UK: Freedom of Information: The Teeth of Contractual Consultation Obligations

Last Updated: 8 February 2005
Article by Richard Best

It is well known that the Freedom of Information Act 2000's right of access to information held by public authorities came into force on 1 January 2005. It is also known that commercial entities dealing with or otherwise providing information to public authorities could be affected by the changes.  For example, individuals, competitors, journalists or potential claimants may request and sometimes obtain commercially sensitive information originally supplied by those entities. 

Public authorities transacting with such entities are likely to find that contractual negotiations include a request for inclusion of a clause requiring consultation prior to disclosure under the Act.  Questions may arise as to what liabilities a public authority could face if it were to breach that clause, given that the circumstances surrounding such a breach would usually entail the public authority's compliance with a statutory duty to disclose information to the requesting party.  Could a public authority find comfort in the notion that compliance with that statutory duty might trump a contractual obligation and therefore exclude contractual liability?  In all likelihood, the short answer is no and that a failure to comply with a contractual consultation clause may render the authority liable for damages.  This article considers this issue by reference to relevant New Zealand case law under that country's Official Information Act 1982.

Consultation as a prerequisite to disclosure under the Freedom of Information Act ("FOIA")

Where an authority is in doubt as to whether its disclosure would constitute a breach of confidence, or might otherwise fall under an exemption, it can be expected to consult with the party from whom the information was obtained. To some extent this issue is now covered in the Secretary of State’s Code of Practice on the Discharge of Public Authorities' Functions Under Part I of the Freedom of Information Act 2000 (the "FOIA Code") as revised in November 2004.(1)

The FOIA Code states that in some cases it will be necessary to consult, directly and individually, with third parties to determine whether or not an exemption applies to information requested, or to reach a view on whether the Act’s disclosure obligations arise in relation to that information. It also states that in a range of other circumstances it will be good practice to do so:  “for example where a public authority proposes to disclose information relating to third parties, or information which is likely to affect their interests, reasonable steps should, where appropriate, be taken to give them advance notice, or failing that, to draw it to their attention afterwards.”  The Code states further that it may also be appropriate to consult third parties about matters such as whether any further explanatory material or advice should be given to the applicant together with the information in question. Such advice may, for example, refer to any restrictions (including copyright restrictions) which may exist as to the subsequent use which may be made of such information.(2)

One may note that the FOIA Code's expectation of consultation “in some cases” is neither precisely defined nor statutory in nature.(3) One might argue on public law grounds that consultation is mandatory where confidential or commercially sensitive information is at stake, but these arguments, although strong, are not necessarily robust.(4)  Perhaps more importantly, breach of a public law obligation does not, without more, give rise to an action for damages against the public authority.  For these reasons, companies transacting with public authorities may wish to include contractual consultation clauses to ensure, to the extent one can, that their counterparty public authorities will be subject to a contractually binding obligation to consult.  For example, they may want to include a term stating that no confidential information shall be disclosed except where:

  • the public authority has consulted the other contracting party on the proposed disclosure or at least reasonably informed that party of the proposed disclosure (within, for example, 7 days of receipt of a request, to enable that party to respond); and
  • disclosure is required by law, under FOIA or otherwise.

Are such clauses binding?  The Astra Pharmaceuticals case

If properly drafted, this kind of clause ought to enable companies to protect their commercial position as best they can prior to the proposed disclosure.  Such clauses have been employed in other jurisdictions with freedom of information legislation, perhaps most notably, from the perspective of case law on their validity, in New Zealand. 

The key case is Astra Pharmaceuticals (NZ) Limited v Pharmaceutical Management Agency Limited.(5)  The Pharmaceutical Management Agency ("Pharmac") is New Zealand's regulatory body responsible for determining which pharmaceutical products are subsidised from public funds.  It frequently enters into contracts with suppliers setting out the terms on which their products will be subsidised.  In this case, Astra Pharmaceuticals had entered into such a contract for its anti-ulcerant drug Losec (a proton pump inhibitor ("PPI")).  It sued and sought damages from Pharmac for breach by Pharmac of the confidentiality obligations in that contract. 

