Posted on October 04, 2022
When people describe a successful business, they consider the net position of the business. We see a key attribute of a successful business as having well-drafted contracts such as employment contracts, shareholders agreements and non-disclosure agreements.
Some qualities that build the foundation for a well-drafted business contract are:
- reasonableness;
- well-tailored contracts to the businesses needs and goals – there is no one-size-fits-all precedent; and
- contains intellectual property and/or confidentiality clauses (sometimes known as non-disclosure agreements).
A confidentiality clause is a legally binding agreement that obligates one or both parties to keep specific information confidential. A well-drafted confidentiality clause is beneficial in many aspects including protecting sensitive information and preventing employees from misusing business information.
Enforcement
A breach of a confidentiality clause can be categorised in one of two ways:
- Actual Breach – this is when the other party fails to abide by their contractual obligations, and they use or disclose the confidential information without express permission or authorisation; or
- Anticipatory Breach – this is when the other party demonstrates an unwillingness or inability to perform their obligations under the contract. In other words, one party cannot or will not complete their part of the agreement.
Damages are usually awarded for an actual breach, and an injunction will be awarded for an anticipatory breach. However, for an anticipatory breach claim to be successful the party seeking an injunction is required to terminate the contract before the contractual end date.
Nevertheless, business owners claiming a breach of confidence tend to have two common misconceptions:
- They are entitled to an injunction or damages as they suspect that a breach of confidentiality has occurred; and
- They are entitled to an injunction or damages if the other party forms an intention to breach the confidentiality clause. Fore example, the other party has threatened to use or disclose the confidential information.
The above examples are not sufficient to warrant a court awarding damages or an injunction. The party alleging the breach must be able to demonstrate that not only did the other party take the confidential information, but they used it without authorisation. The party alleging the breach must demonstrate that usage of the confidential information resulted in loss of commercial advantage and/or exploitation, amongst other things.
Case study
Dreamtime Supply Company (Dreamtime) and its new employees used information owned by the employees’ previous employer, Steadfast ICT Security Pty Ltd (Steadfast). Steadfast is an ICT security company that worked in partnership with Dreamtime.
Mr Peak was a general manager of Steadfast and he worked with Mr Glavonjic, a former director of Steadfast and current director of Dreamtime, to divert business from Steadfast to Dreamtime. Together they were found to have:
- exploited the good will of Steadfast;
- used Steadfast’s confidential information;
- exploited the intellectual property and business systems of Steadfast;
- taken Steadfast’s employees; and
- given Steadfast’s business opportunities to Dreamtime.
The Court held that:
- Dreamtime was liable to pay compensation of more than AUD$1.18 million;
- Mr Peak and one other employee had compensation orders made against them under the Corporations Act 2001;
- Steadfast could only recover the loss once and could not receive a windfall due to the fact that several people were involved in the action causing the loss;
- Steadfast had well-drafted employment contracts which prevented the employees from being able to defend their actions on the basis that Dreamtime was a related body corporate of Steadfast; and
- Mr Peak’s restraint clause of two years was enforced for its maximum duration.
Next steps
Having a competent lawyer draft well-tailored confidentiality clauses might be an investment, but its benefits far outweigh the problems and costs associated with a party disclosing and using your confidential information.
It is always recommended and prudent to seek a lawyer’s advice to make sure your contracts include effective confidentiality clauses that protect your business properly.
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