by Graham Plumbe
The tag of “confidentiality” is increasingly being tied to property agreements and other information. Is this protecting a right of privacy or is it eroding the “market intelligence” on which deals themselves are founded. What is the object of “confidentiality agreements” and is that objective being achieved?
The practice spreads into areas of contract, statute, professional conduct and commercial benefit. The considerations are very much a matter of opinion, and the purpose of this article is to expose some of the areas of debate.
Objective and market intelligence
There can be no doubt that, subject to recognised requirements, companies are entitled to privacy in respect of their business affairs. Probably the most topical situation in which this arises is the “confidentiality agreement” attached to a market transaction or a rent review, but it is open to question whether the cloak of secrecy achieves its purpose. Disregarding possible side-stepping of the tax man, the main purposes appear twofold. One is to “hype” the market into thinking that the terms of a deal were better than they were, thus (a) protecting investment values and (b) avoiding embarrassing precedent in subsequent negotiations for sale, letting or rent review. The other is deliberately to prove nothing at all, so that subsequent negotiations start with a clean sheet. In some cases, the cloak may be used by a party apparently on the wrong end of a deal to cover its potential embarrassment.
The type of information being hidden is diverse. There may be collateral agreements of a trade or professional nature; there may be covert agreement to take over unwanted premises; or the level of rent attained may trigger an equity step in the funding arrangement. Equally, the practice in a soft market is to grant concessions — rent-free periods, fitting-out allowances, benefits by way of side letter, reverse premiums and so on — all of which are used to bolster the rent payable. To the extent that the investment value is boosted by more than the bank balance is diminished, this is clearly a good thing so far as shareholders are concerned, but it might be said that the practice borders on deception in the context of valuing or selling the investment. In any case, any surveyor worth his salt will discount the apparent rent if he encounters camouflage, for the true rent must reflect what the tenant gets, whether it is a covert golden handshake or an overt gold-plated door knob. To that extent, the practice may even be counter-productive. Equally, no self-respecting arbitrator will do other than discredit evidence that is flawed in that way so that as a precedent for other reviews the pretence may again be counter-productive.
It is also to be recognised that the market intelligence on which the parties to a deal depend is itself dependent on a free exchange of information. If everyone buttoned their lips, the market would be a shambles. Valuers giving advice can do so only on the basis of knowledge received, and to obtain that it is necessary to give information in return. It is on this very intelligence which developers are able to gauge their market and assess their risks. It may be seen as somewhat one-sided then to withhold from the market the very intelligence which has produced rewards. It is also worth observing that parties who strike clandestine deals are the same people who write review clauses into leases. These in turn depend in the future on the parties being told as much as possible about everyone else’s deals in order to strike a new fair level of rent, an expectation which might suggest an element of hypocrisy. Certainly, the withholding of information in the current market is becoming an increasing problem to those advising principals in the matter of both reviews and renewals, and there are already strong indications that the “confidentiality” practice is promoting such regrettably formal counter-attacks as the use of subpoenas.
How it works
Confidentiality agreements may take several forms, ranging from gentlemen’s agreements, through side letters, to formal contracts or provisions in leases. It is questionable how far these agreements are enforceable and who is expected to honour them. For a start, there are several parties to whom the information may have to be given (in whole or in part) such as auditors or purchasers of the investment. Second, it is difficult to see what remedy would be available in the event of breach, as in most cases damage would be very hard to prove and it is almost inconceivable that a lease could, for instance, be forfeited. Third, it is possible that such an arrangement might fall foul of the Law of Property (Miscellaneous Provisions) Act 1989, although it has been suggested that failure to include the agreement within the contract would probably not be fatal to the contract itself; alternatively, the courts would probably construe the agreement as a collateral contract in its own right. Perhaps in some cases it is accepted that the protection sought is not intended to be of any great depth or duration.
The surveyor’s position
Whatever the merits of confidentiality, it has to be respected by surveyors in their capacity as agents, expert witnesses and arbitrators, and it is in these fields that most of the difficulty arises. It is increasingly being recognised that surveyors, in subscribing to market intelligence, may well be stepping outside the bounds of professional or contractual constraints.
These constraints arise broadly under four headings: professional duty, contractual limitations, arbitration rules and privilege/discovery.
Professional duty
Under Regulation 19 made under RICS Byelaw 24, “no member shall, without his client’s consent, disclose personal information concerning that client”. “Personal information” is then defined as relating to the “personal, financial or business circumstances of any person or body, or any other information of a sensitive nature which, having been disclosed to the member in his professional capacity, is not known to have been otherwise generally published”.
This provision speaks for itself. The surveyor may, however, find himself in some difficulty if constrained from telling of the whole truth when, for example, selling an investment or giving evidence. In the first example, he may be able to rely on caveat emptor, but in the second, he may have to resign an instruction if he is not permitted to make his position clear.
Beyond that, certain limitations may arise under the Financial Services Act in which there are express provisions as to the handling of confidential — particularly price-sensitive — information.
