It is common for settlement agreements to contain a confidentiality clause whereby each party agrees not to disclose the fact of the settlement and the amount agreed. In Duchy Farm Kennels Ltd v Steels, the High Court held that if an ex-employee breaches the confidentiality clause, that did not necessarily release the company from its obligations to continue paying them under the terms of the agreement, as it was not a condition.
Basic facts
After bringing a claim for unfair dismissal, Mr Steels reached a settlement agreement through ACAS with his former employer whereby they would pay him £15,500 in 47 weekly instalments. It also included a confidentiality clause.
However, after a few weeks the company stopped the instalments because it learned that Mr Steels had breached the confidentiality clause by telling a former employee (who had left on bad terms) about it.
Given this clear breach, the company argued that it was no longer obliged to maintain the payments. Mr Steels issued proceedings in the County Court.
County Court decision
The County Court judge found that despite this breach, the confidentiality clause was not a condition of the agreement. If it had been, the breach would have discharged the ex-employer from further obligation under the agreement, which in this case was the obligation to pay money.
The judge instead found that as it was an intermediate term, she therefore needed to consider the severity of the breach. Finding that the breach of the term was not a fundamental breach and did not go to the root of the contract, she refused the company’s application for relief from further payments.
High Court decision
On appeal the High Court agreed with the County Court judge’s finding that the confidentiality clause was not a condition of the contract. Indeed, the court pointed out that the parties could have stipulated that the confidentiality clause was a condition and specified consequences for breach but did not do so.
The High Court then went further to consider whether the breach was fundamental and determined that it was not, noting that this case “flags up the general problem of enforceability of confidentiality clauses in employment settlements”.
There are two potential remedies available to a party where the other party has breached the confidentiality clause:
- apply for an injunction; or
- claim damages.
An injunction is of no use if the breach of the confidentiality clause has already taken place. In this case, damages were not impossible to quantify so therefore parties to an agreement need to pre-empt and foresee what will happen in the event that one party breaches the confidentiality clause.
In the judgment, the High Court stated that “parties can make specific provision in the contract terms for what should happen if there is a breach of confidentiality”. If that level of specificity is undesirable and the contract needs to remain drafted in general terms for whatever reason, the parties can specify not only that the confidentiality clause is a condition of the contract, but they can also stipulate the consequences of any breach.
Comment
Solicitors advising employees in settlement proceedings need to consider carefully the importance of confidentiality to the parties and what consequences should flow from any breach of that confidentiality. Without specified consequences an innocent party cannot be sure there will be any consequence if the other side breaches this requirement.