Settlement agreements usually include a confidentiality clause requiring an employee to keep the existence and terms of a settlement confidential. Employers often regard this clause as vital to prevent the settlement becoming common knowledge. This, they hope, should prevent reputational damage and discourage other employees from making claims (with or without merit) in the hope of receiving a financial settlement.
The recent case of Duchy Farm Kennels Limited v Steels led to an important ruling on the consequences of breaching a settlement agreement confidentiality clause. It is a reminder that where the confidentiality aspect of a settlement agreement is particularly important to an employer, they should ensure it is adequately protected.
Mr Steels had brought a number of claims in the Employment Tribunal against his former employer, Duchy Farm Kennels Limited ("Duchy"). The parties negotiated a settlement which was recorded under a COT3 agreement (the "Agreement"). Under the terms of the Agreement, Duchy agreed to pay Mr Steels £15,500 over the course of 47 weekly instalments.
The Agreement contained the following confidentiality clause:
“The parties will treat the fact of and the terms of this Agreement as strictly confidential and the parties will not disclose them to any other person or entity, save as set out in this clause or as may be required by law or to any regulatory authority or to professional advisers subject to them maintaining the same level of confidentiality.”
After initially paying some of the weekly instalments, Duchy stopped the payments, claiming Mr Steels had breached the confidentiality clause by disclosing the fact and the amount of the settlement to a third party. Duchy claimed that as a consequence of the breach, it was no longer under any obligation to make further payments.
The judge at first instance refused Duchy's application for relief from further payments and Duchy appealed to the High Court.
High Court Decision
The key issue for the High Court to consider was whether the confidentiality clause was:
- a condition of the contract, a breach of which would entitle the innocent party (Duchy) to bring the contract to an end; or
- an intermediate term, where a breach may or may not be a repudiatory breach (allowing the innocent party to terminate the contract) depending on the circumstances and nature of the breach.
The High Court decided the confidentiality clause was not a condition of the contract; it was not expressly stated to be so nor was confidentiality the main driver for Duchy in entering into the Agreement. The judge commented that "parties often overestimate the harm that can be done by a relatively minor breach of a confidentiality clause". In reality, Duchy's main aim had been for Mr Steels to waive his claims under the Agreement.
Having found that the confidentiality clause was an intermediate term instead, the judge considered whether there had been a repudiatory breach. On the basis that the breach was never likely to, and did not, cause any commercial embarrassment or other commercial problems for Duchy and the risk of copy-cat claims was remote, this did not amount to a repudiatory breach. If there had been any financial loss, an award of damages would have sufficed.
This case highlights the issue of enforcing confidentiality clauses in a settlement, particularly where the settlement payment is paid all at once (which is usually the case) and the breach of confidentiality happens after the payment has been made. When this happens, it can be difficult to quantify the financial loss (if any), potentially leaving an innocent ex-employer without a remedy in damages.
When confidentiality is a core concern for you as an employer, you could consider the following in the settlement agreement:
- specify terms for what should happen in the event of a breach of confidentiality (e.g. withholding part of the settlement sum) – taking care not to transgress the rules on unlawful penalty clauses; and/or
- specifically refer to the relevant term as a condition of the agreement.
While this case concerned a COT3 agreement, the comments on conditional and intermediate terms are equally relevant for any form of settlement agreement.
Of course, an innocent party can also seek an injunction. However, this should perhaps only be considered where the potential damage involved would justify the high costs likely to be incurred.
Originally published by Taylor Vinters UK, July 2020
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.