Contractual limitations
The retention of a surveyor by a principal is a contractual one. It is also important to recognise that the relationship is almost certainly a fiduciary one and, if so, the surveyor is on trust to act for the benefit of his principal. These two factors will therefore govern the extent to which the surveyor is free to use the information imparted to him and that information, to the extent that it is not otherwise public knowledge, is the property of his client and should be treated accordingly. Clearly, part of the duty to the client is to honour any confidentiality agreement which that client may have entered into, as to breach that contract as the client’s agent will in itself be a breach of contract with that client, and (while the surveyor is acting for the client) will cause a breach of contract between the client and the other party.
Against this, it must be recognised that a client/surveyor contract has to be interpreted in the context in which it is made. If there is no express agreement as to the handling of information, the courts might possibly recognise an implied acceptance of the conventional exchange of market information of certain types. This concept could attach to an open market letting whereas it might not attach to a review agreement.
Quite apart from contractual limitations (express or implied) there is an equitable principle that if information is imparted by one person to another in confidence for a particular purpose, that other must observe that the confidence and equity will intervene to protect it. Clearly much will depend on the nature of the information — whether personal or of a more public nature. There is clearly a difference between the giving of private advice and of representing a party in a negotiation where the outcome is not exclusive to the instructing client. It is unlikely, therefore, that there is a general implication of confidentiality in a contract of agency (including the review of rent) where the information derives not from the principal but from the fact of the surveyor’s involvement. A bare right to privacy is not generally recognised at law, unless the information has particular confidential qualities.
In some cases the surveyor may have no control over the situation. He may with authority use confidential information in an arbitration which may reappear in a reasoned award and be the subject of an appeal in open court. Equally, a lease renewal dispute may end up in open court.
The privacy rules may also be broken in the face of a court order, a statutory obligation to disclose or a subpoena. All of these would give protection against a claim for breach of contract, but steps to have the subpoena set aside if possible may first be advisable.
Arbitration rules
An arbitration is in itself a contractual arrangement and the parties are entitled to privacy. To that extent, confidential information may be used in relative security, subject to the potential exposure on appeal mentioned above.
None the less, in spite of this entitlement to privacy, it seems highly uncertain that there is any form of contractual obligation on either party to keep private thereafter either the outcome or even the matters leading thereto.
There is, in addition, the practical difficulty of securing enforcement of that security, given that the arbitrator has no sanction in that respect and that it is not uncommon for a number of people to become involved in an arbitration (particularly at a hearing) on one pretext or another. Their lips cannot effectively be sealed.
Privilege/discovery
This is without doubt the most complex area and starts with the arbitrator’s position. His role is to ensure that the best possible answer is reached and it is his duty to encourage production of all relevant facts. He is not to be prevented from doing so by confidentiality agreements. In the cut and thrust of an arbitration, one side will seek to penetrate the armour of confidentiality and the other will seek to protect it. The sword in this is the order for discovery and the shield is privilege.
If the arbitrator is asked to order the production of evidence, then he should clearly consider the benefit to be gained from the evidence before looking at the harm that its disclosure might cause to the party concerned. In doing so, he should recognise an underlying test which is whether discovery is “necessary either for disposing fairly of the cause or matter or for saving costs”(1), and this test applies whether or not the documents are relevant(2). If they are necessary, “then discovery must be ordered notwithstanding confidentiality”(3). If the “necessity” of the documents is in the balance, then confidentiality might tip the scales, but a senior legal view is that the value of the information would need to be very marginal indeed before discovery should be denied on the ground of confidentiality.
Thereafter, discovery should be ordered provided the information sought is not too general (“fishing expeditions” are avoided), and the recipient of such an order is bound to “give discovery” of all pertinent documents, ie disclose their existence, but is bound only to produce them if they are not privileged. Thereafter, they may be used in cross-examination, or may be produced in evidence unless they are inadmissible, for example by being irrelevant.
In a recent case(4), trading accounts were held to be inadmissible as evidence on the grounds that they would not have been available to the hypothetical tenant in the open market, and were therefore not discoverable. In a later judgment(5) it has been observed that the tests of discovery and admissibility are different and the second main test for discovery is whether a document “contains information which may enable the party either to advance his own case or to damage that of his adversary” or if it is “a document which may fairly lead him to a train of inquiry which may have either of these two consequences”(6).
The whole principle of discovery is that of candour between litigants and of disclosure of documents that would otherwise be kept secret; it is a principle practised very widely in the courts. Although the subject in dispute in the case mentioned was specifically that of trading accounts, there are many other areas of normally unavailable information which would meet the discovery tests and which would otherwise be admissible as being relevant.
Against that, it is a fact that if one is attempting to reflect market value, then that very value is established by parties and their advisers who work on assumptions based on exclusion of confidential information (with some exceptions) and on information which breaks every rule in the book of evidence. To that extent, some might say that rent review evidence is even better than the market which it is intended to reflect, although that would of course turn a blind eye to the truth of how deals are done.
