Business Law

An introduction to employment contracts and confidentiality obligations for small businesses

Published in: January 2017

There are many jobs where employees are privy to confidential information, therefore, it’s essential that there are laws in place that protect an employer against unauthorised disclosure by an employee during, or after the term of employment – especially when talking about highly sensitive information. There are a number of elements in relation to the laws associated with confidential information, however, this piece will primarily focus on the contractual obligations of confidentiality.

The sources of the obligation of confidentiality can be created by statute, such as s 183 of the Corporations Act 2001 (Cth) for example, or the general law.

Confidentiality and contractual obligations

Generally, a contract of employment will have both express and implied obligations to ensure the employer’s confidence. In Deta Nominees Pty Ltd v Viscount Plastic Products Pty Ltd [1979] VR 167, Fullagar J said that express and implied contractual obligations protecting confidential information of the employer will (at 190), “depend for their existence and their attributes solely upon the law of contract. They are obligations at common law, although of course equity may act in their enforcement if the ordinary conditions for equity’s intervention are met.”

Express covenants

In Deta Nominees, Fullagar J noted that “[e]xpress contracts not to divulge confidential information are made every day...between employers and employees”. Additionally, there are generally no formal rules in the construction of express covenants, nor restrictions that may be imposed on either the use of said information, or its disclosure.

One of the things to keep in mind is that express covenants which contends that it is protecting confidential information, but is not in fact confidential, may not always be considered as such, as Kirby P said in Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317 (at 333):

“Merely because a person says that something is regarded as confidential or a “trade secret” does not make it so...” However, his Honour did further note, “[c]ourts should, nevertheless, exercise a modest disinclination to hold that information is not confidential when parties have taken the trouble to say that it is.”

Implied contractual obligations

The implied contractual obligation for an employee is “not to divulge confidential information or to use it in a way that could be detrimental to the employer” (per Del Casale v Artedomus (Aust) Pty Ltd (2007) 165 IR 148 at [32]), or without the consent or against the wishes of the employer (per Attorney-General v Guardian Newspapers Ltd (No 2) [1990] 1 AC 109 at 214).

The implication arises by operation of law, and is associated with the implied duty of good faith because confidentiality in many ways, is an essential element of the employer, employee relationship as was highlighted in Merryweather & Sons v Moore[1892] 2 Ch 518 (at 524): “[A] confidence arising out of the mere fact of employment, the confidence being shortly this, that the servant shall not use, except for the purposes of the service, the opportunities which that service gives him of gaining information.”

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