The High Court has recently considered whether a lender should be held liable for damages as a result of a breach of its duty of confidentiality owed to a customer.
From 1997 to 2007, Royal Bank of Scotland Plc (the “First Defendant”) provided banking services to Primary Group (UK) Ltd (the “First Claimant”) and its parent company, Primary Group Limited (the “Second Claimant”). At all relevant times, Direct Line Insurance Group plc (the “Second Defendant”) and the First Defendant were subsidiaries of The Royal Bank of Scotland Group plc.
The Second Defendant was a competitor to the First Claimant. The Claimants contended that, when they expressed concern about the relationship between the First Defendant and Second Defendant, the First Defendant assured them of confidentiality.
On 17 January 2006, the First Claimant entered into a Senior Facilities Agreement (the “SLF”) with the First Defendant. The First Claimant defaulted under the SLF and the First Defendant took steps to prepare reports on the First Claimant’s financial position, known as the “Medway Reports”.
It was common ground between parties that the First Defendant disclosed copies of the Medway Reports to at least one individual in the Second Defendant company, without seeking or obtaining the Claimants’ consent and that that individual used the Medway Reports at least for the purposes of advising the First Claimant.
The Claimants contended that this constituted an actionable breach of confidence by both Defendants and further contended that their information was disclosed more widely and that it was used for the Second Defendant’s own purposes.
The Defendants denied committing any breach and, in the alternative, contended that any breach sounded only in nominal damages. It fell to be determined whether the First Defendant was in breach of its contractual obligation of confidence and whether the Second Defendant was in breach of its equitable obligation of confidence.
With regards to the claim against the First Defendant, Mr Justice Arnold recognised that terms may be incorporated into a contract by written or oral agreement or conduct. He further noted that it was “common ground that a banker owes his customer a duty of confidentiality”. Viewed as a whole, the information contained in the Medway Reports was accepted by the Court to contain information confidential to the Claimants. Mr Justice Arnold readily found that the First Defendant had given the Claimants the assurances of confidentiality, had breached those assurances and was therefore in breach of contract by disclosing the Medway Reports.
Turning to the damages sought by the Claimants, Mr Justice Arnold did not find an inquiry to be warranted. Since the Second Defendant was simply providing the First Defendant with an insurance industry perspective on the Medway Reports which the First Defendant would have otherwise paid for, the Court considered a suitable measure for damages to be the value of time that the Second Defendant had in fact spent on the project. Assessed summarily, the Claimants were awarded the sum of £5,000.
With regards to the claim against the Second Defendant, the issue left for the Court to consider was whether the Second Defendant was in contravention of its equitable obligation of confidence. It was the Claimants’ contention that a reasonable person standing in the position of the Second Defendant would have appreciated that the First Defendant was not entitled to disclose the Medway Reports, or at least, would have made inquiries of the Claimants and therefore acted in breach of confidence by reading the reports and using the information contained therein to advise the First Defendant. Applying a subjective test, it was clear to the Court that the Second Defendant understood that the First Defendant was entitled to disclose the Medway Reports. Applying an objective test, the Court found that the Second Defendant was entitled to assume that the First Defendant would act consistently with its duty of confidentiality, particularly when the purpose of the disclosure was to enable the Second Defendant to advise the First Defendant. Accordingly, Mr Justice Arnold did not hesitate in finding that the Second Defendant was not in breach of its obligation of confidence to which it was subject.
The dispute between the parties highlights the circumstances in which a lender can, quite inadvertently, breach its duty of confidentiality. The decision of the High Court is a reminder to lenders that their duty of confidentiality owed to customers is a pervasive one which must be maintained at all times.
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