The power of the arbitrator to order discovery is given in section 12 of the Arbitration Act 1950, which provides that arbitration agreements are deemed to contain a provision that the parties shall produce before the arbitrator “all documents within their possession or power respectively which may be required or called for”. The power, therefore, applies only to parties to the reference and only affects the surveyors in so far as they are agents for the principals concerned. There can be no order against the surveyor for information or documents in his possession which are the property of that party; such material is in the “possession or power” of the client and not the surveyor, who simply does as he is told. Such information could, however, be attacked by means of subpoena or by cross-examination of the surveyor as expert witness. The abitrator cannot, however, force a witness to answer questions; that can be achieved only through the processes of the court and is unlikely to happen in practice.
It follows that such matters in the surveyor’s file, the production of which could not be required by the principal in the normal way — eg workings to a valuation or comparables on which it is based, for example — may well be immune from a discovery order.
Whether or not vulnerable to discovery, the party under fire (through his surveyor) can defend his confidentiality by pleading (a) that the material is irrelevant and therefore inadmissible or (b) that the material is privileged.
Confidentiality, however, does not in itself create privilege(7), which must be established on other grounds. Privilege arises out of public policy (it is better to settle than to fight) or implied contract between the parties. It falls under three headings:
(1) “Legal professional” privilege which attaches to virtually any advice given by a solicitor to a principal.
(2) “Contemplation” privilege which is material passing between a principal and a third party for the “purpose of obtaining legal advice in existing or anticipated proceedings” which presumably includes the collation of evidence; this is an extension of legal professional privilege(8).
(3) “Negotiating” privilege, which attaches to material, whether or not marked without prejudice (although that establishes a prima facie claim to privilege), directed towards a settlement. It is not necessary that a dispute is as yet in existence for this purpose(9).
Certain areas in this context remain ill-defined at law; for example, whether a surveyor can stand in the shoes of a solicitor for the purpose of providing legal advice (which nowadays is well within the capacity of some surveyors), or whether he can do so when conducting an arbitration case (when the emphasis may be on valuation rather than law) and in the context of direct professional access (unchartered territory).
Another uncertainty is the point in time when “contemplation” starts, in which context the substance of a document rather than the actual timing may prevail. It is because of these queries that valuation reports, produced at a time when “contemplation” is in doubt, are sometimes fed through solicitors. It is hoped, but it is by no means certain, that they will thereby shelter under the umbrella of legal professional privilege.
Furthermore, whether a surveyor’s activity is in contemplation of arbitration may also relate to the fee structure, which may in itself be on an alternative basis — ie negotiation or arbitration.
Further doubts exist in that the taking of “legal advice” seems to be very loosely interpreted in many quarters as referring to any activity in building up a case for arbitration and doubts may exist as to whether proceedings related to a third party determination simply of value can necessarily be thought of as “legal proceedings”.
Subpoenas
On another tack, a surveyor may also be on the wrong end of a subpoena whether or not he is engaged to appear in arbitration. That process will require him either to attend to give evidence (ad testificandum) or to produce documents (duces tecum), although the recipient of the subpoena has the right of applying to the High Court to set the writ aside. Even if it stands, the difficulty facing an arbitrator in making a witness answer questions, without an injunction from the court, has been referred to earlier. Furthermore, a witness produced under subpoena can only be examined, not cross-examined, by the calling party, which somewhat restricts the scope of this procedure.
Subpoenas would normally be served on principals rather than surveyors, so the difficulty may be somewhat remote. None the less, such a writ may target a surveyor who holds specific material and who is not otherwise involved in the proceedings. If that knowledge or those documents are the property of someone else, particularly a client, then the surveyor must clarify his position and, if necessary, apply to the court to exercise its discretion and set aside the subpoena. If he does that, he should be immune from action.
Conclusion
The surveyor clearly has a difficult balancing act. On the one hand, he is expected to be well informed, and in turn expects a free exchange of information with other surveyors. Conversely, he is bound to respect his obligations to his client and the privacy of the information he holds. If he gives information to a colleague, it may fairly be assumed by that colleague that the information is “fair game” and can be used; at the very least, therefore, the informant should ask that the information is not used for other than that colleague’s private purposes without specific permission. Better still, although it may introduce cumbersome difficulties into the free workings of the market, the surveyor should secure express permission from his client to divulge private material. He should also make sure, if he is practising in the field of landlord and tenant work, that he is familiar with the complex rules relating to privilege and discovery, so that he may know how to handle a situation properly on behalf of his client. Above all, however, the market must go on.
References
(1) Rules of the Supreme Court, Ord 24.
(2) Dolling-Baker v Merrett — The Times, April 9 1990.
(3) Science Research Council v Nasse [0] AC 1028.
(4) Cornwall Coast Country Club v Cardgrange [7] 1 EGLR 146; (1987) 282 EG 1664.
(5) Urban Small Space Ltd v Burford Investment Co Ltd [0] 28 EG 116.
(6) Compagnie Financiere du Pacifique v Peruvian Guano Co (1882) 11 QBD 55.
(7) Shearson Lebman Hutton Inc v Maclaine Watson & Co Ltd (1988) 1 WLR 946.
(8) Rules of the Supreme Court, Note 24/5/9.
(9) South Shropshire District Council v Amos [6] 1 EGLR 141; (1986) 280 EG 635.
