Directors are privy to lots of confidential information about their company. Company confidential documents nowadays are often circulated to the board by email rather than in hard copy form. What happens to such documents when the director leaves the company?
You might expect that the company could require the director to delete every email he ever received containing confidential information. But a recent court case shows that this cannot be assumed.
The starting point is to look at the director’s contract if one exists. A comprehensive contract will provide what’s to happen to confidential information when the director leaves the company. In this case, however, the director had a “letter of appointment” which contained a confidentiality clause but did not specifically cover delivery up of information when the appointment ended.
Sir Paul Judge had been a non-executive director of Eurasian Natural Resources Corporate Ltd (ENRC). The terms of appointment included a confidentiality obligation which applied during his appointment and after termination. The obligation restricted use and disclosure of company confidential information.
ENRC made several claims against Sir Paul after his appointment ended alleging breaches of duty. They included breach of an alleged duty to deliver up company confidential documents on termination of his appointment.
Sir Paul asked the court to strike out ENRC’s claims. The court refused to do so – except in relation to the claim for delivery up of company confidential documents.
ENRC argued that there was an implied term in Sir Paul’s letter of appointment requiring the delivery up of documents containing confidential information provided for the purposes of performing his duties as director. ENRC said the duty applied to all hard copy documents belonging to the company; and any other documents, whether hard copy or in electronic format.
Alternatively, said ENRC, a delivery up obligation should be implied as part of the director’s fiduciary duties.
The judge refused to imply a term into Sir Paul’s contract:
- If the term was so obvious, one would have expected it to be incorporated into the letter of appointment.
- There was no Code of Practice, Guidance or other evidence to suggest that such a requirement was the norm for directorships.
- The judge was heavily influenced by the practical difficulties in complying with such a duty, especially for individuals who take on multiple directorships. The difficulty was particularly acute where, as here, company documents had been sent to a number of email addresses, some personal to the director and others maintained by other private and publicly listed companies with which the director was associated. How, asked the judge, could ‘business efficacy” be achieved by an implied term to deliver up? It would potentially involve a considerable amount of work for those subject to it – to very little purpose.
Finally, the judge held that there was no delivery up obligation arising out of the director’s fiduciary duties. There was a contract between the parties and it contained provisions on confidentiality. As a rule, the general law of confidence would not impose a wider set of obligations.
The decision does not give carte blanche to an outgoing director to do as he pleases with company confidential information that he might retain after he leaves. He will still be subject to express or possibly implied duties of confidentiality as regards use or disclosure of such information.
Two competing issues arise. Companies will quite rightly be concerned that copies of sensitive information should not remain in the hands of someone who is no longer with the company. On the other hand, depending on how the information has been circulated, in some cases it may be impractical if not impossible for the director to retrieve and return it.
Companies and directors for whom this may be an issue should review their contracts and terms of appointment to check their confidentiality provisions. Your Brodies contact would be pleased to provide further advice.
On November 24, 2014