Dealpoint - Exclusivity and Confidentiality Agreements
A recent Privy Council decision suggests that in the future
courts may be more willing to award significant damages against those breaching
exclusivity and confidentiality agreements. The decision should be of note to those
engaged in corporate transactions of all descriptions, where entry into such agreements
is a common precursor to negotiations.
The Facts
The case of Pell
Frischmann Engineering Ltd v Bow Valley Iran Ltd & Others concerned a proposed
joint venture (in the mid-1990s) for the development of an off-shore oil field in
Iran. The parties were hoping to conclude a development contract with the National
Iranian Oil Company (NIOC). PFE had the original contract with NIOC and as part
of their joint venture arrangements Bow Valley (BVI) entered into a confidentiality
and exclusivity agreement with Pell Frischmann (PFE) in which BVI agreed to only
work on the project exclusively with PFE, not to approach NIOC directly without
PFE’s permission and to keep certain information confidential.
The joint venture ultimately broke down and
NIOC refused to deal with PFE. BVI went on to conclude a contract with NIOC for
the development of the oil field without PFE’s involvement or consent. PFE
sued BVI for breach of the confidentiality and exclusivity agreement. The matter
was litigated before the Jersey Counts where it reached the Jersey Court of Appeal.
On appeal it was referred to the Privy Council in the UK who ruled that PFE were
entitled to damages of $2,500,000 (USD).
Damages for Breach of Exclusivity and Confidentiality Agreements
The standard method of assessing damages for breach of
a contract, such as an exclusivity or confidentiality agreement, is to determine
the sum of money which will put the claimant in the position he would have been
in had the contract been performed. This means that damages for some breaches of
contracts can be negligible, because the party bringing the claim is in fact no
worse off as a result of the contract being breached.
This might well have been the case in Pell Frischmann.
Following entry into the exclusivity agreement PFE’s negotiations with NIOC
went badly off course, such that by the time that the agreement was alledged to
have been breached PFE had no prospect of reaching a deal for the development. Indeed
the Privy Council stated in its judgement that PFE had “irrevocably become
persona non grata with NIOC.” Therefore PFE had lost nothing
by BVI contracting with NIOC in breach of the exclusivity terms, because even if
BVI had observed those terms PFE could not have exploited the relationship. As such,
using the standard measure of assessment the damages might have been very limited.
However, in this instance the court resolved to award what have become
known as Wrotham Park damages (from the case of Wrotham Park Estate
Company Limited v Parkside Homes Limited). Wrotham Park damages
may be awarded in certain limited cases, usually where negative obligations have
been breached. The case of Wrotham Park concerned a breach of a restrictive
covenant, where the defendant built houses on a plot of land without obtaining consent
from the plaintiff. There was no measurable reduction in the value of the land with
the benefit of the covenant, but rather than require the houses be demolished the
court awarded damages representing “such a sum of money as might reasonably
have been demanded by the plaintiffs from [the defendant] as a quid pro quo for
relaxing the covenant.”
As such, an award of Wrotham Park damages involves the court conducting
a hypothetical negotiation between the parties over a price for the release of the
relevant contractual obligation. The court will then award damages against the party
in breach equivalent to the sum it believes the other party would have accepted
to give up its rights.
For the purposes of this hypothetical negotiation the court will assume
that both parties will act reasonably and the fact that in reality one or both parties
would have refused to make a deal is irrelevant.
The court will also
consider the extent to which it should take account of events that occurred after
the hypothetical negotiation would have taken place, for example, how profitable
the outcome has proved for the contract-breaker. In Pell Frischmann the
Privy Council felt that in cases where there had not been anything like an actual
negotiation, the court was entitled to look at the eventual outcome and consider
whether that provided a guide as to what the parties would have thought at the time
of their hypothetical bargain. In Pell Frischmann there had been actual
negotiations which showed that the parties had expected that the contract with NIOC
would be much more profitable than it ultimately proved to be and the Privy Council
factored this into its assessment of damages.
Is the case binding?
The Judicial Committee of the Privy Council is (amongst other things) the
court of final appeal for UK overseas territories such as Jersey. Although Privy
Council decisions are not binding on courts in England and Wales the judges are
usually (and were in
Pell Frischmann) the same judges who sit in the Supreme Court (formerly
the House of Lords) and therefore its decisions are highly persuasive.
Implications for transactions
Although confidentiality and exclusivity agreements are commonplace in
corporate transactions, legal advisers will often stress to their clients that enforcing
them in practice can be very difficult for a number of reasons. These include the
fact that once breached the wrong cannot be undone, and the fact that, as outlined
above, it can often be difficult for the wronged party to demonstrate any loss in
the event of breach.
