This article is written by Hemal Shah who is pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.

“Confidentiality is a virtue of the loyal, as loyalty is the virtue of faithfulness.”

-Edwin Louis Cole

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Introduction

When an individual or a corporation enters into an arrangement with other parties, the confidentiality clause plays a critical role. In specific, it stands out to be an important factor of service provider deals, permits, technology, job contracts, etc. The key purpose of this clause’s presence is to ensure that security and high degree of confidentiality can be preserved by the parties participating in the arrangement. It is imperative for organisations to retain a tactical advantage with the emergence of fierce competition. The topic of the confidentiality of classified information has not yet been resolved by law in India, and it is important to focus on judicial opinions dealing with such concerns. This article attempts to examine under Indian law the confidentiality covenants and their remedies for breaches.

What is a Confidentiality Clause?

Confidential information, as known by different court rulings, is any content, intelligence, information, data accessible solely to a private organisation but not to the public domain that could adversely impact the company’s business if misused or revealed. Trade secrets, such as construction practises, manufacturing procedures, consumer databases, are protected by statute. No breach of secrecy shall be deemed to reveal such information to a government representative, lawyer or court official to help with a dispute as long as the parties provide a notice of such order. Material that is in the public’s common knowledge is not treated as private

The Confidentiality clause for each business may always not be the same, it shall depend on each business to another and the parties need to demarcate about the information that shall be termed as confidential to some and non-confidential to another. With the emergence of start-ups in the country and with the advent growth of digital era, it is upon the parties to decide the confidential information, the liabilities of the breach and the remedies to be cured for the defaulting parties along with an understanding that can a non-defaulting party sue the other in case of absence of confidential information in the agreement and the recourse to the same as well. No clear outline shall be provided for either party, or any business, a clear understanding of the working of the business and its implications on loss of information can be captured by the parties.

Essentials of Confidentiality Clause

The protection of sensitive information for businesses is a pressing necessity. Though statutes have been adopted by several nations, India still lacks a legal system dealing with privacy rights. In the absence of specific laws providing sensitive information security, it is important that the information provided by both the parties are confidential. Therefore, care must be exercised when writing the confidentiality clause and the parties are instructed to do it in compliance with the qualifications set out by the courts, such as that the information should be of such commercial importance and utility that it would be adverse to the interests of the corporation if disclosed; such provisions should not constitute a restraint of trade; and information must be unknown.

However, the disclosing party may also insist on the principle of fairness, equity, good conscience and fair dealing in the absence of the confidentiality clause / agreement, even if its applicability is not unlikely. This is to preclude the publication, after the arrangement has been concluded, of any confidential information which one side has obtained from the other, or its use for its own purposes, whether that disclosure causes irreparable harm or injury.

Consequences of breach of Confidential Information

In the event of a breach of contract, a party can obtain relief by an injunction by prohibiting a third party from releasing or returning sensitive information, as well as liability or restitution for injuries allegedly suffered as a result of a breach of contract. To use these reliefs, however, the proof of breach of contract as well as the harm incurred is on the default, which, considering the existence of sensitive documents, often becomes a difficult task.

Businesses may also take advantage of clauses of the Indian Penal Code, such as Section 381 (theft by clerk or servants), Section 403 (dishonest misappropriation of property) and Section 405 (criminal breach of trust), in addition,  Information Technology Act, 2000 provisions such as Section 43A (compensation for failure to protect confidential personal data or information at the corporate level in particular) and Copyright Act, 1957 which acts as an additional recourse to the organisations

It is necessary that the following elements be identified in order to prevail in an action for violation of confidentiality:

• The information/data has all the meaning of the term confidentiality or fits within the parameter.
• The data/information was communicated to the recipient, placing an obligation of trust.
• The receiver misused the data/data for a cause other than the justification for its disclosure.

The first condition notes that the data is not in the public domain. It may be a trade secret, consumer date, method or development information for a new product (such as ingredients or formulae).

The second key determines the way in which the secret material has been transmitted to the receiving party by the disclosing party. The duty typically emerges from a contractual arrangement whereby the material is transmitted only for the reason expected to be used.

The third vital specifies that, without the consent and to the detriment of the revealing party causing harm, disability and damage, the receiving party has revealed or used the sensitive material.

The choice of remedy in a case for violation of secrecy is usually one or more of the following:

• Damages (monetary indemnity)

Typically, this involves the aggrieved party to measure, produce proof of the amount of loss and explain how the amount was measured. If the aggrieved party is not genuinely causing losses, it is entitled to collect only negligible damages and nothing more.

The infringement party has unjustly made to claw back some profit. It is possible to pray for an injunction to prohibit the group from trying to do this or to stop them from doing something under CPC in the future.

If the offence is so flagrant that an extra degree of penalty is necessary, exemplary damages.

