Duty of confidence explained and what Australian employers need to know

The duty of confidence is the legal obligation not to use or disclose information that was received in confidence. For an Australian business, it is the main protection for commercially sensitive information that falls outside patents, trade marks and copyright: client lists, pricing, supplier arrangements, formulas and know-how. It binds employees while they work for you and, in some important ways, after they leave.

This article covers:

• What the duty is: an obligation that arises from the circumstances in which information is shared, not only from a signed contract.
• The three elements: what a court must be satisfied of before it will find a breach.
• How the duty applies to employees: during employment and after it ends.
• The misconceptions: the ones that leave Australian businesses unprotected.
• When to get legal help: when to call a lawyer and what one can actually do for you.

What the duty of confidence is

The duty of confidence is an equitable obligation. It comes from principles developed by the courts, not from a statute, and it can exist even when nothing has been signed. In Australian law the standard account of when the duty arises is the three-part test set out by Megarry J in Coco v AN Clark (Engineers) Ltd [1969] RPC 41, which the NSW Court of Appeal confirmed as part of Australian law in Del Casale v Artedomus (Aust) Pty Ltd [2007] NSWCA 172. To succeed in a breach of confidence claim, a business must show three things: the information was genuinely confidential, it was received in circumstances that carried an obligation of confidence, and it was then used or disclosed without authorisation.

Element one: the information must be genuinely confidential

The first requirement is that the information have the necessary quality of confidence about it, in the words of the classic test adopted in Del Casale. Information does not need to rise to the level of a patentable invention, but it must not be common knowledge or available in the public domain. If a competitor could work the information out by legitimate enquiry or simple experiment, it is unlikely to qualify.

Courts weigh a number of factors when deciding whether information is genuinely confidential. The NSW Court of Appeal listed them in Del Casale:

• How widely it is known: inside and outside the business.
• Its value to competitors: the commercial value of keeping it secret.
• The effort spent developing it: for example, through research, testing or customer cultivation.
• The difficulty of acquiring or duplicating it: by legitimate means.

Common examples of information that can be confidential in a business context include customer and client lists, pricing and costing data, business plans and marketing strategies, formulas, software, designs and the identity of suppliers. In Prime Creative Media Pty Ltd v Vranjkovic [2009] FCA 1030, for example, the Federal Court granted an interlocutory injunction restraining a former account manager from using a database of customer contacts she had compiled in the course of her employment. The source of the stone in Del Casale itself, discussed below, is another example: the importer had kept its supplier secret precisely because the information was valuable.

Element two: the duty must arise from the circumstances

The second element is that the information must have been imparted in circumstances importing an obligation of confidence. The test is whether a reasonable person in the position of the recipient would have realised, on reasonable grounds, that they were not free to use or disclose the information as they pleased.

Employment is the classic setting. An employee who is given access to a client database, a manufacturing process or a pricing schedule ordinarily knows the information is not theirs to deal with. The obligation can be made express and precise through a confidentiality clause in the employment contract, but it does not depend on one. It can also be supported by conduct: marking documents as confidential, restricting access to staff who need the information to do their jobs, and limiting who is told about a project all make it harder for a departing employee to argue the information was freely available.

Element three: unauthorised use or disclosure to detriment

The third element is unauthorised use of the information to the detriment of the business that communicated it. This is where a breach actually occurs: an employee sells the information, hands a client list to a new employer, or uses what they know to set up a competing business.

For directors and employees of companies, there is also a statutory layer. Section 183 of the Corporations Act 2001 (Cth) provides that a person who obtains information because they are, or have been, a director, other officer or employee of a corporation must not improperly use the information to gain an advantage for themselves or someone else, or to cause detriment to the corporation. The duty continues after the person stops being an officer or employee, and a contravention is a civil penalty provision, as well as grounding the usual remedies for breach of confidence.

How the duty applies to employees

The duty of confidence operates differently during employment and after it ends.

During employment, an employee's obligation to keep their employer's information confidential is backed by an implied term of good faith in the employment contract, a principle that goes back to Robb v Green [1895] 2 QB 315 and was confirmed in Del Casale. In practical terms, an employee cannot use their employer's confidential information against the employer's interests while the employment continues.

