Canada: Lesson For Companies Aquiring Financing: Tort For Breach Of Confidence Cannot Be Modified By Confidentiality Agreement

The recent case Scott & Associates Engineering Ltd. v. Finavera Renewables Inc.¹ serves as a warning to many companies, in particular, technology companies that share commercially sensitive information with a perceived partner to secure the necessary funds or financing.

The Alberta Court of Queen's Bench held in this case that a party who shared commercially sensitive information with a perceived partner could not rely on a mutual confidentiality agreement or the common law breach of confidence when the confidentiality information belongs to a third party and not the party claiming the breach. Notably, the Court rejected the argument that common law breach of confidence can be modified by private contract.

Facts

In 2006, Scott & Associates Engineering Ltd. ("Scott") became interested in acquiring an Alberta wind energy project from Penn West Petroleum Ltd. ("Penn West"). After a series of offers were exchanged, Scott became the preferred potential purchaser of the project; however, Scott lacked the required funds or necessary financing for the acquisition.

Subsequently, Scott was introduced to Finavera Renewables Inc. ("Finavera") who agreed to finance the acquisition of the project. Before Scott allowed Finavera access to the information related to the acquisition, Finavera signed a mutual confidentiality agreement (the "MCA") which encompassed both Scott and Penn West's confidential information.

Prior to the acquisition of the project, Finavera and Scott attempted to formalize the terms of their relationship. While a formal contract was never established, Finavera agreed to pay Scott a fee of $600,000.00 and to hire Scott as the owner's engineer following the acquisition. In 2007, Finavera alone executed the Purchase Agreement with Scott's knowledge and consent; however, following this, Finavera selected another Canadian engineering firm as the owner's engineer for the project and failed to compensate Scott due to a breakdown of the relationship between Scott and Finavera.

Scott claimed a constructive trust over 10% of the project alleging breach of confidentiality and unjust enrichment. Scott made the argument that the parties mutually modified the elements of an action for breach of confidence by the terms of the MCA.²  Specifically, Scott claimed the parties expanded the definition of confidential information such that everything Scott gave to Finavera was protected as either Scott's "Confidential Information" or "Proprietary Data" in a breach of confidence claim. ³

Analysis

The three elements that must be established to make out a claim for breach of confidence, as set out in Lac Minerals Ltd. V. International Corona Resources Ltd.,⁴ are as follows:

1. the information conveyed must be confidential;
2. the information must have been communicated in confidence; and
3. the information must have been misused by the party to whom it was communicated to the detriment of the party who confided it.

Martin J. found that Scott's claim for breach of confidence failed for a number of reasons. First, as the information provided by Scott to Finavera was primarily Penn West's confidential information, the information did not have the necessary quality of confidence. The Court held that there is no obligation of confidence owed for the misuse of a third party's confidential information.⁵ Further, while Scott argued that the MCA operated to expand the idea of what qualified as Scott's confidential information for the purposes of a breach of confidence action, Martin J. held that the definition of "Confidential Information" in the MCA did not operate to expand the definition of confidential information under the test for breach of confidence. Martin J. held that a private contract cannot expand the law of tort or equity to make confidential
information, which does not bear the hallmarks of confidentiality, confidential when the action is one of breach of confidence and not breach of contract.⁶

Martin J. further held that Finavera did not misuse Scott's confidential information in putting forward the final offer and executing the Purchase Agreement in its name alone as the use of confidential information cannot become a misuse of information retroactively. At the time Finavera used the confidential information, it was done with Scott's consent and cooperation and, therefore, this was not a detriment to Scott at the time the final offer was made, nor at the time the purchase agreement was finalized between Finavera and Penn West.⁷

Finally, the court held that Finavera did not misappropriate Scott's business opportunity as Scott would have been unable to complete the acquisition without Finavera and had no realistic alternative partners.⁸

Significance

This case highlights the importance of ensuring a proper confidentiality agreement is in place before disclosing information to or entering into a relationship with a potential business partner. These agreements should not only outline the prohibited uses of the confidential information, but should also clearly outline the permissible uses. Further, the Court affirmed here that the terms of private contracts, including confidentiality agreements, will not be taken into account when considering the test for breach of confidence. Finally, the Court will not allow a claim for breach of confidence where the information originates from a third party source, and is not truly the plaintiff's information.

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