The choice of solution will rely on the reality of each case above, if an injunction plus bring claim for damages is the ex-employee who quit the company and began a competing business on infringed records. If the former employee exits the corporation and is about to start up a rival enterprise, the permanent injunction will be the right solution. In the absence of any legal injury, this will be even safer.

The other form of solutions that any organisation or an individual can take for any possible breach is to ensure that:

• Put the employee ‘on alert’ about their ongoing duties;
• Set out any doubts or fears that the employer has about the employee violating their duties or planning to violate them; and
• The employee’s order to sign an undertaking.

Accidental breach of Confidentiality

Accidental breach of confidentiality can be taken as a recourse by the individuals or the corporations when they believe that by putting this information out, they shall neither be breaching the confidentiality clause nor harming the goodwill of the organisation or the individual. The Litmus in such scenarios is to prove that there isn’t mens rea on the part of the disclosing party. It also becomes pertinent to note here that a clear ill-will agenda is struck out. 

However, if it is proved by the non-defaulting party that, the defaulting party had knowingly and in spite of agreed to all the terms in the agreement committed such breach, the non-defaulting party can take all the relevant actions as if the breach has been purposely committed by the defaulting party.

Remedies for a breach of a confidentiality clause

In order to remedy the breach caused, it has to be divided in two parts:

1) Remediable Breach 

2) Non-Remediable Breach

The courts take the opinion that the test, in most cases, depends on making it right for the future while deciding if a violation is worthy of redress (or a ‘corrective infringement’). Therefore, the offending party shall delete (to the extent possible) the past consequences of the violation and eradicate the potential effects of the infringement.

By means of comparison, the idea of a remediable offence has been contrasted by the courts to an illness where the results of the disease will not be reversed because they have already arisen, but where the treatment is the act of subduing and suppressing the potential symptoms.

However, the courts accept that there are certain violations, such as a violation of trust, that would not be capable of redress. Similarly, by means of extrapolation, it seems likely that failure to do anything at a time stated in a contract will still be able to resolve it (by doing that thing at a later date and compensating the other party for the damage that flows in the intervening period) unless it is necessary to do that thing at a specified time.

Interestingly, if the termination clause defines a period for redress, a two-step analysis has been implemented by the courts. The first step is to inquire if the violation can be remedied (in the context mentioned above), thus avoiding the time stated in the agreement. The second move is, assuming that the violation may be remedied, to inquire if it was actually remedied at the time.

However, it can be remedied in the following manner:

1) Injunction

The plaintiff will not be demanding punitive interest in certain loss of trust situations, but would rather keep the details completely out of the public domain. This may be done by the injunction order of the court either limiting the defendant from doing something or requiring the defendant to do something. 

2) Account of Profit

A profit account is a redress that strips the defendant of the gains earned as a result of a breach.

3) Damages

Damages can be sought and compensated by the judge for breach of contract or sensitive knowledge leakage.

Defences for breach of Confidentiality

It is essential to demarcate what confidential information shall mean to the individual parties and how long can such parties treat the given information as confidential. 

In case of breach of confidentiality following resources shall be appended too:

1) If the defaulting party can prove  to the court that the non-defaulting party itself has come with unclean hands as prayer, the non-defaulting party can be barred from taking the recourse to the court.

2) If the defaulting party can prove that there was no clear demarcation in the clause mentioned in the agreement, which turned into ambiguity and even after reaching the non-defaulting party for constant clarification, such requests were turned down by the non-defaulting party

3) If the information disclosed by the disclosing party is within the exemptions of the confidentiality clause

4) If the information was necessary for the disclosing party to disclose before any judicial or non-judicial authority.

Case Laws

American Express Bank Ltd. v. Ms Priya Puri

The complainant is a financial corporation, and as head of their wealth management service for the northern area, the defendant was working with the plaintiff. The plaintiff alleged that the defendant left her job and took up work with the competition bank and used the client details of the claimant to order the complainant from their customer / customer and prompted them to transfer to the competitor bank. The complainant brought a perpetual and binding injunction against the defendant seeking, inter alia, to bar the defendant from using or revealing any information and trade secrets related to the plaintiff’s business and activities. The complainant argued that the defendant’s action represents a violation of the terms of secrecy as set out in her letter of appointment, and the defendant’s action was aimed against the consumer protection policy’s code of conduct.

The defendant categorically argued that the identities of clients, their telephone numbers and addresses are well known and that anybody can readily recognise them and that such information cannot be represented as trade secrets or sensitive information. The defendant also argued that she had formed a relationship with all her customers and collected the details from the directories of the different organisations to ask the client about the claimant when working with them. In these agreements, the bank does not have any exclusive rights, and the customers are not bound by any contractual agreements with the claimant bank. It was averred in the circumstances that the relief sought against the defendant was nothing but an effort to injunct consumers to transfer their accounts from the plaintiff and to prohibit the defendants from dealing with the customers. 