Prior to the contract, the PPI therapeutic subgroup, to which reference pricing had been applied (the effect of which in general terms is to subsidise each product in the subgroup at a level equating to the price of the lowest priced product), consisted of Losec and Zoton.  To limit expenditure across the anti-ulcerant therapeutic group (which consisted of the PPI subgroup and an H2 antagonist subgroup ("H2As")), Pharmac had placed restrictions on subsidisation of drugs in the PPI subgroup to the extent that they were only subsidised if the patient had first been treated with H2As, had seen a specialist, and had an endoscopy.  Astra wanted these restrictions lifted. 

In October 1997 Pharmac agreed to lift the restrictions in return for Astra's agreement to reduce the average daily cost ("ADC") of the drug (which, through reference pricing, automatically lowered the level of public subsidy for all drugs in the PPI sub-group) and to guarantee a cap on the level of total Pharmac expenditure across the entire anti-ulcerant therapeutic group.  The contract provided that, in general, reference pricing should continue, but there would be an exemption from the reference pricing system where any reduction in the ADC of Losec’s subgroup was the outcome of a cross deal by Pharmac with another company.

Importantly for present purposes, the Losec contract also contained a confidentiality clause in respect of information each party provided to the other in the course of negotiating the contract.  Under that clause, a prerequisite to disclosure, even under the Official Information Act 1982 (NZ) (similar to FOIA), was that "the other party ha[d] been reasonably informed prior to any such disclosure".  In addition, Pharmac could not disclose the information "for the purposes of consultation [in relation, for example, to other subsidisation proposals] unless it [had] consulted with [Astra] before releasing that information." 

Although, as part of its consultation process with the industry, Pharmac disclosed to Astra’s competitors that Losec was to be de-restricted and that Astra had agreed to lower the ADC of Losec and manage an expenditure cap across the anti-ulcerant group, the Court's judgment states that the fact that there was an exemption from reference pricing was not disclosed. 

Subsequently, and albeit after initial refusal to an information request under the Official Information Act which was taken to the Ombudsman, Pharmac disclosed details of the Losec agreement to another company, Pharmacia and Upjohn ("P&U"), whose competing PPI (Somac) had also been listed on the Pharmaceutical Schedule (meaning it too was authorised to be state funded).  P&U then made a proposal to Pharmac, which was accepted, which allowed it to compete on an equal footing with Losec for a share of the PPI market.

Astra sued Pharmac.  Among other things, it claimed damages for breaches by Pharmac of the confidentiality obligations in the Losec agreement.  Astra's complaints concerned the provision of forecasts of expenditure by Pharmac to P&U which were said to disclose Astra’s confidential information and the disclosure to P&U of the Losec agreement and in particular the clause dealing with the application of reference pricing.  Astra did not succeed in the High Court but succeeded in part in the Court of Appeal.  On the issues of confidentiality, the Court of Appeal held that:

  • Pharmac was in breach of its obligations under the confidentiality clause in disclosing certain market forecast and share data of Astra, and in disclosing, without first reasonably informing Astra, the provisions for exemption from reference pricing of Losec in the Losec Agreement.
  • Had Pharmac not breached its confidentiality obligations, an agreement to lift restrictions on Somac would have come into effect four months later than it did. This part of the judgment contains a useful discussion of loss of chance principles and the Court's approach to Astra's argument that, had it been properly informed of the proposed disclosure, it would have sought injunctive relief.(6)
  • Astra was entitled to be compensated for the breaches on the basis that Pharmac had an improper headstart in entering the Somac derestriction agreement which, when it came into effect, reduced the subsidy payable from public funds to Losec.
  • Because Astra had not established that it had incurred loss due to the reduction in subsidy, damages were to be assessed in terms of the opportunity cost to Astra of the reduction.

