UK: Michael Douglas Photo Exclusive And Other Stories

House of Lords re-defines the law on economic torts and commercial confidentiality: OBG v Allan; Douglas v Hello! Limited; and Mainstream v Young (2007).

In an important triple judgment, issued on 2 May 2007, the House of Lords has provided welcome clarification of the law relating to tort claims for economic loss caused by intentional acts - also taking the opportunity to extend the law on breach of confidence.

The judgment covers three separate cases, each of which had raised related issues. The most well-known of these is Douglas and Others v Hello!, where OK! magazine was seeking damages from Hello! magazine for the unauthorised publication of photographs of Michael Douglas’s wedding to Catherine Zeta-Jones. The other two cases were OBG v Allan, relating to losses suffered by the claimant company following the unauthorised appointment of administrative receivers, and Mainstream v Young, where the defendant was alleged to have facilitated breach of contract by two employees of a property company who had diverted a development opportunity to a joint venture in which they were interested.

The judgment contains somewhat divergent opinions from each of the panel of five Law Lords who heard the case, but a majority agreed with each element of the leading judgment of Lord Hoffmann, and the essential findings are as follows.

Their Lordships recognised that the previous law on the so-called "economic torts" was, to quote Lord Nicholls, in a "terrible mess", and their judgment goes a long way towards clarifying the position. The key points are as follows.

• The panel unanimously agreed that, contrary to what is suggested in some of the authorities and textbooks, there were in fact only two, distinct torts relevant to the cases in question. The first is the tort of inducing a breach of contract ("Inducement"), which originally dates from the classic case of Lumley v Gye in 1853. The second is the tort of causing loss by unlawful means ("Unlawful Causation of Loss"). Although these two torts can potentially overlap, their Lordships made it clear that there is no separate, intermediate tort of "interfering with contractual relations" - i.e. a hybrid tort which does not require either the intentional procurement of a breach of contract nor the intentional causation of loss by unlawful means.

• As regards Inducement, there are two key ingredients. The first is that the defendant must know that he is inducing a breach of contract, or (as a minimum, per Lord Nicholls) have deliberately turned a blind eye to the fact that he is doing so. The tort will not however be made out if the defendant can prove, as happened in the Mainstream case, that he honestly believed there would be no breach of contract - even if that belief might appear objectively unreasonable. The second ingredient of the tort is that the defendant must have intended to procure the breach: either as an end in itself or, as is more often the case, as a means to an end (usually the defendant’s own financial advantage). It is, however, not sufficient merely to show that the breach of contract was a foreseeable consequence of the defendant’s action.

• As regards Unlawful Causation of Loss, the Court of Appeal in Douglas had sought to limit the scope of the tort by (as above) interpreting the concept of the defendant’s intention restrictively - ruling that OK!’s claim failed because Hello! did not "intend" to cause loss to OK!, even though Hello! had been seeking its own financial advantage. Lord Hoffman characterised this type of approach as "artificially narrow", again stating that one intends to cause loss even if the objective in doing so is to enrich oneself (as had been the case with Hello!’s publication of the unauthorised photographs). He said that the scope of the tort should, however, be controlled by a more restrictive interpretation of "unlawful means" than that used by the Court of Appeal. The tort should only apply where the defendant has interfered with the freedom of a third party in a way which: (i) is unlawful as against that third party; and (ii) affects the third party’s freedom to deal with the claimant. The majority of the panel agreed with this approach, although Lord Nicholls favoured a wider, less specific definition of "unlawful means".

The implications of these findings for the Mainstream and Hello! cases have already been referred to above. On the facts of the OBG case, the Law Lords held that the company’s administrative receivers, although improperly appointed, were neither liable for Inducement (because there had been no breach of contract) nor for Unlawful Causation of Loss (because there had been no intention to cause loss and no employment of unlawful means).

It had also been argued as a separate point in the OBG case that the administrative receivers should compensate the company, on a strict liability basis, for "conversion" (i.e. misappropriation) of the company’s debts and other contractual rights. A majority of the panel however ruled that it would be inappropriate to extend the tort of conversion to contractual rights in this way, and that the tort should remain limited to the conversion of tangible assets and documents of title.

The panel did, however, (by a three to two majority) rule that Hello! was liable to OK! for breach of the latter’s equitable right to confidentiality regarding all photographs of the Douglases’ wedding.

In doing so, it reversed the Court of Appeal, which had taken the somewhat artificial view that the obligation of confidence from which OK! benefited had only covered the photographs which the Douglases had authorised them to publish. It had therefore ruled that the publication of Hello!’s photographs did not infringe any right of OK! (although it may have invaded a residual right of privacy of the Douglases). Rejecting this approach, Lord Hoffmann warned against the danger here of legal theory "losing touch with reality". OK! had paid £1m for the confidentiality of any photographs of the wedding, and that was, in his view, an actionable right of confidentiality which Hello! had breached.

In one of the two dissenting opinions on this issue, Lord Walker of Gestingthorpe questioned the wisdom of this approach in breach of confidence cases. He warned that expanding duties of confidence to protect "wholly commercial" interests (such as OK!’s exclusivity rights) could potentially lead to "an uncontrolled and unprincipled explosion" of the law in this area. He noted that such protection is not available to licensees of established intellectual property rights and that, in the commercial context, the traditional preserve of the law of confidence has been restricted to the protection of trade secrets.

Practical implications

• The scope of the economic torts is now much clearer. As regards Unlawful Causation of Loss there is still considerable scope for dispute about precisely what constitutes "unlawful means". As Lord Walker pointed out, the test proposed by Lord Hoffman in this area "might be regarded as so flexible as to be of limited utility" and is unlikely to be the last word on this difficult and important area of the law.

• The definition of intention for both Unlawful Causation of Loss and Inducement has been clarified in a logical manner, removing the anomaly that a defendant could be held not to have "intended" the relevant tort if his primary purpose was (as is usually the case) his own gain rather than the infliction of loss or contractual breach on the claimant. However, the good news for defendants is that in Inducement cases they can still escape liability if they can prove that they honestly believed there would be no breach of contract, even if that belief was objectively unreasonable - an escape route which clearly troubled the Court of Appeal in the Mainstream case.

• The new ruling on breach of confidence will no doubt encourage further litigation by media companies and others wishing to protect commercial confidentiality. However, it is hard to predict how the ruling will be interpreted by the courts in the context of future commercial disputes. Will it be interpreted as turning on its own specific facts? Or will it be interpreted more widely, stretching the law of confidence further from its traditional role of protecting trade secrets, towards the protection of "exclusives"?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.