The court held that nothing had been created by the appellant that would prove that they had done enough to assert proprietary rights in the public domain for the content available. Furthermore, if the restraint is absolute or partial, unqualified or skilled, whether it is in charge of commerce, the arrangement is invalid. When the code is exhaustive on the subject protected by it, the court will not look at the test applied by the English courts. 

The permanent injunction requested by the defendant was refused.

Homag India Private Ltd v. Mr Ulfath Ali Khan & Other

The claimant was an Indian affiliate of the multinational MNC Homaga company and its business concentrated on the supply of equipment, cells and factory installations for the building industries of panel manufacturing furniture, structural parts and timber frame house construction.

As a Senior Business Engineer, the defendant (first defendant) joined the claimant’s services. The defendant was granted two promotions in the year 2009 after entering the services of the complainant’s corporation. In the course of employment, the defendant had access to the sensitive business records of the claimant. On 25.03.2009, the first defendant forwarded his resignation and begged the plaintiff to deprive him of his employment on the basis that he had earned a better position.

The complainant found that the defendant had given the second defendant many emails from an official email account containing classified material. These emails included customer information, including the revised published reports included, the status of pending offers and other technical specifics of the goods of the claimant. Subsequently, the defendant admitted this in an affidavit.

The court found that the first defendant was in collusion with the second defendant and had the intention of forming a competing private limited company in India. The purpose of the second defendant was to name the first defendant as its Indian entity’s Sales and Service Chief. Until such a corporation is set up, the first defendant will be an employee of the second defendant. It was decided by the defendants.

Accordingly, the injunction was issued to prohibit the use of data by the appellant.

Burlington Homes Shopping Pvt Ltd v. Ajnish Chibber

The claimant becomes a postal order processing provider which issues mail order catalogues dealing with many consumer goods that have been placed on the consumers of the applicant’s select list. For a number of years, the complainant has built a directory of clients / customers database, spending a large amount of money and resources. It was averted by the complainant that by going into a similar mail-order shopping company, the defendant had developed himself as a rival when severing his partnership with the complainant. The defendant managed to procure a copy of the database and otherwise guarded the secret of the plaintiff and began using it to create a partnership with the customers of the plaintiff. The appellant requested, against this, a perpetual injunction against the defendant.

All the content case averments were rejected by the defendant on the basis that the said database was neither created by the claimant nor has any copyright therein. Furthermore, the claimant argued that it had independently created its own database and that its use did not represent any violation of the applicant’s copyright. “The court ruled that” the deciding factor in determining whether the copyright of another person has been infringed is to see whether the impugned work is a slavish reproduction and copy of the work of another person or whether it carries the appearance of the labour and efforts of the author itself.

“The court ruled that” the deciding factor in determining whether the copyright of another person has been infringed is to see whether the impugned work is a slavish reproduction and copy of the work of another person or whether it carries the appearance of the work and efforts of the author himself.

As the evidence given by the appellant is compared with the data present on the floppies recovered from the defendant’s custody, it is discovered that there were a large number of entries comparable word by word, line by line, and even room by space.

An appeal by the appellant for the grant of an injunction was permitted.

Absence of Confidentiality clause -Recourse in these situations

Indian courts have generally followed the law of equity that, even in the absence of a contract, a person obtaining sensitive information in trust should not take undue advantage.

In the case of John Richard Brady v. Chemical Process Equipment Private Limited (‘Brady Case’), the Delhi High Court ruling is perhaps one of the first cases that, in the absence of a contract, addresses the concepts of secrecy obligations. The Saltman Engineering Case was pursued by the Delhi High Court and held that “the law on this subject does not depend on any implied contract. It depends on the broad principles of equity that who has received information in confidence shall not take unfair advantage of it“. The Delhi High Court found it to be in the interest of justice to restrain the defendants from abusing the know-how, specifications, drawings and other technical information regarding the plaintiff’s machine “which was entrusted to them under express condition of strict confidentiality, which they have apparently used as a ‘spring-board’ to jump into the business field to the detriment of the plaintiffs.“

The Karnataka High Court made similar findings in the case of Inphase Power Technologies v. ABB India Limited, quoting the following observations from Lord Greene: 

“If a defendant is proved to have used confidential information, directly or indirectly obtained from a plaintiff, without the consent, express or implied of the plaintiff, he will be guilty of an infringement of the plaintiff’s rights.“

It is clear that courts in India have generally followed the method taken by the English courts and, even in the absence of a deal, have tried to secure sensitive information. However, in some circumstances, Indian courts have pursued additional conditions to apply the law and there have been nuanced variations in the approaches of the different High Courts. It is obvious that we probably haven’t heard the last word on this yet.

Conclusion

The importance of Confidentiality and its protection is not only important but mandatory since a lot of the individuals and organisations goodwill depend on such information that is passed to the parties for their speedy and smooth conduct of business.

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.