Arbitral Tribunal’s ruling on a breach of confidentiality obligations

Background

A FAI arbitral tribunal recently rendered an award in a cross-border dispute where the tribunal had to assess the interplay between the contractual confidentiality obligations binding on the parties, on one hand, and the respondent party’s alleged right to disclose confidential information to third parties for the purposes of pleading its case in the arbitration, on the other hand. The key elements of the dispute can be summarized as follows:

Companies A and B, having their registered offices in different EU countries, entered into FAI arbitration proceedings seated in Finland. Both parties were represented in the proceedings by Finnish counsel. The arbitral tribunal was composed of three members: the two party-nominated co-arbitrators were of different nationalities (both, however, with a civil law background), while the presiding arbitrator appointed by the FAI (upon joint nomination by the parties) was a Finnish citizen.

Claimant A argued, among other things, that respondent B had violated certain confidentiality obligations set out in clauses 23.1 and 35.3 of the two contracts (hereinafter together the “Contracts”) based on which A had commenced the arbitration and that were governed by Finnish substantive law. A requested inter alia that the Arbitral Tribunal (1) declare that B has breached its confidentiality obligations set out in said contract clauses by providing third parties X and Y with confidential information, and (2) order B with immediate effect to cease and desist from disclosing confidential information to any third party to the extent such disclosure breaches clauses 23 and 35.3 of the Contracts.

Claimant A’s position

A claimed that B had divulged confidential information to A’s competitor X e.g. by providing X with A’s Statement of Claim filed in the arbitration. B had done so in order to receive an expert opinion from X that B could use in the proceedings against A. In addition, B had requested another company Y to evaluate A’s pricing and, to that effect, disclosed confidential information to Y.

A contended that already the mere fact that, through B’s unjustified actions, key market players had gained knowledge of the ongoing major arbitration proceedings between A and B had a detrimental effect on A’s business. According to A, B had not only provided A’s competitors with knowledge of the existence of the dispute, but also of key issues relating to A’s business strategy, financial standing and pricing. For example, the Statement of Claim provided to X included a detailed overview of A’s pricing principles, verified the entire cost structure of A’s tender and its pricing strategies, and specifically divulged detailed pricing. Furthermore, it contained explicit information on the financial situation of A and of its capabilities to continue its business operations. Such information was certainly of interest to A’s competitors and could be used to the clear disadvantage of A when tendering for future projects.

A alleged that B’s conduct amounted to a wilful breach of its confidentiality obligations under the Contracts. The confidentiality provisions of the Contracts unequivocally prohibited disclosure of any confidential information to any third party. Despite having had every opportunity to seek an expert opinion from an independent and neutral third party, B had deliberately chosen to disclose confidential information to A’s direct competitors, thereby causing A immense harm and damage.

A asserted that there was no legal justification for B’s deliberate disclosure of confidential information. Firstly, none of the third parties that B had contacted were entitled to receive confidential information pursuant to clause 23.1 of the Contracts. Secondly, none of the disclosed confidential information fell under the exclusions set out in clause 23.2. For example, detailed information on A’s pricing structure and the arbitration was certainly not in the public domain prior to B’s disclosure, and no mandatory law required B to disclose such information. Thirdly – and contrary to what B suggested – B had no legal justification for disclosing confidential information to A’s competitors in order to “pursue its legal rights” in the arbitration. No such exemption was found in clause 23 of the Contracts. In fact, the purpose of clause 23 was to protect against the very situation that now had occurred. B could have pursued its legal rights in the arbitration while still complying with its contractual confidentiality undertakings. B had the burden of proving its allegation that it was allowed to disclose confidential information despite specific contractual wordings to the contrary.

Respondent B’s position

B denied the relief sought by A. According to B, the confidentiality clauses invoked by A had been replaced by a separate Non-disclosure agreement between the parties under which only A was obliged not to disclose information; in other words, the confidentiality undertaking was one-sided and binding only upon A.

Further, B argued that it was a fundamental right of any party to a dispute to have a fair opportunity to present its case. This included, among other things, a party’s right to choose witnesses and experts at its discretion. Due to the nature of the present dispute, the persons with the best knowledge of the issues at hand were quite naturally also active in the same industry and, consequently, A’s potential competitors. B could, of course, have opted to hire consultants who provide expert opinions generally on any industry and on any issue, but such testimony hardly would have provided any real insight. In any event, B had taken appropriate measures to ensure that only the necessary information needed by the expert had been disclosed, and that such information was not disclosed beyond the group of persons necessary for the purposes of preparing the expert opinion for the arbitration proceedings.

