Confidentiality During Business Negotiations: What is Your Duty?

Legal_361649096

Entrepreneurs face many challenging decisions when growing and operating a company.  The directing minds of a company must continually evaluate business opportunities whenever such opportunities present themselves, some of which may include engaging in joint venture projects, entering into licence agreements and buying or selling company property and assets.  Making a decision about whether to pursue such an opportunity, however, is not a quick and easy feat.

The decision-making process often commences with some initial discussions between parties and some preliminary due diligence in order to decide whether to move forward.  Normally in these preliminary negotiations one or more parties disclose certain confidential information about their respective businesses.

During the initial stages of negotiations, one of the most critical considerations is to arrange for the signing of a confidentiality agreement.  In some cases (albeit infrequently), the negotiating parties may not have a confidentiality agreement in place before certain information surrounding financials, business plans and strategies, third party contracts and other confidential information has already been divulged.  If one or more of the negotiating parties subsequently decides that the business opportunity presented to them is not worth pursuing without ever having signed a confidentiality agreement, what protection exists for the party that has disclosed key confidential information regarding its business?  And even with a confidentiality agreement in place, is a disclosing party afforded any protection at common law?

Legal Framework

The Supreme Court of Canada (the “SCC”) in Lac Minerals Ltd v International Corona Resources Ltd held that the receipt of confidential information in circumstances of confidence establishes a duty of the receiving party not to use that information for any purpose other than that for which it was conveyed.

Where the disclosing party alleges a breach of this duty, the question becomes whether or not the receiving party’s use of such information is permitted.

Without a confidentiality agreement in place to set parameters for information use, it can be difficult to determine whether the receiving party is using such information in a way that is permitted.  Once it has been established that confidential information was transmitted in circumstances of confidence, the onus is on the receiving party to prove that the use of such information was permitted given the arrangement between the parties.

Where the disclosing party alleges a breach of the receiving party’s duty of confidentiality, the SCC in Lac Minerals held that three elements must be established in order to show that a breach of confidence exists: (1) that the information conveyed by the disclosing party to the receiving party was confidential; (2) that the information was communicated in confidence; and (3) that the information was misused by the receiving party to the detriment of the disclosing party.

In Lac Minerals, International Corona Resources Ltd. (“Corona”), a junior mining company, had entered into negotiations with Lac Minerals Ltd. (“Lac Minerals”), a senior mining company, with a view to establishing a joint venture arrangement for the development and financing of a mining property.  In pursuit of this goal, Corona, who had performed testing in the area, provided representatives of Lac Minerals with confidential geological findings and theories relating to the desired property.  After obtaining such information, Lac Minerals proceeded to acquire the desired property without informing Corona.  Naturally, negotiations to establish the joint venture between Lac Minerals and Corona that ensued thereafter failed.

The SCC evaluated each of the above criteria to determine whether Lac Minerals had breached a duty of confidentiality owed to Corona.  With respect to the first criterion, the SCC looked at whether the information that Corona provided to Lac Minerals was in the public or private sphere.  The SCC found that the geological findings were private and had not been published by the company.  Furthermore, the SCC found that although senior representatives of Corona were known to freely discuss Corona’s drill hole results and other geological findings with brokers, investors, and friends, the information conveyed to Lac Minerals was more extensive and detailed than what had been conveyed to the general public.  In fact, this information was revealed in order to entice Lac Minerals to enter into a joint venture arrangement with Corona.  The SCC concluded that the information that was conveyed by Corona to Lac Minerals was the “springboard” which led Lac Minerals to acquire the desired property.

With respect to the second criterion, the SCC held that one must use the “reasonable man test” to determine whether information was conveyed in confidence in the course of business negotiations.  The test states that where information with commercial or industrial value is provided to a party on a business-like basis and where there is a common objective between the parties, the recipient of such information carries a heavy burden if he seeks to repel the contention that he will not be bound by an obligation of confidence.  The information that was conveyed by Corona had commercial value and was used by Lac Minerals in its decision to acquire the desired property for itself rather than for the purpose of the joint venture.  Furthermore, the SCC held that there was a mutual understanding between the parties that the information being conveyed by Corona to Lac Minerals gave rise to an obligation of confidence.

