England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE QBENF 95/1785/C

Royal Courts of Justice

Strand, London WC2

Thursday, 11th December 1997

B e f o r e :

LORD JUSTICE NOURSE

LORD JUSTICE SCHIEMANN

and

SIR JOHN VINELOTT

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DRUMMOND MURRAY Plaintiff

(Respondent)

-v-

YORKSHIRE FUND MANAGERS LIMITED

First Defendant

(Respondent)

MICHAEL HARTLEY

Second Defendant

(Appellant)

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Handed Down Judgment prepared by

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MR D WAKSMAN (instructed by Messrs Eversheds, Leeds) appeared on behalf of the Appellant Second Defendant.

MR T E SHANNON (MR W POTTS 11.12.97) (instructed by Messrs Mainman Heywood, Manchester) appeared on behalf of the Respondent Plaintiff.

MR S COLES (instructed by Messrs Davies Arnold & Cooper, London EC3) appeared on behalf of the Respondent First Defendant.

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J U D G M E N T

(As Approved by the Court)

Crown Copyright

Thursday, 11th December 1997

LORD JUSTICE NOURSE:

This is an action for breach of confidence brought by the plaintiff, Drummond Murray, in which, on 20th September 1995, His Honour Judge Kershaw QC entered judgment against the second defendant, Michael Edward Hartley, for damages to be assessed, the action as against the first defendant, Yorkshire Fund Managers Ltd. ("YFM"), being dismissed on the ground that it had made no use of the confidential information. Mr Hartley now appeals to this court. Mr Murray has not appealed against the dismissal of the action as against YFM.

Several grounds of appeal are relied on by Mr Hartley. Without objection from the parties, we have started by hearing argument on the question whether, on the facts admitted or as found by the judge, there was a breach of confidence in law, it being agreed that if that question is answered in the negative the appeal must succeed and no other question need be argued. We now give judgment on that question.

The facts can be taken mainly from the judge's judgment and many of them can be stated in his own words. In 1991, when the material events occurred, Mr Murray had for several years been involved in the purchase of companies, his expertise being in the field of marketing. At that time he and Mr Mark Fielding were on a register of people looking for investment opportunities which was maintained by Robson Rhodes, a well known firm of chartered accountants. Mr Fielding's background was in accounting, finance and management. Robson Rhodes regarded Mr Murray and Mr Fielding as being complementary to each other by reason of their different fields of expertise. In March 1991 they suggested to them that they might be interested in a buy-in/buy-out of the assets of a company called Serviscope Electronics Ltd. ("Serviscope").

At the beginning of 1990 Serviscope, which had a nation-wide depot network from which warranty and after sales service was provided to major UK manufacturers, distributors and retailers of domestic appliances and home entertainment equipment, was a subsidiary of Granada plc. However, it had been losing money and in January 1990 Granada sold all the shares in it for a consideration of £1 to a company called Computec Electronics Service and Maintenance Engineering Ltd. ("Computec"), which had been established in 1985 by Mr Michael O'Brien and whose business was the repairing of appliances and equipment of the kind serviced by Serviscope.

After the acquisition of Serviscope Mr O'Brien approached various possible sources of working capital. One of them was YFM, for whom Mr Hartley was then working as an investment manager. Over a period of about four months in 1990 Mr Hartley, on behalf of YFM, spent quite a lot of his time investigating the Serviscope business. In the end, Mr O'Brien was unable to raise money from YFM or elsewhere and on 14th February 1991 administrative receivers were appointed of both Computec and Serviscope. They advertised the goodwill of Serviscope together with the benefit of leasehold interests in its various depots. It was at that point that Robson Rhodes approached Mr Murray and Mr Fielding.

