Richmond Pharmacology Ltd v Chester Overseas Ltd & Ors

The court construed the confidentiality clause in the Shareholders' Agreement (clause 13) as imposing an obligation not to disclose commercially sensitive information about Richmond to third parties except in the specific exceptions set out in that clause. Clause 13.2 allowed disclosure to "professional advisers", and the court held that New World Corporate Finance (NWCF) fell within that description, so the initial provision of confidential material to NWCF was authorised. The marketing by NWCF to third parties (teaser, NDAs and meetings) did involve some disclosure in breach of clause 13.1 and therefore constituted breaches by Chester and, to the extent they caused Chester to breach the agreement, by the Levines. The Levines also breached the statutory s.175 duty under the Companies Act 2006 by placing themselves in a conflicting position when Chester breached the Shareholders' Agreement. However, the court found on the facts that none of the breaches caused any loss to Richmond and therefore no compensatory damages were awarded (the court proposed, provisionally, nominal damages of £1 against Chester and dismissal of claims against the Levines).

Background and relief sought. Richmond, a contract research organisation, sued Chester (a minority shareholder), and two director representatives (the Levines) for damages or equitable compensation of £4,293,225, alleging unauthorised disclosure of confidential information during Chester's attempt to sell its shares via NWCF and consequent loss of business, turnover and profit. The claim raised contract, equitable and statutory director-duty issues.

Procedural posture and issues. This is a first-instance trial in the Chancery Division. The court set out the issues for determination: (i) the scope and construction of the contractual confidentiality obligation in the Shareholders' Agreement (clause 13), including whether confidentiality could be preserved by disclosure to prospective purchasers under an NDA; (ii) whether disclosure to NWCF and then to third parties breached those duties; (iii) whether Richmond consented or was estopped from complaining; (iv) whether any disclosures caused loss and, if so, the quantum.

Evidence and factual findings. The judge heard factual witnesses (the Founders, the Levines and NWCF's director) and expert accountants on loss. The court accepted that a substantial quantity of confidential material was sent to NWCF by Larry Levine; NWCF undertook a multi-stage marketing process (initial approach without naming Richmond, conference calls, NDAs and meetings). NWCF was cautious in disclosures; three prospective buyers signed NDAs and only two received a modified business plan and one attended an information meeting. The court found that NWCF and Chester did disclose some confidential information to third parties and that on occasions NWCF gave the impression that all shares in Richmond might be for sale. The court held NWCF was a "professional adviser" under clause 13.2, so the initial disclosure to NWCF was authorised.

Legal reasoning. The court applied established principles of contractual construction (citing recent authorities on commercial interpretation) and held that clause 13.1 should be given its natural meaning: an obligation to treat information as confidential requires non-disclosure outside the permitted exceptions. Clause 13.2 was construed to permit disclosure to professional advisers and NWCF fell within that category. The court held the Levines owed duties under ss.172, 174 and 175 Companies Act 2006; the s.175 no-conflict rule is strict and objectively assessed. By causing Chester to disclose confidential information in breach of clause 13.1, the Levines breached s.175 and the equitable duty of confidence even though they acted in good faith. However, on causation the court applied the balance of probabilities and recent guidance on inferences from circumstantial evidence (Milton Keynes Borough Council v Nulty). The judge concluded that the large fall in Richmond's business from 2010 had plausible alternative causes (price increases, loss/illness of business development personnel, market contraction, client disputes, competitive pricing and specific trial incidents) and that there was no reliable evidence clients had declined work because of disclosures or rumours from the marketing exercise. As a result, the breaches did not cause Richmond measurable loss.

Outcome. Although the court found breaches of contractual, equitable and statutory duties, it found no causation of loss and therefore no substantive damages; the judge indicated a provisional remedy of nominal damages of £1 against Chester and dismissal of claims against the Levines, and reserved final orders after submissions.

At first instance the court found that Chester and the Levines committed breaches of their contractual, equitable and statutory duties by permitting some disclosure of Richmond's confidential information to third parties in the course of marketing Chester's shares (clause 13.1 of the Shareholders' Agreement) and that the Levines breached the no-conflict duty under s.175 Companies Act 2006. NWCF was a "professional adviser" under clause 13.2 so initial disclosure to NWCF was authorised. However, the judge held that none of the breaches caused Richmond any compensable loss on the balance of probabilities; accordingly no award of substantive damages was made. The judge proposed to award nominal damages of £1 against Chester and to dismiss the claims against Milton and Larry Levine, for reasons based on contractual construction, the statutory director duties (ss.172, 174, 175) and a causation analysis rejecting that the marketing exercise was the effective cause of the decline in Richmond's business.