With respect to the third criterion, the SCC found that the information conveyed to Lac Minerals was misused to the detriment of Corona.  As stated above, the information that was acquired from Corona was of value to Lac Minerals in assessing the merits of the property, a property that Lac Minerals ultimately acquired for itself.  Furthermore, the SCC found that there was an informal understanding between the parties as to how to conduct themselves in anticipation of a joint venture or some other type of business arrangement.  Although it was not made clear who would acquire the property, what was clear was that the acquisition by Lac Minerals of the desired property to the exclusion of Corona was not an authorized use of the confidential information that it received.  It was clear that this acquisition benefitted Lac Minerals to the detriment of Corona, who would not benefit from the mining property that they themselves had invested time and resources to explore.

Ultimately, the SCC determined that Lac Minerals owed a duty of confidentiality to Corona and that it breached this duty.

Further Interpretations

If one anticipates being on the receiving end of information during business negotiations, it may be difficult to decipher what information will qualify as being confidential.  In circumstances where the information being received is already in the public domain, or where it may be reasonable to assume that such information is commonly known or widely available in the industry, such information will not likely be considered confidential.  However, work performed on a publicly accessible document which results in a new process or some new outcome will in some instances be considered confidential. One further consideration is whether it would be industry practice to consider the information confidential in the circumstances.

In an Alberta case, the court stated that one factor to consider when determining whether information is worthy of protection is the extent to which measures are taken by the disclosing party to keep the information a secret.  In another Alberta case, it was found that where information that a party considers confidential is discussed openly without any mention of confidentiality, the disclosing party will have a more difficult time asserting that the information has the necessary quality for an obligation of confidence to arise.  In each instance, the analysis as to whether or not information will be considered confidential will be determined on the facts of the case. 

In order to further assess whether information was conveyed in confidence, one court set out an objective test:  the circumstances must be such that any reasonable person standing in the shoes of the recipient of the information would have realized upon reasonable grounds that the information was provided in confidence. 

There has been some inconsistency in court decisions across the country as to whether detriment is a necessary element to establish for the third prong of the test articulated by the SCC in Lac Minerals.  In its analysis in Lac Minerals, the SCC demonstrated that detriment had occurred to the disclosing party and that this was both connected to proving liability of the receiving party and aided in determining the remedy in the circumstances, thus showing why detriment was an important element to establish.  In analyzing the decision in Lac Minerals, the SCC in Cadbury Schweppes Inc v FBI Foods Ltd suggested that the concept of detriment should be interpreted broadly enough to include emotional or psychological distress that would result from the disclosure of confidential information.

In one British Columbia case, a confidentiality agreement had actually been entered into between the parties prior to information being divulged.  When the information was used by the receiving party to acquire certain mining claims, the Court of Appeal determined that the receiving party had breached the terms of the confidentiality agreement in using the information for this purpose.  Furthermore, although the trial judge was not required to analyze whether the receiving party owed a duty of confidentiality at common law to the disclosing party in these circumstances, the trial judge concluded that the information that had been conveyed to the receiving party met the criteria established in Lac Minerals.  As a result, the receiving party had also breached its duty of confidentiality to the disclosing party at common law.  The Court of Appeal agreed with the trial judge’s findings in this regard.

A duty of confidentiality will be deemed to arise where confidential information is received in confidence during business negotiations.  This duty obligates the receiving party to use such information only as permitted.  Whether or not this duty of confidentiality is breached will depend on whether it can be established that the information that was conveyed by the disclosing party was confidential, that it was conveyed in confidence to the receiving party and that it was misused by the receiving party to the detriment of the disclosing party.  Each of these elements is subject to its own examination and evaluation based on the facts of the case. Whether you are disclosing confidential information that may harm your business if such information is misused, or whether you are the party receiving potential confidential information, it is prudent to put a confidentiality agreement in place as soon as possible in order to avoid disputes such as the one in the Lac Minerals case.  This confidentiality agreement will set out the permitted use of such information so that all parties receive the certainty, protection and comfort required to move forward with business negotiations.  However, as was shown in the Minera Aquiline case, even with a confidentiality agreement in place, a duty of confidentiality may still be breached at common law where it is determined that the test outlined in Lac Minerals is met.

The content of this article is intended to provide general information to the reader and is not intended as advice or an opinion to be relied upon in relation to any particular circumstance.  For specific applications of the law to a particular set of circumstances, the reader should seek professional advice.

Jenna Rucas practices corporate and commercial law with McLean & Kerr LLP, a law firm based in Toronto.

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