By Nic Hart
The High Court have held in Duchy Farm Kennels v Steels that an employer cannot avoid paying out on a settlement where an employee is in breach of a confidentiality clause, unless confidentiality is genuinely a condition of the agreement.
Here, the employer agreed to pay the employee a settlement sum in instalments in full and final settlement of the employee’s employment tribunal claims. The COT3 agreement also included:
- a clause under which the parties agreed to treat the fact of and the terms of the agreement as strictly confidential (‘the confidentiality clause’); and
- a warranty that the employee had not previously disclosed the facts and terms of the agreement to any other person.
The employer subsequently did not pay the final instalment, and the (now former) employee issued proceedings for payment. The employer sought a declaration that the sums were no longer recoverable on the basis of breach of the confidentiality clause in the agreement.
The county court found that the employee had disclosed the settlement and its terms to a former colleague, but that such disclosure was not to have caused the employer harm. The County Court did however accept that the employee could be liable for damages in the event that such disclosure caused other colleagues to rely on information obtained as a result of the employee’s disclosure to bring “copy-cat unmeritious” claims against the employer.
The confidentiality clause was not however a condition of the contract. It did not go to the root of the agreement so as to warrant termination in the event of breach giving the other party the right to treat the contract as at an end but rather, it was an innominate term. In addition, the breach was not repudiatory. The employee’s disclosure did not mean that he had renounced the contract to the extent that a reasonable observer would think he no longer regarded himself as being bound, and so the obligation to pay the instalments continued.
The High Court agreed, asserting that on the facts of the arrangement in question, the COT3 agreement “was not primarily intended to purchase confidentiality” but for the employee’s withdrawal of his tribunal claims.
Points to note going forward
The judgment is certainly useful to consider when attempting to draft confidentiality clauses in settlement agreements.
The High Court stated that a confidentiality clause could be expressly made a condition of a COT3, particularly if confidentiality was of sufficient importance under the agreement to achieve the status of a condition. Examples given in the judgment include where allegations intimated or the identity of the claimant or respondent are so sensitive that the achievement of confidentiality is the very essence of the benefit for the employer from the agreement, or where an employer would face significant commercial risk from breach. However, express provision that the clause constitutes a ‘condition’ would not, without the context to support that stipulation result in that being the automatic result.
Another “answer to the problem” put forward by the High Court was that the parties could make specific provision in the terms of the agreement for damages in the event of a breach of confidentiality. For example, for repayment of all or a proportion of money paid to the other party. An issue to consider here is that such a clause may be interpreted as a ‘penalty clause’ which, under English law may be unenforceable. Such a clause If included at all should be carefully drafted so as to stand the greatest chance of being held enforceable, but may constitute a liquidated damages clause in any event.
To summarise the position, the result is that confidentiality clauses cannot be inserted into settlement agreements with certainty that breach thereof will entitle a party to treat that breach as sufficient to bring the agreement to an end and recover or withhold sums payable under that agreement. The effect of breach will be determined in the context of a particular arrangement, applying basic principles of contract law.
For More Information
For more information on any of the issues raised in this blog, please contact Nic Hart or another member of the Duane Morris London Team.