Richmond Pharmacology Ltd v Chester Overseas Ltd & Ors

A contractual obligation to treat commercially sensitive information as confidential ordinarily prohibits disclosure outside the permitted confidentiality circle. Contractual exceptions must be construed as part of the agreement and do not generally permit disclosure to prospective purchasers without the required approval.

Directors’ duties under Companies Act 2006 ss 172, 174 and 175 apply according to their distinct statutory tests. The duty under s 175 is objective and is not avoided by good faith or a reasonable but mistaken belief in entitlement. A claimant must still prove causation on the balance of probabilities; a temporal fall in business, without more, does not justify an inference of causation where other explanations are established.

Richmond Pharmacology operated a contract research organisation. Chester held 44 per cent of Richmond’s shares, while Milton and Larry Levine acted as Chester’s representatives and as directors of Richmond.

Chester retained New World Corporate Finance to market its shareholding after unsuccessful discussions concerning a management buy-out. Confidential information was supplied to New World and, under non-disclosure agreements, to prospective purchasers. Richmond alleged breach of contractual, equitable and statutory duties, and claimed that the marketing exercise caused a substantial reduction in its business.

The issues were whether the disclosures breached the parties’ duties and, if so, whether they caused recoverable loss.

1. The court construed clause 13 of the Shareholders Agreement according to its ordinary and natural meaning. An obligation to treat information as confidential meant that commercially sensitive information could not be disclosed outside the permitted confidentiality circle, subject to the express exceptions. The ability to sell a minority shareholding did not create an implied right to disclose confidential information to prospective purchasers.

2. Disclosure of confidential information to New World itself was authorised because New World was Chester’s professional adviser within clause 13.2. Disclosure by New World to prospective purchasers was not authorised. The teaser, modified business plan and related information therefore involved breaches by Chester of clause 13.1. Telling prospective purchasers that all Richmond’s shares were, or might be, for sale also constituted disclosure of commercially sensitive information relating to Richmond’s affairs.

3. The Levines’ duties under Companies Act 2006 ss 172, 174 and 175 were distinct. The s 172 duty depended on their good-faith belief about Richmond’s interests. The s 174 duty applied an objective reasonable-director standard. The s 175 no-conflict duty was objective and strict. It was not a defence that the directors acted honestly or reasonably believed that their conduct was permitted.

4. The Founders had authorised the Levines to act in the dual capacity of Richmond directors and Chester representatives where Chester exercised rights under the Shareholders Agreement. That authorisation did not extend to causing Chester to breach the Agreement. Chester’s breach therefore also constituted a breach by the Levines of s 175 and of their equitable duty of confidence. The contractual duty left no room for a wider equitable duty, but the equitable duty was no narrower.

5. The estoppel case failed. Acquiescence could create an estoppel only where silence reasonably conveyed an intention that the other party should rely on the assumption, and the other party in fact relied on it as a material inducement. Those requirements were not established.

6. None of the breaches caused loss. The court applied the balance-of-probabilities approach to circumstantial causation. The evidence showed several alternative causes for the reduction in business, including increased prices, disruption in business development, market contraction, commercial disputes, aggressive competitor pricing, a trial error and reduced Japanese work. The claim for substantial damages therefore failed.

7. The court provisionally considered that Chester should pay nominal damages of £1 for breach of contract and that the claims against the Levines should be dismissed.

First-instance decision. The judgment itself does not state any prior appellate decision.