It was obvious that any buy-in/buy-out of the assets of Serviscope would have to be accomplished quickly if the goodwill of the company was to be preserved. A team was quickly put together consisting, in addition to Mr Murray and Mr Fielding, of four existing employees of Serviscope, Mr Wills, Mr Rickard, Mr Wilkinson and Mr Stimpson. Mr O'Brien himself was very keen to be included, but was regarded as a liability rather than as an asset and was therefore excluded. The initial plan was that a new company should be incorporated or an existing company acquired off the shelf, in which Mr Murray would invest £70,000 and have 20 per cent of the shares and the other five members of the team would each invest £20,000 and have 10 per cent of the shares. The remaining 23 per cent of the shares would be available as equity participation to any provider of venture capital, who would also provide the necessary working capital by way of loan. Mr Murray would be the managing director of the new company.

Robson Rhodes looked on Mr Murray and Mr Fielding as their clients and wrote them a letter dated 7th March 1991 in which they set out what they would do and what they would charge. They also prepared a fact sheet bearing the same date, which they sent within a few days to various providers of venture capital, with some of whom they were able to arrange meetings. On 13th March there was a meeting with a potential investor, whose representative told Robson Rhodes on the telephone afterwards that they did not wish to proceed with an investment and that Mr Murray gave them particular cause for concern. That was not at that stage reported to Mr Murray or Mr Fielding. Meanwhile, a business plan was prepared by the team, Mr Murray contributing to the section which dealt with marketing. The judge said:

"That section is short, but its importance is not to be measured by its length. Any provider of loan capital would obviously want to know about not only the way in which a potential borrower proposed to set about making money but also about any outlay of money on the marketing side of the business, and it does not take long to express a conclusion that little or no outlay is proposed."

The final version of the business plan was prepared by Robson Rhodes and sent to several potential investors on 14th March.

In the week commencing Monday 18th March there were several meetings with potential investors. There were meetings on 18th and 19th March, the first of which led to no interest in lending and the second which led Robson Rhodes and Mr Murray to think that there was a prospect of 50 per cent funding for the project from the investor concerned.

On Wednesday 20th March there was a meeting with YFM, which was represented by its managing director, Mr Philip Cammerman, and Mr Hartley. The business plan was discussed and also the price to be paid for the assets, which had been reduced by negotiation from the initial asking price. After that meeting Mr Cammerman spoke on the telephone to Robson Rhodes. He said that YFM liked the proposals and would seriously consider support, but had serious question marks over Mr Murray, though that was not necessarily a deal breaker. On Friday 22nd March there was a meeting in London with another potential investor. Although the judge found that Mr Murray gave his best performance at that meeting, on Monday 25th March the investor telephoned Robson Rhodes to say that they were interested in the proposal but did not feel that they could support it at all if Mr Murray was involved because they did not think that he would be an appropriate chief executive.

Also on Friday 22nd March there was contact between Mr Fielding and Mr Hartley when, as the judge found, they discussed the possibility of Mr Hartley's replacing Mr Murray as the proposed managing director of the new company and that overtures to the other members of the team began on that day and continued through the following week-end. That finding is challenged by Mr Hartley, but he accepts that its outcome does not affect the question of law. The judge also thought it far more likely that Mr Hartley, rather than Mr Fielding, initiated the proposal that Mr Hartley should become the managing director, and with it the idea that funding would be more likely to be available to a team led by him.

I proceed on the footing that Mr Hartley initiated the proposal and that he and Mr Fielding between them approached the other four members of the team over the week-end of 22nd to 24th March. Mr Cammerman's evidence was that he received a telephone call from Mr Hartley on the evening of Sunday 24th, in which the latter suggested that he might offer himself in place of Mr Murray. Mr Cammerman said that he would consult his colleagues, which he duly did, and on Monday 25th March he told Robson Rhodes that, without any suggestion or encouragement from YFM, Mr Hartley had offered to leave and get involved with the new company. Mr Cammerman told Robson Rhodes that YFM saw Mr Murray as a weak link and was unlikely to invest with him in the team, though he did not "push" Mr Hartley by saying that if the team wanted money from YFM they would have to take him. The judge accepted Mr Cammerman's evidence that he knew nothing of Mr Hartley's plan until the Sunday and then knew of it only as an idea in his mind.

