied waiver, the conduct had to convey clearly the meaning of the waiver relied on.

Protection of own interests

This principle depends on the existence of an implied term permitting someone under a duty of confidentiality to disclose confidential information in circumstances where that disclosure is necessary for the business efficacy of their ordinary contractual transactions. For example, such a term would be implied so as to permit a bank to disclose details of the amount owing by a customer in a writ seeking payment of an overdraft. To that extent, it operates on a limited basis. However, it has been held to encompass a “self-defence exception”, where disclosure is permitted in order to protect one’s own interests in defending litigation or disciplinary proceedings initiated by a client or a third party (in the second case, the proceedings must relate to dealings with the client) or in pursuing a cause of action against a third party.

Application to Nam Tai

The self-defence exception could not apply in this case because:

  1. Nam Tai had not launched any legal or disciplinary proceedings against PwC, nor had any such proceedings been issued against PwC by a third party; and
  2. PwC was not seeking to establish its legal rights in litigation or other proceedings against a third party.

However, the CFA accepted that a term could be implied – either as a matter of business efficacy or of law – that Nam Tai and PwC had agreed that disclosure of otherwise confidential information could be made where such disclosure was required for the protection or furtherance of either party’s legitimate interests (“the defensive disclosure term”). However, each defensive disclosure would need to be scrutinised to ascertain whether it was, in fact, made for such purpose.

The CFA decided that PwC’s efforts at securing an appointment as liquidator of Albatronics were undertaken as part of the firm’s ordinary professional activities and therefore in pursuit of its legitimate interests. The disclosure formed part of those efforts and, for the purposes of the defensive disclosure term, should be regarded as having been made in furtherance of PwC’s legitimate interests.

But for PwC to show that its disclosure was fairly required as a defensive response to Nam Tai’s allegation of conflict of interest, it had to establish that its disclosure was in response to Nam Tai’s allegation. It was here that PwC’s position became more difficult. Even if the court ruled that the disclosure was in response to Nam Tai’s allegation, it would still be necessary to inquire whether (1) the disclosure was necessary; and (2) PwC should have taken other steps before resorting to the disclosure of confidential information. Did the disclosure exceed what was fairly required by way of self-defence?

Unfortunately for PwC, the Court of Final Appeal concluded that, in the light of the parties’ mutual dealings, the content of Nam Tai’s allegation did not justify a response in the terms of the disclosure made by PwC. The statement that PwC would have a conflict of interest if appointed was capable of bearing different meanings, some of which had nothing to do with PwC making either a positive or negative recommendation regarding Nam Tai’s acquisition of Albatronics.

Indeed, an allegation of conflict founded on a perceived impediment to PwC acting impartially as liquidator because of its possible preconceptions about past management misdeeds was an allegation that was wholly consistent with PwC having given a negative, and not a positive, recommendation. So it was a non sequitur to suggest that the disclosure that PwC had made a negative recommendation was a required response. The court came to the same conclusion when viewing the conflict of interest allegation from the creditors’ perspective, and ruled that the disclosure constituted a breach of PwC’s duty of confidentiality owed to Nam Tai as a former client.

It was agreed by both parties, though, that Nam Tai had suffered no pecuniary loss as a result of the disclosure, which explains why nominal damages of only HK$100 were awarded.

Implications

These are probably best summed up by Mr Justice Ribeiro’s concluding remarks:

“Disclosure of confidential information in the confidant’s own interests without the confider’s express consent is fraught with danger, since reliance on implied consent or upon the self-interest qualification is likely to be susceptible to challenge and subject to a degree of uncertainty.”

As for PwC’s reaction to the CFA’s decision Chris Harford, general counsel of PwC Hong Kong/ China, commented:

“Protecting the confidentiality of client information is something of great importance to PwC, and disclosing such information in any circumstances is not something we do lightly. The court recognised that, in the face of attack, it is permissible to disclose confidential information in properly defending oneself. We believed we had acted in accordance with that premise, but the court found, ultimately, that we had stepped over the line (with nominal damages being awarded). This is an important reminder to professional service firms about the care that needs to be taken in dealing with client confidential information, no matter what the circumstances.”

The author is very grateful to Chris Harford of PwC for his help over this article.