Vercoe & Ors v Rutland Fund Management Ltd & Ors

Confidentiality agreements governing a proposed management buy-in can protect a business opportunity and the proposed management team even though the target and final terms remain subject to due diligence. A fund that uses the information to acquire the target must do so for the agreed purpose and cannot exclude the proposed managers without varying the agreement or abandoning the transaction. Unauthorised use may found contractual and confidence claims. In an arm’s-length commercial relationship, the usual remedy is damages assessed by a fair notional price for release from the restriction, rather than an account of profits, unless exceptional circumstances justify gain-based relief. The arrangements did not make the fund a fiduciary or agent of the promoters.

The claimants developed a business opportunity to acquire Harvey and Thompson Limited and its associated Swedish business, and approached Rutland Fund Management Limited to provide finance. They entered into confidentiality agreements concerning the proposed management buy-in and supplied a business plan and related information. Rutland subsequently acquired the businesses without involving the claimants, who alleged breach of contract, breach of confidence and breach of fiduciary duty.

The court had to construe the confidentiality agreements, determine the effect of the exclusion of the claimants and their subsequent conduct, identify the scope of any obligations of confidence, decide whether an account of profits was available, and determine whether a fiduciary relationship arose.

1. The claims in contract and confidence succeeded. The fiduciary-duty claims and the claims for an account of profits were dismissed.

2. The September and November confidentiality agreements were enforceable notwithstanding that the proposed management team, target and detailed transaction terms were initially described only in general terms. The obligations were owed to each member of the team. In the absence of any agreement between team members permitting majority variation, each member’s consent was required to vary or abrogate the obligations.

3. The agreed purpose permitted Rutland to investigate and, if it chose, carry through the proposed acquisition. It did not oblige Rutland to proceed. But if Rutland proceeded with the identified acquisition, it had to use the confidential information for that purpose and involve the proposed managers in the roles, or equivalent roles, contemplated by the business plan, with appropriate service contracts, remuneration and equity participation. Acquiring the businesses after excluding the claimants was outside the permitted purpose and breached the contracts.

4. Rutland’s exclusion of Mr Pratt amounted to a repudiatory breach which he accepted by ceasing involvement in the transaction. Mr Vercoe did not waive his rights and was not estopped from relying on them. His attempts to obtain clarification and protection concerning his proposed role and package were reasonable in the circumstances.

5. The business opportunity and the preliminary development ideas had the necessary quality of confidential information. They were imparted in circumstances importing an obligation of confidence and were used without authorisation. The contractual limits defined the obligations owed by Rutland and, because the other defendants knew of those limits and acted through Rutland, also defined the corresponding obligations of the Rutland Funds and Mr Cartwright. The defendants were jointly and severally liable.

6. An account of profits was not a remedy which the claimants could elect as of right. The court had to determine the just and proportionate response. In this arm’s-length commercial relationship, closely analogous to contract and lacking fiduciary features, damages based on a reasonable notional release price were appropriate. The approach was informed by Wrotham Park Estate Co. Ltd v Parkside Homes Ltd [1974] 1 WLR 798, A-G v Blake [2001] 1 AC 268, Experience Hendrix LLC v PPX Enterprises Inc. [2003] EWCA Civ 323 and Pell Frischmann Engineering Ltd v Bow Valley Iran Ltd [2009] UKPC 45.

7. The notional price was to reflect reasonable commercial parameters, relevant conduct and fairness considerations, and the claimant’s objectively assessed interest in performance. On that basis, the reasonable release price was equivalent to 2.5 per cent of the equity in the target companies for Mr Pratt and 5 per cent for Mr Vercoe, with the parties to agree the resulting figures.

8. A fiduciary relationship could in principle arise even where the alleged fiduciary had some legitimate regard to its own interests. However, equity would not ordinarily impose fiduciary duties over an arm’s-length commercial relationship regulated by contract, absent special circumstances such as partnership, agency or entrusted discretionary responsibility. Rutland acted for itself and the Rutland Funds, not as agent for the claimants. No fiduciary duty arose.