On 27th March Mr Fielding told Mr Murray that he had been replaced as prospective managing director by Mr Hartley and he made Mr Murray an offer of compensation for his time and expense. Not surprisingly, Mr Murray was shocked and angered by what he heard. We were told that Mr Fielding paid him £5,000 on that or the following day. On 28th March Robson Rhodes wrote to Mr Murray stating:

"We have received notification from Mr Mark Fielding that he no longer feels able to proceed with yourself in respect of the original proposal. Regrettably we consider this brings to an end our engagement as detailed in our letter of 7 March 1991.

Giving consideration to the comments which we have received from funding institutions we are of the opinion that it is unlikely we would be able to effect the buy-in with respect to this proposal for a team headed by yourself and that it would not be in your best interests to continue with this matter."

Also on 28th March Robson Rhodes wrote a letter of engagement addressed to Mr Fielding and Mr Hartley.

Mr Fielding and Mr Hartley prepared a new business plan, in which the financial projections differed from that of the March plan. It was submitted to YFM, which agreed to invest. The purchase from the administrative receivers went through and Mr Hartley became managing director of the new company. For a time he received substantial emoluments and fringe benefits. But by the end of 1993 the company was hopelessly insolvent and was placed in receivership. Mr Hartley lost his equity investment in it of over £40,000. YFM itself suffered an irrecoverable loss of some £1.474m.

The judge found that the business plan, the information that Serviscope's assets could be purchased at below the original asking price, the sum for which they could be purchased and the fact that there was a team willing to work for and invest in the new project were highly confidential information which YFM and Mr Hartley did not know until it was communicated to them on 20th March by Robson Rhodes, Mr Murray and Mr Fielding. He also found that Mr Murray's contribution to the section of the business plan which dealt with marketing was sufficiently significant to enable him to claim that he was a co-author of the plan and, further, that he adopted the whole plan. It followed from that, as the judge implicitly found, that Mr Murray, Mr Fielding and the other four members of the team each had equal rights in the confidential information. On the other hand, there was no agreement between Mr Murray and the other members of the team as to the use to which the information might or might not be put. Indeed, no such agreement was alleged. Further, the judge accepted a submission made on behalf of Mr Hartley that there was no equitable obligation between the members of the team in relation to their individual use of the information. It is also important to emphasise that there was no allegation of a partnership between them. Furthermore, the judge rejected Mr Murray's alternative case that Mr Hartley owed a fiduciary duty to him. Mr Murray has not sought to revive that case in this court.

It follows that the case must be approached on the footing that the six members of the team were entitled to equal rights in the confidential information, in other words that they were co-owners of it, but that there was no contractual, fiduciary or other special relationship between them and that the information was not an asset of a partnership between them. That was the position as at Friday 22nd March, when, on the judge's findings, Mr Hartley started to make use of the information for his own benefit. Since the members of the team other than Mr Murray thereafter agreed to Mr Hartley's becoming managing director of the new company in place of Mr Murray, it follows that they effectively consented to Mr Hartley's using the information for his own benefit. The question is whether Mr Murray, not having agreed to the proposal and thus not having consented to Mr Hartley's use of the information, is entitled to relief against Mr Hartley.

As to the law, the convenient starting point is the judgment of Megarry J in Coco v. A.N. Clark (Engineers) Ltd. [1969] RPC 41, where, at p.47, he stated the three elements normally required, apart from contract, for an action for breach of confidence to succeed: first, the information must have the necessary quality of confidence about it; second, the information must have been imparted in circumstances importing an obligation of confidence; third, there must be an unauthorised use of that information to the detriment of the party communicating it. There can be no doubt that the first two elements were present in this case. Everything depends on whether there was an unauthorised use of the information.

