In a recent High Court decision, Haven Insurance Limited v Lombard [2020] NZHC 1248, several former contractors to insurance broker Haven Insurance Limited were held liable for misusing confidential information.

Haven’s claim was, however, somewhat hampered by a failure to ensure that the relevant contractual arrangements were properly documented, serving as a reminder to ensure that arrangements are formalised. This case also provides helpful guidance on the remedies available to brokers (and other firms) for misuse of their confidential information.

Background

Haven operated its business by contracting with incorporated “advisers” across different regions. Haven would generate “leads” (being members of the public who are or may be open to purchasing insurance) that it would then refer to an adviser to progress. If successful, Haven would pay a portion of its commission to the relevant adviser.

In this case, the defendants terminated their contracts with Haven and then proceeded to arrange policies for leads provided to them by Haven. Haven sued for breach of contract, breach of confidence and breach of fiduciary duty. Ultimately, just one of the contractors (ASJ) and its principal (Mr Brown) appeared in Court to defend the allegations made – four other defendants went bankrupt / entered liquidation and were discontinued against, while the others did not appear. The focus of the Court’s decision was, as a result, on the claim against ASJ and Mr Brown.

The claim against ASJ and Mr Brown

The Court first considered Haven’s breach of contract claim against ASJ and Mr Brown. No executed agreement could be located, however the Court was nevertheless satisfied that there was enough evidence to conclude that there was a contract between Haven and ASJ. In reaching this finding, the Court relied on subsequent conduct indicating that ASJ (through Mr Brown) had agreed to be bound by contract terms it had received from Haven, and the fact that Mr Brown arranged for another of the defendants to execute an identical agreement.

However, the Court did not accept that Mr Brown was either a party or guarantor to the contract because he had not signed it (as required by the Property Law Act 2007). ASJ had ceased to trade upon termination of the relationship with Haven. As Haven’s losses were all suffered after termination, the Court held that “ASJ’s presence adds little to Haven’s case in terms of remedies”. Had Mr Brown been a party or guarantor to the contract, the position may have differed. Companies engaging contractors should take this as a reminder to ensure that their arrangements are properly documented and copies retained.

However, Haven had more success against Mr Brown on its claim for breach of confidence. There was no real dispute that Haven had supplied to Mr Brown information that had the necessary quality of confidence (being the leads) and that it was supplied to Mr Brown in circumstances importing an obligation of confidence. The key issue was whether Mr Brown had made unauthorised use of the leads provided by Haven. Even without direct evidence from leads/clients as to the circumstances in which they instructed Mr Brown to act as their broker, the Court was prepared to infer that Mr Brown had taken advantage of Haven’s leads from the fact that he had brokered new policies for a large number of Haven clients/leads. Her Honour found Mr Brown’s alternative explanations (e.g. that the leads had approached him) implausible.

Breach of confidence having been made out, it was not necessary to consider the claim for breach of fiduciary duty.

The damages available

Haven claimed a range of damages flowing from the breach of confidence. It was successful on some, but not others:

• Haven claimed lost profits due to being the denied the opportunity to arrange new policies and receive upfront commissions. The Court rejected this claim, concluding that Haven was unlikely to have positioned itself to sell new policies because it was primarily focussed on finding new clients rather than serving existing client. That was for its contracted advisers.
• In the alternative, Haven sought an account of profits on the upfront commissions earned by KAM, the new company formed by Mr Brown to carry out his business after ASJ’s contract with Haven was terminated. The Court indicated that it would have been prepared to award Haven an account of profits – but for the fact that KAM had not been joined to the proceeding.
• Haven further sought to recover lost annual trail commissions on clients taken by Mr Brown, which was awarded on the basis of 3.5 years of lost commissions.
• Haven also sought to recover its costs associated with hiring a number of salaried advisers after its relationship with the defendants was terminated their contracts. A material part of these advisers job was to “shore up” Haven’s client base in response to the threat posed by the defendants. As for Haven’s claim for an account of profits, the Court would have been willing to award an amount for this – had Haven put before the Court evidence as to commissions it generated from the salaried advisers (which would be deducted from the award). The Court was unwilling to make an award in the absence of such evidence.
• Haven also claimed for time spent by its director and an existing employee responding to the breach. In the case of the employee, the Court decided her time was spent exclusively outside of her usual working hours and so Haven did not suffer loss. In the case of Haven’s director, the Court was prepared to make an award for his time albeit with a significant discount, reflecting the Court’s scepticism as to Haven’s estimate and lack of evidence (e.g. time records).

Finally, the Court also granted Haven a permanent injunction restraining the defendants from using its information and an exemplary damages award of $20,000 to mark out Mr Brown’s “blatant breach” of his obligations.

Key lessons

This case serves as a warning to contractors who receive confidential information that that information cannot be misused to their advantage.

However, it also highlights the need for businesses to take care to protect themselves when engaging contractors, to ensure that they will have access to the full range of remedies. In particular, businesses should take care to ensure that contracts and guarantees are properly executed and copies retained.

Read Cover to Cover: Issue 21