Once employment ends, the position changes. In the absence of an express clause dealing with the matter, the issue is governed by general equitable principles rather than implied terms. Australian law recognises two classes of information, as set out in Faccenda Chicken Ltd v Fowler [1987] Ch 117 and the NSW Court of Appeal decision Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317, and summarised in Del Casale:

• Trade secrets and truly confidential information: cannot be used by a former employee.
• General skill and knowledge: the employee acquired in the job can be used, unless there is a valid contractual restraint.

Where a particular piece of information falls depends on the factors already mentioned: how widely it is known, its value, the effort spent developing it and how hard it is to acquire. As the court noted in Del Casale, if the information can be readily distinguished from the employee's general know-how and is not ascertainable by enquiry or experiment, it is more likely to be treated as confidential.

A worked example: the importer and its secret source

The facts of Del Casale show how these principles operate in practice. Artedomus was the sole Australian importer of a particular stone from the Ragusa region of Italy, which it marketed under the name Isernia. The company kept the source of the stone secret: the fact that Isernia was modica stone could not be easily ascertained, and the information was given only to a few people in the organisation, including the two appellants, who were directors and employees.

After the two men left the company, they set up Stone Arc and used their knowledge that Isernia was modica stone to find their own supplier and import the stone themselves. Artedomus sued for breach of confidence. At first instance the court found the claim made out and granted a permanent injunction and an account of profits.

On appeal, the NSW Court of Appeal took a different view of part of the case. It held that the source information was difficult to separate from the appellants' general know-how about stone, and that in the absence of a contractual restraint this information could be used by them. The court did, however, find that the first appellant had breached an express non-compete clause he had signed as part of a share sale agreement when he competed with the company.

The case is a useful illustration of two points. First, a business that keeps a genuinely secret and valuable piece of information can enforce the duty of confidence against former employees. Second, where information shades into the general skill and knowledge of an industry professional, the protection that survives employment is whatever the contract validly says.

Common misconceptions

Four misconceptions recur in practice and each can leave an Australian business exposed:

• "Everything in my business is confidential": not true. Only information with the necessary quality of confidence is protected. If the information is common industry knowledge, appears in public materials, or could be worked out by legitimate means, it will not qualify, no matter how important it seems to you.
• "A confidentiality clause alone protects me": a well-drafted clause is valuable because it defines the information, makes the obligation express and can extend protection to information that would otherwise count as general know-how. But courts still look at the substance: the information must be identified with sufficient specificity and must actually be confidential. A clause cannot make public information secret, and an overreaching clause can be challenged as an unreasonable restraint of trade.
• "The duty ends when employment ends": it narrows, but it does not end. The equitable duty of confidence and any express post-employment clauses continue to apply, and the statutory duty under s 183 of the Corporations Act 2001 (Cth) expressly continues after a person leaves. What changes is the scope: after employment, only trade secrets and genuinely confidential information are protected, not general know-how.
• "Former employees can freely use everything they learned": the opposite error. Former employees can use their general skill and knowledge, but not trade secrets, client lists or other confidential information. In Bluescope Steel Ltd v Kelly [2007] FCA 517 the Federal Court granted injunctions restraining a former senior employee from further disclosing technical information from his former employer's steel casting project, rejecting his argument that the information was in the public domain or simply his own skill and knowledge.

When to get legal help

Because the boundary between confidential information and general know-how is decided case by case, most disputes turn on evidence rather than obvious answers. A lawyer can help in several ways:

• Audit what you have: identify which information is genuinely protectable and worth the cost of protecting.
• Draft the documents: confidentiality clauses, non-disclosure agreements and post-employment obligations that define the information and survive termination, while remaining enforceable.
• Manage exits: practical steps for when an employee resigns, including reminding them of their obligations and recovering company documents and data.
• Act quickly on a suspected breach: when information has already been misused, speed matters. An urgent application for an interim injunction can stop further use or disclosure before the damage is done, as happened in Prime Creative Media and Bluescope Steel.

The question that decides most confidentiality disputes

Most confidentiality disputes are decided by one question: is this information genuinely confidential, or is it the employee's general skill and knowledge? Everything else, including the drafting of your contracts, serves that question. A confidentiality clause defines and strengthens the duty, but it cannot turn public information or an employee's own expertise into a trade secret. If you cannot already say which category your client list, pricing, processes and supplier arrangements fall into, close that gap before someone resigns, not after.