Mr Murray's case, as advanced by Mr Shannon on his behalf, is that the confidential information was disclosed to Mr Cammerman and Mr Hartley at the meeting on 20th March so that it could be used, and used only, for the purpose of deciding whether YFM should invest in the venture disclosed in the business plan. Mr Shannon submits that Mr Hartley was therefore not entitled to disclose the information to anyone else nor to use it for any other purpose; he did use it for another purpose, a purpose detrimental to Mr Murray, namely to replace Mr Murray by himself as the prospective managing director of the new company.

In my opinion Mr Shannon's submissions are correct to this extent. The confidential information was disclosed to Mr Hartley so that it could be used, and used only, for the purpose of deciding whether YFM should invest in the business venture. The consequence of that was that Mr Hartley was not entitled to disclose the information to any third party . Clearly, it did not mean that he was not entitled to disclose it to the other members of the team, who had equal rights in it with Mr Murray and who, in any event, must be taken to have known it already. So his approach to them was not a breach of the obligation not to disclose it. It was, however, a prima facie breach of the obligation not to use the information for some other purpose. The question whether that gave Mr Murray a cause of action against Mr Hartley depends on what was the effect of the agreement of the other members of the team that Mr Hartley should replace Mr Murray and thus, effectively, that the confidential information could and should be used in the way in which it was used.

Mr Waksman, for Mr Hartley, relies on a line of authority starting with the decision of Lord Cranworth LC, sitting as the Court of Appeal in Chancery, in Mathers v Green (1865) 1 Ch.App. 29. That decision was approved by the House of Lords in Steers v. Rogers [1893] AC 232, where it was held that one of two joint patentees who had made use of the patented invention for his own benefit without the consent of his co-owner was not liable to account to him for a share of the profits derived from articles manufactured according to the invention. In the speech of Lord Herschell LC, in which Lords Halsbury, MacNaghten and Shand concurred, there is this passage at p.235:

"What is the right which a patentee has or patentees have? It has been spoken of as though a patent right were a chattel, or analogous to a chattel. The truth is that letters patent do not give the patentee any right to use the invention - they do not confer upon him a right to manufacture according to his invention. That is a right which he would have equally effectually if there were no letters patent at all; only in that case all the world would equally have the right. What the letters patent confer is the right to exclude others from manufacturing in a particular way, and using a particular invention. When that is borne in mind, it appears to me to be very clear that it would be impossible to hold, under these circumstances, that where there are several patentees, either of them, if he uses the patent, can be called upon by the others to pay to them a portion of the profits which he makes by that manufacture, because they are all of them entitled, or perhaps any of them is entitled, to prevent the rest of the world from using it."

Mathers v. Green and Steers v. Rogers were both decisions on the inability of one joint patentee of a patent to control its use by the other patentee or patentees. Since, as Lord Herschell LC observed, the right conferred by a patent is a right to exclude third parties from using an invention which, so far from being kept secret, is published by the patent, that might have been a ground for holding that a case of confidential information was distinguishable. However, in Heyl-Dia v. Edmunds (1899) 81 LT 579 Kekewich J applied a similar principle to a secret process and held that one co-owner could not, in the absence of contract, restrain the other from using it for his own benefit.

In that case the plaintiff claimed that he was in partnership with the defendants. The defence was that there was no partnership and that the parties were simply co-owners of the process. Mr T.R. Warrington QC, for the defendants, submitted at p.580:

"One of several co-owners of an invention, whether patented or not, can use it for his own benefit in the absence of any contract or statute; nor can he be restrained by the other co-owners."

In replying on behalf of the plaintiff, Mr P.O. Lawrence QC submitted:

"The inference is that there must be a partnership, because, if it be held to be a co-ownership, each of the co-owners, being entitled to deal with his share without the consent of the other co-owners, could destroy the value of the very asset itself."

Kekewich J found that there was no partnership and that the plaintiff and the defendants were co-owners of the process. At p.580, he said:

"What is argued on the part of the plaintiff is that this is a secret process, and that as regards a secret process of this kind, if any one of the three co-owners is allowed to use it - and if he use it I suppose he may assign it - apart from the others, he would destroy the very thing which is in co-ownership ..."

