29th May, 2020
Breach of confidentiality not enough to refuse settlement payment
A High Court has ruled that an employer remained legally liable to pay the remaining settlement sums due under a COT3 agreement, despite the employee’s breach of a confidentiality clause.
This decision is a useful reminder of the importance of carefully drafted confidentiality terms in settlement and COT3 agreements, if confidentiality is an essential term for the employer.
When settling an employee’s potential or issued Employment Tribunal claims, or simply managing a mutually agreeable exit from the business, employers will offer terms in a Settlement Agreement or COT3.
A COT3 is used in claims which are settled with the mediation of Acas, either before or after claims are issued. Settlement Agreements are more commonly used before claims are actually issued; they can contain more detailed and robust terms to protect the employers’ interests, particularly around confidentiality, but will require the employee to receive independent legal advice for the agreement to be enforceable (usually requiring the employer to contribute towards the legal costs).
Whichever form of agreement is used, we strongly recommend it is professionally and carefully drafted, and the recent case of Duchy Farm Kennels v Steels demonstrates why.
In this case, a COT3 was used when settling several Employment Tribunal claims by Mr Steels against his former employer, a small business which makes and supplies dog kennels and catteries. The COT3 contained a standard confidentiality clause, requiring the parties to keep private the existence and terms of the agreement. It also included an agreed compensation payment which was to be paid in small installments over 47 weeks.
Mr Steels breached the confidentiality term after a few weeks by disclosing the fact of the settlement and the amount of the payment to a single third party and in response Duchy Farm ceased making the further staged payments. The employee issued proceedings in the county court to recover the balance of the agreed settlement sum. The County Court held that the employer was not entitled to cease payments, even if the employee had breached the confidentiality clause, as the confidentiality clause was not a condition of the contract. The employer appealed this decision to the High Court.
The key issue determined by the court was that the ‘boilerplate’ confidentiality clause was not a “condition” of the contract, so that any breach, however minor, by one party, would relieve the other party of its obligations under the agreement. Instead, the court held it was an “innominate term” for which a breach would not automatically free the employer from its obligation to continue paying the installments and the impact of a breach would depend on its gravity.
The High Court agreed with the County Court and held that the term was not a condition of the contract, saying that the employer did not face any significant commercial risk from breach of the confidentiality clause. At most, the risk was that it would encourage others to bring copy-cat claims.
The fact that the word “strictly” was used in front of the word “confidential” in the clause was not, of itself, sufficient to elevate the term to a condition.
The High Court also examined whether the confidentiality breach was sufficiently serious to be a repudiatory breach of the contract as a whole, but again found for the employee that it was not. Accordingly, the employer lost the appeal.
This case illustrates the difficulty of enforcing confidentiality obligations in settlement agreements. The clear lesson to be learnt from this case is that, if a confidentiality clause is to be relied on it must be a fundamental condition of the agreement, whether COT3 or Settlement Agreement.
Clear drafting is required to show the confidentiality is a condition. Alternatively, provision can be made in the agreement for damages in the event of a breach of confidentiality. In many cases, employers will need to rely on a breach of damages clause as payments are usually made in one lump payment and therefore the breach occurs after the full settlement has been paid.
If confidentiality is a commercial concern to employers, careful consideration should be given to the use of confidentiality terms and whether they are appropriate in each case. When confidentiality terms are used it is essential to ensure that agreements are carefully drafted to make it clear to the employee exactly what the clause requires and the scope of the permitted exceptions.
We would always recommend seeking legal advice when drafting settlement agreements and in particular in relation to confidentiality terms.
Head of Team and Partner
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