The Arbitral Tribunal’s findings

The Arbitral Tribunal first noted that clause 23 of the Contracts included detailed provisions outlining the limits of the parties’ confidentiality obligation as well as specific exclusions to it. According to clause 23.1, confidential information “shall mean any technical, financial and commercial or other confidential information disclosed by either PARTY to the other PARTY under this CONTRACT”. Clause 35.3, on the other hand, expressly provided that “any dispute, arising out of or relating to this CONTRACT, including the possibility or existence of the proceedings themselves, oral statements made during the course of proceedings, documents and other information submitted by the PARTIES or prepared by the arbitrators and the final award shall be deemed CONFIDENTIAL INFORMATION.”

The Arbitral Tribunal then noted that B had invoked clause 23.8 (under the heading “Confidentiality period”) of the Contracts, which first specified that the duration of the confidentiality period under clause 23 was five years, and then provided for the superiority of the separate Non-disclosure agreement over the confidentiality obligations under the Contracts. The Arbitral Tribunal found it unconvincing that this exception under the heading “confidentiality period” could nullify all obligations under clause 23 of the Contracts, thereby leaving A’s confidential information effectively without any protection; also, it was very unlikely that A had intended to agree to this. Moreover, the Arbitral Tribunal pointed out that the terms and conditions of the separate Non-disclosure agreement prevailed only in case of conflict, and it was questionable whether an obligation for B to keep confidential A’s business secrets that B had assumed only after the execution of the Non-disclosure agreement could be deemed to constitute a case of conflict with the unilateral confidentiality obligations that the Non-disclosure agreement imposed upon A.

The Arbitral Tribunal ultimately held that the confidentiality obligations pursuant to clauses 23 and 35.3 of the Contracts were valid and binding on both parties, that the information B had provided to X and Y prima facie qualified as confidential information in the meaning of clause 23 and – in any event – under the provisions of clause 35.3, and that the disclosure of this information did not fall under the exclusions defined in clause 23.2. For example, B had divulged information about the existence of the present dispute and arbitration proceedings as well as on A’s financial difficulties. Whether or not the information regarding A’s pricing and pricing principles fell under the definition of “confidential information” set out in clause 23.1, it certainly fell under the prohibition contained in clause 35.3.

As for B’s assertion that it had merely exercised its fundamental right to have a fair opportunity to present its case and to use the experts of its own choice for its defence in the arbitration, the Arbitral Tribunal acknowledged the fundamental nature of said right as such. However, considering that the parties had specifically agreed under clause 35.3 of the Contracts to keep the arbitration proceedings and all materials submitted in the course of the proceedings confidential – without granting in the provision any exceptions for the parties to exercise the fundamental right to choose their own witnesses and experts as they deemed fit – the scope of application of the defence invoked by B had to be narrow, lest said clause 35.3 be devoid of any meaning. Therefore, the Arbitral Tribunal found it necessary to assess whether it had been absolutely necessary for B to disclose the existence of the proceedings as well as the materials to A’s competitors X and Y, or whether B could have accomplished the same goal by other, less damaging means.

Based on careful consideration of the arguments advanced by each party, the Arbitral Tribunal concluded that B could have acquired credible expert opinions from neutral third parties, or without disclosing the content of the dispute. Also, B could have requested a price comparison without disclosing A’s pricing information to its competitors. The fact that B had shown to have taken precautions in mitigating the effects of its actions by limiting the information that was disclosed, and by requiring non-disclosure commitments from the third parties to whom the information was divulged, was not sufficient to release B from the liability for a breach of its contractual confidentiality obligations.

To sum up, the Arbitral Tribunal rejected B’s defences and granted the relief sought by A, declaring that B had breached its confidentiality obligations set out in clauses 23 and 35.3 of the Contracts by providing X and Y with confidential information and ordering B with immediate effect to cease and desist from disclosing confidential information to any third party to the extent such disclosure breaches said contract clauses.

Reported by Mika Savola
Chair, FAI Board

Posted in FAI cases |