Breach of Confidence in Contracts: Understanding the Legal Implications - MMJC

Many times, we come across agreements or contracts that do not provide for confidentiality clauses. Does this mean that the Parties to the agreement are not bound to protect the secrecy of the agreement?

The principle of breach of confidence can rescue the aggrieved party in such untoward situations. This write-up expounds on this principle and the judicial precedents in this regard.

Breach of Confidence

The word “Breach” in simple words means – an act that breaks an agreement, a law, etc. The Law Lexicon defines “Breach” as a violation, infringement, or the act of breaking.1 “Confidence” refers to trust or strong belief in somebody/something.  The Law Lexicon defines “Confidence” as an extraordinary trust that involves the communication of a man’s mind to another, but trust is confined to matters of action. A breach of confidence betrays more than an ordinary share of baseness and depravity.2 Breach of Confidence in simple words means the information concerned must: have the necessary quality of confidence; have been communicated to a recipient in circumstances imparting on the obligation of confidence; and have been used in an unauthorized manner.

A breach of confidence can be resorted to by a party in the event of violation of secrecy of the contract or agreement. There lies an inherent obligation on the parties to the agreement to preserve the confidentiality of the agreement. The aggrieved party gets a right to sue the defaulting party for not observing the secrecy of the agreement.

We need to understand here that the fundamental aspect in such information is an element of confidentiality. The person sharing the confidential information trusts the other person to keep such information confidential and shares the same in good faith. Any breach of this trust and good faith will amount to a breach of the contract and shall be subject to the recourse of law.

What precisely will be confidential information will depend upon the nature and purpose of the contract and the intent of the parties. The factor of protection of secrecy will form the essence of the confidential information. Such contract will then stand as evidence in a breach of confidence.³

When the information being shared is a piece of public information, then there cannot lay a claim for breach of confidence.⁴

Governing Law

The principle of Breach of Confidence is governed by the rule of equity and not under any legislation. The Rule of Equity, in the context of confidential information, can be understood as not to allow the other person, to whom the confidential information is being disclosed, to take undue advantage of the confidential information. This undue advantage will be detrimental to the labour and intelligence put in by the person who originally possessed such Confidential Information. The communicator of the information gets a right in personam against the person who becomes aware of such information in confidence.⁵

This principle can be best explained by the decision of the High Court of Justice (“Chancery Division”) in Saltman Engineering Company Ltd (“Saltman”) v. Campbell Engineering Company Ltd (“Campbell”) (1948). In this case, Saltman and Campbell entered a contract to manufacture leather products. Saltman shared certain drawings with Campbell for the purpose of the Contract. Later, Campbell started using the drawings for his own purpose despite knowing that the drawings in his possession belonged to Saltman and were for a strictly limited purpose. The Chancery Division Judge held that though there was no contract between Saltman and Campbell to maintain the confidentiality of the Contract, Campbell’s act of using the drawings for his own purpose is a breach of confidence by Campbell.⁶

Legal Position in India

The Indian Courts have largely upheld the rule of equity in such contracts and followed the decision of English Courts. The Indian Courts have dealt heavily with any unauthorized use of confidential information and undue advantage obtained from such confidential information.

In John Richard Brady v. Chemical Process Equipments Pvt Ltd, 1987, the Hon’ble Delhi High Court followed the Saltman Engineering case principle and held that the law of breach of confidence depends on the broad principles of equity and that whoever has received information in confidence shall not take unfair advantage of it. In this case, Plaintiff made a Fodder Production Unit (“FPU”) to develop green grass as food throughout the year irrespective of the climate. The Plaintiff also entered into a confidentiality agreement with the defendant which stated that the defendant will not manufacture panels used in manufacture of FPU for anyone during the currency of the agreement nor will he disclose any confidential information details or specifications to any other person. After some days, Plaintiff found that defendant made a machine with the same design, and specifications that Plaintiff had used for developing the FPU. The Plaintiff alleged that this was a false representation of this FPU, and defendant had caused a breach of confidence by misusing the information, drawings and specifications provided by the Plaintiff. The Defendant wrongfully converted his information regarding FPU and took an unfair advantage of the Plaintiff’s work.

The Court also rejected Defendant’s argument that there were many other firms in the world that produced similar machines. The Defendant’s contention that Plaintiff only provided the defendant with the information and specifications of the thermal panels for making quotations was also not tenable. The Hon’ble Delhi High Court decided the case in favor of plaintiff citing breach of confidence by defendant in this case and restrained the defendant from producing machines made from using Plaintiff’s information of FPU.⁷

In Bombay Dyeing and Manufacturing Co. Ltd Vs. Mehar Karan Singh 2010, the Hon’ble Bombay High Court held that “a person, who obtained information in confidence, is not allowed to use it as a “springboard” for activities detrimental to the persons who made the confidential communication, it was held that breach of confidential information depended upon the broad principle of equity that he who receives information in confidence shall not take unfair advantage of it.”⁸

Any relationship involves a duty of confidence and a party to the relationship knows or ought to know that the other party can reasonably expect his privacy to be protected. Any breach of this duty of confidence will amount to breach of confidence. This inaccessibility element of confidentiality should be present in all forms of confidential information whether shared in oral or in written form. To establish any information as confidential, the following three elements are essential –

1. the information should be secret to the public at large.

2. the communication of the information should bring a responsibility of confidence.

3. there must be an unauthorized use of the information to the disadvantage of the communicator of the information. ⁹

Conclusion

From the above, it can be concluded that non-availability of a confidentiality clause in any agreement or contract shall not deprive an aggrieved party of their rightful claim of legal recourse in a dispute.

 In the event of a dispute, the aggrieved party has to prove that the disclosure of the confidential information was made for a purpose other than the intended purpose and the alleged defaulting party has used the information without the communicator’s prior consent and obtained undue advantage from such illegal disclosure.  As a relief, the aggrieved party can plead to the court for an injunction order restraining the defaulting party from using the confidential information.

However, it is prudent to have a confidentiality clause, particularly in commercial contracts. This will help to avoid any dispute between the parties to the agreement and forge strong and cordial relationships between the Parties to the agreement or the contract.

The Article is written by Nilesh Javkar – Senior Manager.

 https://taxguru.in/corporate-law/breach-confidence-contracts-legal-implications.html
Reference –

¹ Justice Y V Chandrachud, The Law Lexicon, Reprint 2006, 240

²Justice Y V Chandrachud, The Law Lexicon, Reprint 2006, 382

³Anushree Soni, Clause of Confidentiality: The Consequences in a Commercial Contract, https://www.scconline.com/blog/post/2021/01/30/clause-of-confidentiality-the-consequences-in-a-commercial-contract/#ftn5, accessed 30.6.2023

⁴ Anushree Soni & Ors., Supra

⁵Aditi Chaudhury & Ors., Supra

⁶Saltman Engineering Co Ltd v. Campbell Engineering Co Ltd (1948)

⁷John Richard Brady v. Chemical Process Equipments Pvt Ltd, AIR 1987, https://blog.ipleaders.in/undisclosed-information-ipr/ accessed 30.6.2023, Aditi Chaudhury & Ors, Supra

⁸Bombay Dyeing and Manufacturing Co. Ltd. v. Mehar Karan Singh 2010 (112) BomLR 3759

⁹Coco v. AN Clark (1968), Aditi Chaudhury & Ors. Supra