Confidentiality clauses are common in settlement agreements but often, at the time of drafting, little attention is placed on the terms of the clause and damages that can be claimed as a result of breach. Under contract law, the mere existence of a confidentiality clause does not guarantee a claim for damages as a result of breach of the same. In cases where a settlement agreement contains market or trade sensitive information, it would be relatively straightforward to establish loss arising as a result of breach. However, in most instances, reputational loss is the only head of damages available to an innocent party (separate from any tortious claims a party may have). Under English law assigning a monetary value to reputational loss occasioned by breach of a confidentiality clause is not a simple task.
Consider the following scenario: A and B enter into a settlement agreement, for purposes of settling a family dispute. There is a confidentiality clause in the settlement agreement, which requires A and B not to disclose to any person, the fact of the existence of the settlement agreement, or any of its terms, for a period of 10 years. A discloses the settlement agreement to the public in breach of the confidentiality clause. There are no immediate direct losses to B as a result of the disclosure, however there are various newspaper articles documenting the terms of the Agreement and the settlement reached between A and B, which concern private family matters. The newspaper articles also make disparaging remarks about A and B in the article.
B is a prominent businessman with interests in the hospitality industry and is a director of a number of public companies. B is concerned that disclosure of the settlement agreement by A will affect his reputation in the business community, and separately, his businesses (both current and future). Can B claim damages for reputational loss arising from A’s breach of the confidentiality clause in the settlement agreement?
Under English law, the position with regard to damages resulting from reputation loss has evolved over time. In the 1909 case of Addis v Gramophone Company Limited, the House of Lords, while determining whether an employee was entitled to compensation for the loss he might sustain from the fact that having been dismissed made it more difficult for him to obtain fresh employment, decided that damages for loss of reputation as a result of breach of contract are never recoverable, irrespective of whether such damages are for financial or non-financial loss.
Perhaps this notion stems from the fact that the cause of action known to the law in respect of injury to reputation is the tort of defamation. With certain exceptions, where the necessary ingredients are present, the tort of defamation provides a remedy for reputational loss, whether or not the injury to a person’s reputation causes financial loss. No proof of actual damage is necessary, and damages are at large. If, as a result of the injury to his reputation the claimant does in fact suffer financial loss, this may be recoverable in a defamation action as “special damages”.
The principle established in Addis was however liberalized in the case of Malik v Bank of Credit and Commerce International S.A.; Mahmud v Bank of Credit and Commerce International S.A.. The facts of this case are not complicated. The plaintiffs were employed by the (now) collapsed Bank of Credit and Commerce (“the Bank”). Unbeknown to them, the Bank was involved in dishonest and fraudulent activities. Following the collapse of the Bank, these fraudulent activities were discovered. The Bank’s liquidators terminated the plaintiffs’ contracts of employment on the basis of redundancy. The plaintiffs were unable to gain fresh employment because of the stigma attached to them as former employees of the Bank. They claimed damages for this injury to their reputation and consequent difficulties in finding new employment, allegedly caused by the Bank conducting a dishonest or corrupt business.
In this case, the House of Lords, while departing from the law as laid out by Addis, stated that:
- Where a breach of contract gives rise to financial loss which on ordinary principles would be recoverable as damages for breach of contract, such damages do not cease to be recoverable because they might also be recoverable in an action for defamation;
- The fact that the breach of contract injures the plaintiff’s reputation in circumstances where no claim for defamation would lie, is not by itself, a reason for excluding from the damages recoverable for breach of contract, compensation for financial loss, which on ordinary principles, would be recoverable;
- An award of damages for breach of contract has a different objective: compensation for financial loss suffered by a breach of contract, not compensation for injury to reputation; and
- There is no rule preventing the recovery of damages for injury to reputation, where that injury is caused by a breach of contract (as stated in the dicta in the case of Spring v Guardian Assurance Plc.)
Further, in his dicta, Lord Nicholls affirmed that damage to the reputation of professional persons, or persons carrying on business, frequently causes financial loss. Nonetheless, the distinction is fundamentally sound, and when awarding damages for breach of contracts, courts take care to confine the damages to their proper ambit: making good financial loss.
In summary, the principle which Malik sets out is that an innocent party can recover damages for reputational loss occasioned by breach of contract, if the innocent party demonstrates that he has suffered financial loss as a result of the breach.
The reasoning in Malik has been applied in subsequent cases relating to reputational loss occasioned by breach of contract. In Johnson v Unisys Limited, it was held that damages can only be recovered for loss of reputation where there has been consequent financial loss. In Johnson v Gore Wood (No. 1), Lord Cooke took note of the departure by courts from the decision in Addis, as the approach that is currently taken is that damages for financial loss, caused by harm to reputation, could be recovered.
Chitty on Contracts also states that damages for loss of reputation as such are not normally awarded for breach of contract, since protection of reputation is the role of the tort of defamation. However, where the breach of contract causes a loss of reputation which in turn causes foreseeable financial loss to the claimant, he may recover damages for that financial loss.