After referring to Mathers v. Green and Steers v. Rogers , the judge continued:

"Although a secret process is not strictly analogous to a patented process, because of course the patent itself discloses the invention ... and you get rid of the secrecy at once, yet there is this analogy and it is a very close one. There is no question that each owner of an invention must have the right to use it unless he is restrained by contract with his co-owners or by statute law. Now, if that is true as regards a patented invention, it is true also, it seems to me, as regards a secret invention ..."

Having discussed an argument that the right to use the process must be treated as a chattel, the judge concluded:

"It suffices for the present purpose for me to say that Lord Herschell's language appears to be applicable to this case, and that, whether you may properly speak of a secret process as being a chattel or not, at any rate there is nothing to prevent each of these co-owners of this secret process from manufacturing the materials and using the knowledge which he possesses."

The actual decision in Heyl-Dia v. Edmunds was based on the ground that the pleadings alleged a partnership and nothing more, so that the plaintiff's claim was bound to fail with the finding that there had been no partnership between him and the defendants. Strictly speaking, therefore, the observations of Kekewich J were obiter. They are not binding on this court. Nevertheless, they were the product of a reasoned consideration of arguments advanced by eminent counsel on each side. Especially significant are Mr Lawrence's acceptance that each of the co-owners of a secret process was entitled to deal with his share without the consent of the other co-owners and the judge's apparent acceptance that if he was allowed to use the process he might assign it.

On the basis of these authorities Mr Waksman submits that each member of the team, being himself entitled, as against the others, to use the confidential information for his own benefit, was equally entitled to consent to Mr Hartley's using it for his benefit in the way that he did. The effect of the consents given by the members other than Mr Murray was a partial assignment of their rights in the information to Mr Hartley, a disposition which Heyl-Dia v. Edmunds establishes that they were entitled to make. Thus Mr Murray would have had no cause of action against the other members of the team and, a fortiori, he has no cause of action against Mr Hartley.

While I believe that Mr Waksman's submissions represent a correct application of the reasoning of Kekewich J, I would not wish to rest my decision of this case on that ground alone. At the turn of the century the law relating to breach of confidence was not as well developed as it has since become. Now it might be said that a co-owner of confidential information ought to be in no worse a position than a co-owner of a copyright, as to whose rights see Powell v. Head (1879) 12 Ch.D. and Cescinsky v. George Routledge & Sons, Ltd. [1916] 2 KB 325.

It is necessary to consider the particular relationship between the parties with some care. The position was that the six members of the team got together in order to acquire the assets of Serviscope through the medium of a new company. Although there may have been an agreement or understanding as to the sums to be invested and the shareholdings to be taken if the acquisition came to fruition, with so much remaining to be agreed there can never have been a binding agreement that all the members would continue to participate and any of them could have withdrawn, at all events before a contract was concluded with the administrative receivers. Equally, the members other than Mr Murray were at liberty to decide amongst themselves that they would go ahead without him, either on their own or with others. That is what they did and, however incensed Mr Murray may have been at their conduct and at that of Mr Hartley, he was powerless to prevent it.

It is in that context that the confidential information must be considered. It came into being for the purpose of facilitating the project. Initially it belonged to all the members of the team. But if one of their number could be excluded from the project, he could not, after his exclusion, prevent the others from using the information as they pleased. To put it in another way, the information, being an adjunct of a relationship whose continuation Mr Murray was incapable of prolonging, ceased to be his property once the relationship was dissolved. On that ground I would decide the question of law in favour of Mr Hartley.

In deciding it in favour of Mr Murray, Judge Kershaw thought that the spring-board principle was applicable; cf. Seager v. Copydex Ltd. [1967] 1 WLR 923. He said:

"In my judgment the principle that once information has been communicated in confidence the recipient of the confidence can never use it as a springboard is the relevant one here. I cannot find in any of the authorities relied upon by [counsel for the defendants] which forces, or even persuades, me to the contrary.

It is, in my judgment, contrary to common sense that a recipient of confidential information should be free to take advantage of it which is manifestly unfair to one of the providers of it, even with the agreement or encouragement of other providers."

