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23 March 2021
The Court of Appeal recently held that a recipient of information will be bound by a duty of confidentiality if it was reasonable for them to have made enquiries as to the confidential nature of the information and they failed to do so.(1) Travel Counsellors Limited (TCL) had appealed a High Court decision which found that it had acted in breach of its equitable obligation of confidence by obtaining and misusing a rival company's client information.
In 2016 a group of sales consultants left Trailfinders to join its competitor TCL, which operated as a franchise. Trailfinders claimed that some of its former employees had taken clients' names and contact details from its computer system and disclosed them to TCL, in breach of implied terms in their contracts of employment and equitable obligations of confidence owed to Trailfinders. Trailfinders also argued that TCL had acted in breach of an equitable obligation of confidence by adding that client information to its own computer system for use by Trailfinders' former employees in their new roles at TCL.
The High Court held that the individual defendants in this case, Trailfinders' former employees, had acted in breach of their contracts of employment with Trailfinders and that the individual defendants and TCL had each acted in breach of an equitable obligation of confidence.
TCL had encouraged new franchisees to bring their existing customer contact list with them and did not warn them about any risk of breach of confidence in doing so. TCL had added client information brought by Trailfinders' former employees to its own computer system. The judge held that at least part of that information was likely to have been copied from Trailfinders' customer database and that TCL knew or should have known that Trailfinders would have regarded this information as confidential. TCL had used client contact information that a reasonable person in a position of seniority at TCL would have been aware was likely to have been copied from Trailfinders' customer data and would reasonably have been regarded by Trailfinders as confidential.
TCL appealed this decision. TCL's most significant ground of appeal was that the High Court judge had applied the wrong legal test in holding that TCL owed an equitable obligation of confidence to Trailfinders in respect of the confidential information that it received from the sales consultants.
The Court of Appeal dismissed the appeal. The High Court judge had articulated the correct test for an equitable obligation of confidence to arise, which was as follows:
The quantity of client contact information disclosed by one of the former employees supported the conclusion that TCL had been on notice that at least some of the information was likely to be confidential to Trailfinders. TCL must have appreciated that the employee could not carry all that information in their memory, making it probable that they had copied at least some of it from Trailfinders' client database. Had TCL made enquiries in respect of this information, it would have discovered that some of the information disclosed to it by the former employees had come from Trailfinders' client database and was confidential.
There has been little authority to date on whether a business is owed an equitable obligation of confidence by a competitor business that has received its confidential information through a third party.
This judgment imposes a burden on the recipient of potentially confidential information to make enquiries as to the nature of the information where a reasonable person would do so. Whether the reasonable person would make enquiries and, if so, what the nature of those enquiries might be will be context and fact dependent
Businesses should be aware of potentially confidential information which may have been disclosed to them by a third party, such as a new employee, as they risk being liable for a breach of equitable obligations of confidence if they fail to make enquiries as to the potentially confidential nature of the information.
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