“Mum’s the word” is a traditional English saying to explain that everything is to be kept secret. You may want to remember the short sentence as a useful business imperative when working with a non-disclosure agreement (NDA), a.k.a “confidentiality agreement”. In other words, a company should not simply rely on a confidentiality agreement alone. The flow of information must be actively managed, monitored and controlled. Because, when needed, your NDA could be a toothless tiger. In practice it may prove very difficult (if not impossible) to claim for or sanction any breaches or unauthorised disclosures.
Certainly, in English law effective clauses in relation to fixed damages (“liquidated damages” or “penalties”) are surrounded by numerous pitfalls rendering them unenforeceable.
German law has a very different approach. Under the legal requirements for general terms and conditions (§ 309 no.5 Civil Code (BGB)) a contractually-agreed amount must be so drafted that it can take into account possible higher amounts of actual damage than anticipated and, additionally, the clause must allow for a reduction of the agreed amount if no damage or a lesser amount of damage can be demonstrated. We should also remember that standard terms and conditions are defined so-widely under current German case law that the vast majority of commercial contracts will be regarded as being (in whole of part) general terms and conditions (“AGB”).
Let’s take a template clause from a German law NDA:
“Liquidated Damages. In the event of any use or disclosure of the Confidential Information by the Customer in breach of this Agreement, the Company shall be entitled to liquidated damages in the amount of €100,000 (one hundred thousand euros only). In addition to liquidated damages, the Company is entitled to all other rights at law as well as to claim a higher amount if the Company can prove that the actual damage incurred and caused by the breach exceeds the above amount of liquidated damages. Similarly, the Customer may claim a reduction of the liquidated damages if it can prove the actual damage incurred by the Company is lower.”
For English law the above clause is very problematic for two main reasons:
1. First of all, “penalty clauses” i.e. provisions seeking to punish and allowing for the claiming of excessively high amounts are not enforceable. “Liquidated damages”, in contrast, are intended to compensate with a “genuine pre-estimate” of expected damage. The above cannot be a “genuine pre-estimate” of expected damage. The parties would, in the vast majority of cases, not be able to estimate the damage that would be suffered in the future through a later breach of confidentiality. Depending on “where, when, what and how” the actual damage in each case could vary greatly. No NDA could possibly take into accout all these variations as a “pre-estimate”.
2. The amount is not fixed or “liquidated”; it can vary according to the actual damage (or lack thereof) that may be proven in a particular case. This is against the entire philosophy in common law for liquidated damages to provide a certain, fixed amount that is both a minimum as well as a maximum or cap on liability for damages in a particular event.
Thus, in the NDA situation, it is almost impossible under English law to satisfy both of the apparently conflicting two requirements for liquidated damages set out above i.e. 1. an amount which is a “genuine pre-estimate” of damage expected from each possible event and, at the same time, 2. fixed.
However, a small window of opportunity may have opened up in 2015 . In the Parking Eye case ( UKSC 67) the UK Supreme Court stated that a clause would be allowed if it was i) not extravagant or unsconscionable in terms of the amount (i.e. too high) and, ii) it was protecting a legitimate business interest. We are still awaiting the arrival of NDA liquidated damages to be tested by a higher English court on the basis of a “legitmate business interest”. In the meantime, until Parking Eye is applied to NDA damages, we will have to always have at least two versions of liquidated damages up our sleeve: one template for civil law and the other for common law applications. In addition, with the English law clause there is always a good chance that a court will reject the provision as being unenforceable.
So, as always, in developing your template agreement, flexibility is the key…as well as a knowledge of your contract’s applicable law! At the same time, implement pratical measures and internal procedures to protect your know-how and information. The “need-to-know” principle is very useful in this regard. Wherever possible, keep it quiet and remember always…mum’s the word!