Consequences of a Breach of the Confidentiality Clause in a Settlement Agreement

On 30 April 2020, the High Court upheld the decision of a County Court judge that a former employee’s breach of a confidentiality clause in an Acas-conciliated settlement agreement did not relieve the former employer of the obligation to pay the outstanding settlement sums under a settlement agreement.

This blog takes a look at the case of Duchy Farm Kennels Ltd v Steels [2020] EWHC 1208 and provides guidance on the drafting of confidentiality clauses more generally.

Background

Mr Steels brought a number of claims in the Employment Tribunal against his former employer, Duchy Farm Kennels. A settlement was negotiated between the parties with the assistance of an Acas conciliation officer and an agreement was reached in January 2019. Under the terms of the settlement agreement (the Agreement), Duchy Farm Kennels agreed to pay Mr Steels the sum of £15,500 by means of 47 weekly instalments. The Agreement also included a confidentiality clause, a warranty that Mr Steels had not previously disclosed the facts and the terms of the Agreement to any other person, and a mutual non-disparagement clause.

After a few weeks of paying instalments, Duchy Farm Kennels stopped doing so, asserting that its obligation to do so had fallen away because Mr Steels had breached the confidentiality clause by disclosing the terms of the Agreement to a third party. Mr Steels subsequently issued proceedings for the balance of the settlement sum in the County Court.

County Court judgment

Duchy Farm Kennels defended the proceedings by seeking a declaration that, because of the breach of the confidentiality clause, the outstanding sums were no longer recoverable under the law of contract. However, Mr Steels asserted that he had not disclosed the terms of the Agreement to a third party and, even if he had done so, it was not a breach of a condition or a repudiatory breach of the Agreement, such as would entitle Duchy Farm Kennels to refuse to make any further payments.

Having heard from a number of witnesses, the County Court judge found that Mr Steels had indeed breached the confidentiality clause by disclosing its terms, and in particular the amount of the settlement sum, to the third party. It was held that this amounted to a breach of an ‘intermediate’ or ‘innominate’ term of the Agreement, rather than a breach of a condition, and so did not automatically mean that Duchy Farm Kennels was freed from its obligation to continue to pay the instalments. The obligation to pay the instalments therefore continued, notwithstanding the breach. Duchy Farm Kennels appealed to the High Court.

High Court judgment

The High Court observed that there were two routes by which Duchy Farm Kennels could potentially establish that Mr Steels’ breach meant that, by applying the general law of contract, they would be freed from their obligation to continue to pay instalments. The first was to establish that the term was a ‘condition’. The second was to establish that the term was an intermediate term, but the nature of the breach was such that in all the circumstances it was a repudiatory breach.

The High Court came to the clear conclusion that the confidentiality clause was not a condition but was an intermediate term. The ‘boilerplate’ confidentiality clause was generic and was not at the core of the Agreement; it was instead ancillary to the main part of the contract. The most important obligation, on the side of Mr Steels, was that he would give up his Employment Tribunal claims and not bring any other claims in relation to his employment or termination of it. The fact that confidentiality was dealt with in three out of the thirteen clauses was also, on its own, immaterial. The High Court did note that there may be cases in which a confidentiality clause might achieve the status of a condition, for example where the terms are so sensitive that the achievement of confidentiality is the very essence of the benefit for the employer such that that would be expressly stated in the agreement, which was not the case here.

The next question for the Court was whether, in all the circumstances, the disclosure to the third party was so serious a breach of the confidentiality clause as to amount to a repudiatory breach of the Agreement. The High Court held that it was not. The breach was never likely to, and did not, result in any commercial embarrassment or other commercial problems for Duchy Farm Kennels. The risk that it would trigger other copy-cat claims was also very remote, especially given the sum in question was not very large. In any event, if there had been actual financial loss as a result of the breach, an award of damages would have been an adequate remedy. Since the breach was not repudiatory, the High Court dismissed the appeal.

Practical guidance

The case of Duchy Farm Kennels Ltd v Steels provides useful guidance on the court’s interpretation of confidentiality clauses in settlement agreements. Although a generic ‘boilerplate’ confidentiality clause will generally not be regarded as a condition of a contract, there are ways to expressly make it one, particularly where confidentiality is a significant benefit to the employer (although labelling the clause a ‘condition’ will not automatically do this). Another possibility, without recourse to treating any breach of a confidentiality clause as a breach of a condition, is to make specific provision in the terms for what should happen if there is a breach of confidentiality. Damages, for example, may become payable.

If you wish to discuss this topic further or have any other questions, please contact Linky Trott or any other member of the Employment team.

 

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