Canada: Cruise For Damages For Breach Of Confidentiality And Good Faith Obligation

Last Updated: March 19 2012
Article by Thora A. Sigurdson

We all know that, where applicable, it is important to take care in drafting confidentiality, non-competition and non-solicitation terms in employment, contractor and other agreements. A recent case in British Columbia, Cruise Connection Canada v. Cancellieri (PDF), reminds us of the value of having a "duty of good faith" clause. It also illustrates how damages for the future use of confidential information will be calculated.

The Facts

In Cruise Connection, a number of sales representatives left Cruise Connection and started their own business. Before they left, the sales representatives copied the company's customer data base. The data base contained information on customers' names, contact information, past trips, preferences and other valuable information. The sales representatives set up their own business and actively attempted (often successfully) to transfer sales from Cruise Connection to their new venture, and to generate new sales from Cruise Connection's customers.

The sales representatives' contracts with Cruise Connection had two provisions of note: the obligation to operate honestly and in good faith and in a manner which would not harm the goodwill and reputation of Cruise Connection and the obligation to hold confidential information in strict confidence. The contracts did not have non-competition or non-solicitation clauses.

The Court's Findings

The BC Court found that the sales representatives had breached both the confidentiality and good faith provisions of their contracts. The Court confirmed that the duty of good faith is breached when a person acts out of self interest, ill will or for a dishonest purpose, or acts in a way that causes "significant harm to the other [party] contrary to the original purposes or expectations of the parties". Further, even where a departing employee is not bound by a non-solicitation clause, he or she will breach a contractual duty of good faith to the employer by taking a list of the employers' customers for use after their employment has ceased.

This is not new law, but it is a reminder of the benefit of having a clear "duty of good faith" clause in appropriate agreements.

Calculating Damages

Cruise Connection also provides a helpful review of the assessment of damages flowing from departing employees' use of confidential information.

Cruise Connection advanced a claim for over $1.5 million for future losses. The Court found that claim was not supportable and awarded about $470,000 for future loss. The difference was in the assumptions.

  1. Baseline: The evidence showed that an average of 4.5% of Cruise Connection's customers booked trips in any given year. The Court accepted that as a starting point for the future loss claim.
  2. Retention Rate: Cruise Connection argued that 100% of those clients would have stayed with Cruise Connection. The Court disagreed. The sales representatives could have lawfully and probably successfully pursued some of those sales. A 60% retention rate was appropriate.
  3. Attrition Rate: As there tended to be a personal relationship between a sales representative and his or her clients, it was likely that Cruise Connection would have lost some of its clients to the sales representatives over time, even without them using confidential information. Cruise Connection argued for a 15% attrition rate. The Court said a 25% attrition rate was appropriate.
  4. Duration of the loss: Cruise Connection argued that losses would continue for over seven years. The Court said that three years was more appropriate – based on customer loyalty, mobility of sales agents in the industry and the effect of competition.

What this All Means

Takeaways for employers and counsel? Consider having a clear and strong "duty of good faith" in your employment contracts. This can limit solicitation even if there is no non-solicitation provision. And carefully consider the types of evidence that will be required to support assumptions in a claim for future losses.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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