Express good faith clause and competing businesses
Health & Care Management v Physiotherapy Network [2018]
Express ‘good faith’ clauses are becoming much more common in commercial contracts governed by English law. Some like the principle they reflect whilst others feel that they introduce an element of uncertainty. Here is an example of a good faith clause coming to the rescue in circumstances where contract drafting on a particular topic was otherwise deficient.
Facts:
The High Court, in the context of a business Referral Agreement, considered the relationship between an express good faith clause and a confidentiality clause. HCML provided services to insurance companies by managing referrals to physiotherapy clinics. HCML had a panel of physiotherapy providers of which TPN was one. TPN was in fact a network of physiotherapy clinics, the largest such network in the country. The parties entered into a so called ‘referral agreement’. Under the Referral Agreement TPN was obliged to perform certain physiotherapy services using its network in return for which it got paid certain fees. The Referral Agreement provided that HCML "anticipates making circa 700 referrals per month to TPN". However, interestingly, there had been a forerunner ‘Pilot Agreement’ which contained a virtually identical commitment albeit set at a much lower level but which expressly concluded with the words “"but there are no guaranteed minimum volumes". These words did not appear in the Referral Agreement entered into following the Pilot. TPN sought to argue that the omission of these words was critical and indicated an intention that the referral wording was, despite its wording, intended to be binding.
The Referral Agreement also included the express commitment by HCML that it "shall act in good faith to TPN at all times".
The Agreement contained a confidentiality clause in the following terms “HCML and TPN will keep confidential all information of the other Party obtained under or in connection with this Agreement (including but not limited to any and all information obtained by TPN in respect of other HCML suppliers, HCML's supply chain and HCML's commercial arrangements with its other suppliers) (the "Confidential Information") and will not disclose any of that information to any third party without the prior written consent of the other.
HCML at some point decided to establish their own network of clinics. As a result the number of referrals made to TPN dwindled to pretty much zero. TPN argued that this was a breach of the ‘commitment’ to make referrals, a breach of the good faith undertaking and /or misuse of TPN's database of clinic information and/or TPN's confidential information.
HCML claimed that it had put together its own physiotherapy clinic network from ‘scratch’ although the judge rejected the evidence on this point instead holding that detailed information had been requested from TPN about its own network under false pretences.
Decision:
The judge held that HCML had breached the good faith clause. It set up a rival business and obtained and used TPN's database (consisting of a list of clinics and its leading professionals, number of referrals made and pricing structures) to assist with this, it actively diverted referrals away from TPN, it misled TPN about the rival business' target market and it did not tell the truth about using TPN's database when confronted. The judge noted that the act of covertly using TPN's database to set up a rival business was probably sufficient by itself to amount to a breach of the good faith clause. The judge however rejected the claim that HCML's use of TPN's database to set up the rival business was a breach of the confidentiality clause because the confidentiality clause only restricted the disclosure of confidential information and did not restrict its use. In reality there had been no disclosure.
The case is also noteworthy for an interesting discussion about when information which is essentially in the public domain when collected together can constitute confidential information. The Judge repeated a statement from an old 1979 case in which it was said “something that has been constructed solely from materials in the public domain may possess the necessary quality of confidentiality: for something new and confidential may have been brought into being by the application of the skill and ingenuity of the human brain”. However, he ultimately concluded that it is very difficult for a collection of publicly available information, by itself, to have the necessary ‘quality of confidence’.
TPN's database of information related to its network of physiotherapy clinics was protected under the Database Directive and HCML had infringed TPN's rights in it by extracting a substantial part of it on several occasions.
The Court said that whilst earlier draft versions of contracts are not admissible as evidence when interpreting a contract, a prior binding agreement between the parties is and could be used to shed some light on the second contract. However, a note of caution was sounded and it was made clear that changes in the wording, whilst illuminating are not necessarily conclusive. The Court found that the wording of the referral clause (specifically, the use of "anticipates" and "circa") did not create a contractual obligation on HCML to make any particular number of (or indeed any) referrals. The Court rejected the argument that the referral clause was binding ‘to within a reasonable tolerance level’ i.e. it required ‘around’ 700 referrals per month. The Court said that such an interpretation would have made it impossible to determine at what level of referrals HCML would have been in breach of the Agreement.
Points to Note:
This case provides an example of where an express good faith clause may rescue drafting deficiencies in other express contractual provisions. Were it not for the express good faith clause, TPN's case in relation to the misuse of its data would have failed completely.
It is also a reminder to ensure that confidentiality clauses are drafted carefully to cover both unauthorised disclosure and misuse of data for an unauthorised purpose.