In my view the spring-board principle can have no application where, as here, the information has ceased to be confidential.

In this court Mr Shannon has adopted the judge's reasoning and argued that Mr Murray's consent was an essential prerequisite to Mr Hartley's use of the confidential information. But at every stage in his argument it has appeared clear that he could only have made it good if there had been some contractual, fiduciary or other special relationship or partnership between the members of the team. Since they were only co-owners, and only for the purposes of a project from which one of their number could be excluded, Mr Shannon's argument is bound to fail.

I would allow the appeal and dismiss the action as against Mr Hartley.

LORD JUSTICE SCHIEMANN:

I agree. Mr Murray's lack of any remedy arises from the undisputed fact that his relationship with the other five members of the original team was not regulated by contract. The arrangement between those who were planning the management buyout was a loose one which they chose not to regulate by a contract. I see no reason or commercial logic for implying equitable obligations of uncertain extent.

The breach relied upon by the Plaintiff is essentially the approach by Mr Hartley to the other five at a time when he was in possession of confidential information. Insofar as Mr Shannon

submitted that the recipient of confidential information is not ever entitled to use it for his own benefit, that submission is clearly too wide. It is commonplace for intended lenders to receive information in confidence with a view to persuading them to lend. They are clearly free to do so notwithstanding that the commercial lender in these circumstances will only lend if he thinks the loan is for his own benefit.

If Mr Hartley had said initially to the five "I offer myself as Managing Director of a new company on condition that the Plaintiff plays no part in it", that offer would not, in my judgment, have been a breach of confidence. It might or might not have led the other five to break off negotiations. What happened at that point was out of Mr Hartley's hands and in the hands of the other five. As it seems to me, the crucial question in the present case is whether those five, in entering into the arrangement with Mr Hartley, were acting in a manner of which Mr Murray could legally complain. In my judgment they were not. Mr Murray could have sought by contract to have put himself into a position where he could have restrained them from dropping him and taking someone else on board. We have no idea whether or not the other five would have been prepared to enter into any such contract. In any event they were not asked to and did not.

The essence of the Plaintiff's complaint is that Mr Murray was motivated by the prospect of seeing himself as the largest shareholder. Mr Shannon accepts that Mr Murray was at liberty to advise the five that the Plaintiff needed to go before they stood much chance of getting money. But, he submits, even if Mr Hartley had approached, or been approached by, the other five in the presence of Mr Murray, Mr Hartley was not free to accept any offer which they chose to make. I disagree.

I accept that some measure of confidence was indeed imposed upon him. But I do not accept that it is sufficiently wide to render that which he did a breach of it. It must be a common thing in management buyouts for the existing managers initially all to want to work together but then for some to work out a deal to the exclusion of others.

A different way of looking at the matter which brings one to the same result is this. Any damage to Mr Murray flows not from the request that he be removed but from the removal itself. Whether Mr Murray was removed did not depend on any decision by Mr Hartley. Insofar as Mr Hartley received any subsequent benefit this was not itself causative of any damage to the Plaintiff.

Mr Shannon faintly suggested that Mr Murray had made an investment in the project. So far as I can see none of the joint venturers had at the time of any alleged breach made any investment apart from their own time in the project. It seems that the original team agreed to pay £5,000 for the goodwill. As I understand it, in the event, the Plaintiff has never paid anything. I accept that on 26/27 March a cheque drawn on Mr Fielding's account for £5,000 may have been transferred. But this could hardly be regarded by any of the other five as having been paid on the Plaintiff's behalf and they have never suggested this.

I agree with the order proposed by my Lord.

SIR JOHN VINELOTT:

I have had an opportunity of reading the judgment of Lord Justice Nourse. I agree with it and there is nothing I can usefully add.

Order: appeal allowed and action as against the second defendant Mr Hartley dismissed; agreed minute covering all orders made to be lodged by counsel; leave to appeal to the House of Lords refused.