Although the use of standard confidentiality agreements (CAs) is widespread in the mining industry, several recent court decisions have illustrated the dangers of entering into CAs with boilerplate confidentiality and standstill clauses. In this article, we look at some of the potential "danger zones" for CAs.
1. What is confidential? Using broad, catch-all terms to define confidential information in a CA may apply the agreement more widely than you think.
To promote certainty, parties should try to list and precisely describe the information they want covered by a CA (and, by the same token, what is not covered). Accurate record keeping of disclosed information is also important.
In Minera Acquiline Argentina SA v. IMA Exploration Inc. (2007), IMA, being interested in a project owned by Newmont, had signed a CA that covered data "relating to" the project. IMA then received information relating to an area outside the project area, with no material significance to the project (the Other Data). Although it did not bid on the Newmont project, IMA used the Other Data to stake claims that led to the discovery of a world-class silver resource. Aquiline, the winner of the bid for the Newmont project, sued IMA for breach of the CA.
The British Columbia Court of Appeal interpreted the CA broadly and held that (i) the Other Data fell within the scope of the CA, and (ii) IMA had violated the CA by using the Other Data for a purpose other than evaluating the Newmont project. IMA was ordered to deliver the silver project to Aquiline and was entitled only to be repaid its project expenditures. This case has potentially far-reaching consequences for the industry, where companies routinely sign CAs with all-encompassing definitions of "confidential information" and highly restrictive use clauses.
2. How can confidential information be used? Permitted use clauses can become non-compete obligations.
Parties should clearly outline what they can and cannot do with the confidential information. In Novawest Resources Inc. v. Anglo American Exploration (Canada) Ltd. et al. (2006), Anglo received information as a result of joint venture discussions with Novawest. After the talks ceased, Anglo, using some of the information it had acquired during discussions, staked claims outside of a 1 km2 "area of interest" as defined in a CA signed by the parties. The CA included express language allowing Anglo to stake claims and develop property outside the area of interest. The British Columbia Supreme Court held that such language permitted Anglo's use of the data to stake its claims.
Contrast this situation with that in IMA, where the permitted use of the confidential information was only "for the purpose of the project," a broad and imprecise restriction inviting adverse interpretation by the courts. In IMA, the court also refused to read the area of interest clause as creating a geographical limitation on IMA's confidentiality obligations. If a party wants the freedom to use confidential data to stake claims or conduct other activity outside an area of interest, it should specifically state this in its CA.
Parties need to expressly specify what they consider permitted use of confidential information, especially in merger or joint venture negotiations. Information disclosed under a CA may include regional geology in an area where the recipient is generally active or even unsolicited information concerning projects of the recipient. Being provided with such information may sterilize the ability of the recipient to otherwise legitimately compete for assets or even (in a worst case) to develop their existing assets. Equally, because a duty of confidence may arise under the common law even without a CA in place, the receipt of confidential information even (in a worst case) in unsolicited proposals requires careful handling. 'Data pigs' may get slaughtered.
As in Novawest, if conduct is clearly permitted under the CA, this will circumscribe the duties of confidentiality under the common law or otherwise under the contract. A recipient should recognize that it frequently will not, by definition, know what the confidential information contains until delivered, and should ensure that the obligation to keep the information confidential is kept distinct from the obligation not to use the information other than for a permitted purpose. Ideally, a recipient should agree to maintain confidentiality while being free to use the information in any manner other than a clearly and narrowly defined activity (such as with respect to an area of interest).
3. Standstill clauses: there be dragons.
Standstill clauses, in which a party agrees to not make an unsolicited bid for the other party (among other prohibited activities) are a common feature of CAs, but they must be made very carefully. The party to a CA that agrees to a standstill should not assume the standstill will only apply if confidential information is provided. In Aurizon Mines Ltd. v. Northgate Minerals Corporation (2006), Northgate's hostile bid for Aurizon was beaten back on the basis that it violated a standstill obligation in a CA between the parties, even though no confidential information had been provided to Northgate by Aurizon during earlier, inconclusive discussions. In Aurizon, the British Columbia Court of Appeal found that it was irrelevant whether confidential information had been exchanged and that Northgate was bound by the terms of its standstill provision.
It is clear that parties should not agree to a standstill clause in a CA unless they are certain they will receive confidential information. A simple way of doing this is to make the standstill clause conditional on confidential information being provided, and, in some cases, it should be prescribed what such confidential information will comprise. Otherwise, a party could be caught by a standstill provision when no relevant data is communicated.
Courts will strive to hold parties to the bargains they make. In Sunrise Senior Living REIT v. Ventas, Inc. (2007), following an auction process which resulted in a negotiated acquisition agreement between the winning bidder, Ventas, Inc., and the target, Sunrise Senior Living REIT, the Ontario Court of Appeal required the REIT to enforce a standstill provision in a CA with another participant in the auction process — notwithstanding that this effectively precluded a subsequent higher bid being made for the target. Accordingly, make sure you understand the provisions in your CA. Without a careful consideration of all the possible implications under various scenarios (including the impact of other related agreements), you may find that CAs contain provisions with effects far beyond what was intended.
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.