Case update (3):  Confidential information – Accept with care

Summary:  What is the correct legal test to decide if an employer owes an obligation of confidence when receiving information?

The Court of Appeal held that the correct test is whether a reasonable person in the position of the recipient would have notice that the information, or some of it, may be confidential to another party (Travel Counsellors Ltd v Trailfinders Ltd, available here).

Background:  It is an implied term of an employment contract that an employee owes a fiduciary duty and good faith to their employer. This includes an obligation on the employee to use the employer’s confidential information for the purposes of their employment with the employer. The duty of good faith includes an obligation not to disclose confidential information to a competitor.

An equitable obligation of confidence also exists for both the employee and the employer. This is imposed whenever a person “receives information he knows or ought to know is fairly and reasonably to be regarded as confidential”. These duties and obligations apply even if there is no written restriction dealing with such matters following the end of their employment.

Facts:  In 2016, a number of employees left Trailfinders and entered into franchise agreements with Travel Counsellors Ltd. (TCL). TCL expected and positively encouraged new franchisees to bring customer contacts with them, without warning of the risks of breaches of confidence. The ex-employees noted down lists of Trailfinders’ customers before they left their employment, including email addresses and contact numbers. They then transferred these details to TCL’s database.

High Court decision

In March 2020, the High Court found that TCL had breached its equitable duty of confidence by using the information brought to it by the ex-employees for the benefit of its own business. The Court held that a reasonable person in the position of TCL’s CEO would have been aware that at least part of the information provided by the ex-employees would have belonged to Trailfinders, and was confidential customer information. TCL did not ask the ex-employees where the information had come from and showed no desire to find out.

TCL appealed the decision.

Court of Appeal decision

TCL argued that the High Court had not applied the right legal test to determine whether TCL owed an obligation of confidence to Trailfinders. TCL argued that it could not be liable just because a reasonable person would make enquiries as to whether some part of the information it had received was confidential.

The Court of Appeal dismissed the appeal.

The Court of Appeal held that the test to apply is whether a reasonable person in the position of the recipient would have notice that the information, or some of it, may be confidential to another party.  If it would, a reasonable person’s response should be to make enquiries. If the recipient did not do so, obligations of confidentiality would arise.

Here the circumstances were such that TCL was held to be on notice that the new franchisees may be bringing Trailfinders’ confidential information with them.  Particularly given how it received the information (for example, the quantity of information and the invitation to bring old customer contact lists). TCL should then have made further enquiries. By failing to do so it became liable too for the breach of confidentiality.

Implications:  This case emphasises the need for ex-employees and new employers to be aware of their implied duties and obligations of confidence. Just because there is no written restriction to employees’ activity following the termination of their employment, it does not mean they are able to do as they wish. For employers, if you become aware a new employee is using confidential information from a previous employer to carry out their duties, you must make reasonable enquiries and you must not use this information for the benefit of you as the new employer.

It is possible that the risk could be reduced by the employer/recipient’s inclusion of warranties in the employment contracts that information is being provided lawfully. However, in practice, such warranties would be limited to the financial resources of the particular employee.