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Having faith in your good faith when your counterparty mis-uses your confidential information and sets up a rival business….

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A recent case highlights the important effect of good faith clauses, often omitted or overlooked, in agreements where there are shortcomings in the drafting of other express contractual provisions and non-compete clauses are lacking.

Health & Care Management Limited (“HCML”) manage referrals to physiotherapy clinics for insurance companies. Physiotherapy Network Limited (“PNL”) operate a UK network of clinics and charges its members fees for referrals.  HCML and PNL entered into a comprehensive written agreement (the “Agreement”) whereby PNL would essentially pay HCML for referrals.  All was well between the parties until referrals to PNL from HCML began to dry up and PNL subsequently discovered that HCML had set up its own network of clinics. HCML had systematically taken confidential information from a database compiled by PNL and was making referrals to its own rival network. 

It was perhaps no surprise when court proceedings followed with focus quickly turning to the terms of the Agreement. This provided, amongst other things, that HCML anticipated making c. 700 referrals per month to PNL and, further, that HCML and PNL would keep confidential all information of the other party obtained under or in connection with the Agreement.  

PNL might have been tempted to think that, under the terms of the Agreement and particularly those provisions just mentioned, it had HCML bang to rights in light of what had happened. However, the drafting in the Agreement was far from adequate from PNL’s perspective in that:

  1. There were no exclusivity provisions or ‘non-compete clauses’ in the Agreement by which to restrain HCML from competing with PNL;
  2. The language used in the Agreement was too loose to place any obligation on HCML to send any referrals to PNL; and
  3.  Although HCML were not permitted to disclose PNL’s confidential information in a very narrow context, there was no restriction on HCML’s actual use of PNL’s confidential information.       

PNL’s saviour was the good faith clause in the Agreement and, but for its inclusion in the Agreement, PNL would have been on weak ground trying to establish mis-use of its confidential information.  The court found that by setting up a rival network HCML had conducted itself in an underhand and exploitative manner; HCML realised that until its own network was established it would need PNL to service referrals;  HCML had provided a dishonest reason for requesting data from PNL and had thereby misled PNL;  HCML had diverted referrals which would ordinarily have gone to PNL under the Agreement; and in so doing HCML had not acted in accordance with the spirit of the Agreement and had failed to maintain reasonable commercial standards of fair dealing.

The case provides a salutary lesson that careful drafting is required to impose minimum performance obligations on a counterparty; and that confidentiality clauses should be drafted carefully in order to restrain both unauthorised disclosure and misuse of relevant information. It also highlights the prudence of including an express good faith clause which may rescue the drafting deficiencies in other express contractual provisions, particularly where there is no non-compete clause.

Case: Health & Care Management Ltd -v- The Physiotherapy Network Ltd [2018] EWHC 869 (QB)
 

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