One of Pharmac's points of cross-appeal was that there had been no actionable breach of the confidentiality clause because Pharmac was protected against such a claim by section 48 of the Official Information Act.  Section 48 provides that no proceedings shall lie in respect of the making available of official information in good faith, or for any consequences that follow from making it available. The Court did not agree that this clause protected Pharmac. It said Astra’s claim did not arise from making available official information or consequences that followed from that.  Rather, it arose from a failure to notify Astra in advance that the information would be made available, to which section 48 was not relevant. 

Earlier in its judgment, the Court had commented on the confidentiality clause in these terms:(7)

"… the obligation is expressed as prohibiting disclosure of confidential information other than, first, in accordance with a process (in essence requiring prior notice of intention to disclos[e]) and, secondly, in stipulated circumstances (in particular where a legal duty to make disclosure arises under the Official Information Act). The purpose of the obligation to reasonably inform the other party of an intention to disclose confidential information is, in our view, to allow the other party a reasonable period of time in which to consider its position, and take such steps as are open to it. These might be to make submissions to Pharmac (which however has public responsibilities under the Official Information Act which might require disclosure) or to seek redress, including injunctive relief, in the Courts. The clause requires that the other party be given sufficient notice of when information will be released to have a genuine opportunity to take such action prior to release. Properly understood it is not in conflict with the provisions of the Official Information Act."

Comment

In the author's view, this logic is directly applicable to contractual consultation obligations requiring a UK public authority to consult an originator of information before disclosing it under FOIA.  Provided they are drafted so as not to interfere with the temporal requirements of FOIA (e.g., the expected time limit for complying with requests), they would not be inconsistent with the terms of FOIA and therefore not invalid on the ground of inconsistency with statute.  Further, section 56 of FOIA would not protect the public authority.  That section states that the Act does not confer any right of action in civil proceedings in respect of any failure to comply with any duty imposed by or under the Act.  The section is silent on duties arising in contract.  It is virtually inconceivable that a court would construe the provision in a way which excludes causes of action based on the breach of such duties.  

The significance, for companies and public authorities alike, is that the breach of such a clause would in principle entitle the company to claim, from the public authority, damages arising from the breach.  In some cases those damages may be minimal.  In others, like the Astra case above, they could be significant and give the company a measure of commercial leverage which it might otherwise not have had.

Although an earlier version of the FOIA Code discouraged public authorities from accepting confidentiality clauses, the kind of clause outlined above is not a true confidentiality clause; it simply stipulates a contractually permissible consultation procedure and recognises that disclosure may subsequently be required by law.  In any event, some transactions may simply not go ahead if a public authority refuses to include such a clause.

Conclusion

In the author's view, the conclusion is clear:  a public authority which fails to comply with a properly drafted contractual obligation requiring consultation or notification prior to disclosure under the Act will not be able to argue successfully that the Act somehow immunises it from liability for breach.  To the contrary, it will expose itself to a claim for damages for the harm suffered by its contractual counterparty as a result of the breach.

Endnotes

(1) Available online at http://www.dca.gov.uk/foi/codesprac.htm

(2) See paragraphs 25-30 of the Code.

(3) One might argue, however, that at least a measure of statutory prescription is found in section 45(2)(c) of FOIA which states that the Code of Practice must include provisions relating to "consultation with persons to whom the information requested relates or persons whose interests are likely to be affected by the disclosure of information".

(4) One might argue, for example, that the nature of the interests to be affected by disclosure are such as to warrant consultation as a matter of procedural fairness, that a legitimate expectation of consultation springs from the Code of Practice itself or past practice, or, at least, that whether to consult is a mandatory relevant consideration.

(5) [2000] NZCA 345 (available online in full text via http://www.worldlii.org/nz/cases/NZCA/).

(6) Those who may find themselves advising companies in the position of Astra may wish to read paragraphs 68 to 73 of the judgment.

(7) Paragraph 37 of the judgment.

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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