The High Court has recently provided guidance on obligation, good faith and confidentiality clauses in a case involving the use of a contracting party’s data to help establish a competing business.
Health and Case Management Limited (HCM) is a company that manages referrals to physiotherapy clinics and The Physiotherapy Network Limited (TPN) is a provider with a nationwide network of physiotherapy clinics. HCM and TPN entered into a referral agreement whereby HCM referred patients to TPN in return for fees.
In 2011, HCM started to build its own network of physiotherapy clinics and in 2012 HCM asked TPN for information from its database of clinics, indicating that it wanted the information in order “to develop a geographical pricing model”. TPN willingly provided the information, unaware that HCM was building its own clinic network. From late 2012 until 2014, the number of referrals made by HCM to TPN reduced, then ceased completely. TPN claimed that HCM had used its database to recruit clinics to its own network.
HCM sought a declaration that it had not acted in breach of their agreement. TPN counterclaimed, alleging that HCM had (i) breached the terms of the contract, (ii) infringed TPN's database rights, (iii) committed passing off, (iv) acted in breach of confidence and (v) breached its obligation of good faith.
Was there a breach?
Breach of contract:
Clause 2.3 of the referral agreement stated: "HCM anticipates making circa. 700 referrals per month to TPN” (emphasis added). The court found that this clause had not been breached – the word “anticipates” was inconsistent with any sort of binding commitment and the use of “circa” only strengthened that conclusion.
Infringement of Database Right:
The content of TPN’s database attracted protected from Article 7(1) of Directive 96/9. The provision of data to HCM on a number of occasions and the subsequent use by HCM of this data amounted to an extraction of a substantial part for the purposes of Article 16(1) and (2). The court rejected HCM’s contention that TPN had consented to the acts of extraction as HCM’s explanation for the request for data had been untrue; if HCML had told TPN why it wanted the information, TPN would never have provided it. The court decided HCM had infringed TPN's database right.
Breach of Passing off:
TPN failed to demonstrate any of the essential elements of the tort of passing off. In particular it had produced no evidence of deception or confusion.
Breach of Confidentiality:
Clause 14.1 of the referral agreement stated that “HCM and TPN would keep confidential all information of the other party obtained under or in connection with the agreement… and will not disclose any of that information.”. This clause therefore restricted disclosure of the confidential information, but did not purport to restrict use. As the information held by HCM was not actually disclosed to third parties, the court decided that there was no breach of clause 14.1.
Breach of Good Faith:
Clause 3.1 of the referral agreement stated that “HCM shall act in good faith towards TPN at all times”. The court considered HCM to have breached this obligation of good faith by giving a dishonest reason for its request for data. The court considered HCM to have failed to adhere to the spirit of the contract, to observe reasonable commercial standards of fair dealing, to be faithful to the agreed common purpose and to act consistently with the parties' justified expectations when entering into the contract. In addition, it had acted in an underhand and exploitative manner by setting up a rival network whilst continuing to benefit from a commercial relationship which TPN would probably have terminated if it had known HCM's true intentions.
Points to note
This case provides useful guidance on how the courts determine whether parties have acted in good faith i.e. whether they have adhered to the spirit of the relevant agreement, observed reasonable commercial standards of fair dealing, whether they were faithful to a common purpose and whether they acted consistently with the parties’ justified expectations. It also emphasises the importance of careful attention to the drafting of obligation and confidentiality clauses. Obligation clauses should accurately reflect both parties’ intentions and provide appropriate remedies if these obligations are not met. TPN’s breach of confidence claim failed due to poorly drafted confidentiality provisions - confidentiality clauses should cover both the disclosure AND the misuse of confidential information.