In a recent decision of the Alberta Court of Queen's Bench, Scott & Associates Engineering Ltd. v. Finavera Renewables Inc., Justice S.L. Martin found that a party which shared commercially sensitive information with a prospective partner had no recourse under its confidentiality agreement or the law of breach of confidence when the prospective partner used that information to acquire the project on its own account. However, the party was permitted to recover under the law of unjust enrichment. This decision provides valuable guidance on how to protect confidential or commercially sensitive information in the transactional context.
Scott & Associates Engineering Ltd. (Scott), an engineering firm, was interested in purchasing a wind power project offered for sale by Penn West Petroleum Ltd. (Penn West). Scott became a "preferred potential purchaser" of the project but did not have the requisite funds or financing to complete the purchase on its own.
Finavera Renewables Inc. (Finavera) offered to supply funds for the acquisition of the project. Though the parties never formalized the terms of their relationship, the initial plan was that Finavera would provide the funds and acquire the project in its own name. In exchange, Finavera was to pay Scott C$600,000 and hire Scott as the owner's engineer on the project. Before disclosing the information it had gathered on the project, Scott had Finavera sign a mutual confidentiality agreement (MCA). Finavera entered its bid and acquired the project in its name as planned, but the relationship of the parties broke down such that Finavera developed the project alone, never paying Scott the C$600,000 fee or retaining Scott as owner's engineer.
Scott claimed it was entitled to a constructive trust over 10% of the entire project on the following bases:
- Breach of confidentiality: Scott alleged that Finavera breached the confidentiality and non-competition provisions of the MCA, and that Finavera misused Scott's confidential information to appropriate Scott's business opportunity.
- Unjust enrichment: Scott alleged that Finavera was unjustly enriched by denying Scott its share of the benefit of the development of the project.
Breach of Confidence
The three elements that must be established to make out a claim for breach of confidence were established in Lac Minerals Ltd. v. International Corona Resources Ltd.:
- The information conveyed must be confidential.
- The information must have been communicated in confidence.
- 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 Finavera did not breach the non-competition or confidentiality provisions of the MCA because the MCA contemplated that Finavera would use the information to make a bid in its own name.
Scott's claim for breach of confidence failed for a number of reasons. First, Martin J. held that a party cannot claim for a breach of confidence in respect of the misuse of a third party's confidential information. As most of the information Scott conveyed to Finavera was not its own confidential information, but rather the confidential information of Penn West, Finavera was not liable to Scott for the alleged misuse of that information. Martin J. noted that the definition of "Confidential Information" used in the MCA between the parties did not operate to expand the definition of "confidential information" for the purposes of a breach of confidence action. Second, though a small amount of the information, such as the amounts Scott had bid in its initial offers, could be considered Scott's confidential information, this confidential information was not misused. The information provided was used for the exact purpose for which it was conveyed: to facilitate Finavera's evaluation and acquisition of the project. Third, Finavera did not misappropriate Scott's business opportunity. Scott would not have had the opportunity to purchase the project without Finavera's involvement, and the fact that the transaction did not have the result Scott expected was a result of Scott's failure to formalize an agreement on the terms of the acquisition rather than of Finavera's alleged breach of confidence.
The elements of unjust enrichment are, as set out in the Supreme Court of Canada's decision in Kerr v. Baranow:
- An enrichment of the defendant.
- A corresponding deprivation of the plaintiff.
- The absence of a juristic reason for the enrichment.
The first two elements were made out in this case. Finavera received the benefit of Scott's preferred purchaser position, bid price, preliminary analysis, and negotiation of terms on the acquisition of the project. Scott was not compensated for work it did or the benefits it conferred on Finavera, and thus suffered a corresponding deprivation.
Interestingly, although Martin J. found that Finavera had acquired the project in the manner the parties contemplated and without breaching the MCA, breaching Scott's confidence, or misappropriating Scott's business opportunity, Martin J. found there was no juristic reason for Finavera's enrichment. Martin J. explained her holding as follows: "... Finavera freely accepted the benefits conferred by Scott's status and labours while Scott prejudiced itself with some expectation that it would eventually receive a benefit. These kinds of circumstances make it unfair or unjust for Finavera to retain the benefit provided by Scott". Scott's claim for unjust enrichment was therefore successful.
This case highlights the importance of ensuring that an appropriate confidentiality agreement is in place before sharing commercially sensitive information with a potential partner. A confidentiality agreement should not only prohibit parties from disclosing confidential information to others, but should also be very clear about the permissible uses of the confidential information. In this case, the confidentiality agreement was ineffective to restrain Finavera from using the information to acquire the project without Scott's involvement because the permissible use of the information was defined too broadly. A properly drafted confidentiality agreement is doubly important given that a plaintiff cannot claim for breach of confidence in respect of information which is not its own confidential information, so parties may only be able to recover for misuse of information under a confidentiality agreement.
This case also provides guidance to recipients of commercially sensitive information. If a party uses information gathered by another to acquire a benefit, even if the party does so without breaching a confidentiality agreement or committing a breach of confidence, the party may held liable in unjust enrichment – a reminder that one cannot get something for nothing.
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.