Pursuing breaches of confidentiality agreements by non-contracting parties

In its 1999 decision in Cadbury Schweppes Inc v FBI Foods Ltd the Supreme Court of Canada famously held that, as a matter of equity, a breach of confidential information can be pursued against a knowing or even innocent third-party recipient. In Gold Reserve Inc v Rusoro Mining Ltd, this authority was recently applied by the Ontario Superior Court of Justice in granting an injunction enjoining a party from proceeding with a hostile takeover bid based on obligations of confidence contained in an agreement it was not even a party to. 
Gold Reserve Inc, a mining company incorporated in the Yukon Territory, brought a motion seeking various injunctive relief as a defence to a hostile takeover bid launched by its competitor, Rusoro Mining Ltd.
In mounting its bid, Rusoro had retained the services of Endeavour Financial International Corporation. Endeavour had previously acted as a financial adviser to Gold Reserve pursuant to two successive advisory agreements between 2004 and 2008. The most recent agreement was terminated minutes after Rusoro's announcement of its bid. Both advisory agreements contained confidentiality clauses which, the court found, imposed "strict conditions" to maintain the confidentiality of Gold Reserve's confidential information. The advisory agreements also contained a negative covenant by which Endeavour agreed not knowingly to act against the interests of Gold Reserve in "a material way", as well as conflict provisions which required that Endeavour inform Gold Reserve in the "event of a potential material conflict". Gold Reserve responded that the bid could not proceed because it was tainted by Endeavour's use of confidential information belonging to Gold Reserve. 
The court granted Gold Reserve's motion. It found that there was a serious issue to be tried as to whether Endeavour had breached the express contractual terms of the second advisory agreement with Gold Reserve, as well as its implicit duties of loyalty and maintaining confidence as a professional adviser to Gold Reserve.
The court further considered that a breach of the confidentiality provisions of the advisory agreements could also support a claim for breach of confidence. It found that Gold Reserve had shown a serious issue to be tried as to Endeavour's misuse of Gold Reserve's confidential information. Notably, it stated that it was reasonable to infer that it would be "impossible" for Endeavour not to rely on the Gold Reserve confidential information in assessing the bid for Gold Reserve.
As to Rusoro, citing the authority of Cadbury Schweppes, The court noted that equitable relief can apply to third-party recipients of confidential information even where they have had no direct dealings with the owner. It went even further, holding that in circumstances where a confidence arises out of a fiduciary relationship or involves the public interest, intervention by the courts is even more warranted. In the court's view, the public interest included the "integrity of the capital markets recognized by securities laws which is promoted by enforcing confidentiality agreements".
The court considered that Rusoro was arguably liable as a knowing and willing recipient of Endeavour's services in breach of Endeavour's duties to Gold Reserve, rejecting the notion that Endeavour's principals could have "compartmentalized" the confidential information they received from Gold Reserve. In the absence of  "special measures" or "institutionalized ethical walls", it held that the reasonable presumption is that confidential information will be used, whether intentionally or not, to the disadvantage of the party disclosing it.
The court found that the nature of the harm caused by the improper use of Gold Reserve's confidential information (not only to Gold Reserve, but also to its shareholders) could not be quantified. It also considered expert evidence tendered by Gold Reserve that Rusoro might be unable to satisfy an award of damages.
The court considered that the balance of convenience favoured Gold Reserve in light of Endeavour's contractual promise not to misuse Gold Reserve's confidential information and Rusoro's knowledge of that covenant. It held that Rusoro should be bound to respect, not benefit from, Endeavour's obligations of confidence. It held that Rusoro had gained an unfair timing and tactical advantage, and that it would suffer no harm if it were to participate in an auction on a level playing field where all bidders had the same access to information.
Lessons learned
The Gold Reserve decision represents part of a heightened trend in Ontario towards the enforcement of confidentiality agreements as a matter of public policy. Recipients of confidential information should, therefore, ensure that they have institutionalised strategies in place to prevent misuse of information received pursuant to confidentiality agreements and non-disclosure agreements. In the absence of such institutionalised measures as ethical walls, restricted access procedures and the use of 'clean rooms', the court will presume that confidential information has been taken into account and used.

This is an Insight article, written by a selected partner as part of IAM's co-published content. Read more on Insight

Unlock unlimited access to all IAM content