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Breach of a Confidentiality Clause Did Not Result in Breach of Contract

on Friday, 22 May 2020.

A recent case found that an employer was still obligated to make payments under a COT3 settlement agreement, despite the employee's breach of a confidentiality clause.

A Breach of Confidentiality

In the recent case of Duchy Farm Kennels Ltd v Steels, the High Court upheld a county court decision that an employer was not released from its obligation to make payments due under a COT3 settlement agreement following the employee's breach of a confidentiality clause.

Employee 'S' brought a claim in the employment tribunal against his former employer Duchy Farm Kennels Ltd (DFK). This led to a settlement being negotiated through ACAS and recorded on a COT3 form. DFK was to pay £15,500 to S, in 47 weekly instalments of £330, in full and final settlement of the employment tribunal claims. The COT3 contained a confidentiality clause which meant that the parties were to treat the fact of and terms of the agreement as strictly confidential - a warranty that S had not previously disclosed the facts and terms of the agreement to any other person, and a mutual non-disparagement clause.

After paying a number of the instalments to S, DFK discovered that he had divulged the terms of the COT3 agreement to a former colleague. DFK immediately stopped making the weekly instalments to S. S issued proceedings in the county court for payments to continue. DFK defended the proceedings by claiming that as there was a breach in the confidentiality clause, the outstanding sums were no longer recoverable by S under the general law of contract.

County Court

The county court judge found that the confidentiality clause had not been drafted as condition of the contract, instead it was an intermediate term. This meant that payment was not conditional on adherence to the confidentiality clause. The judge went on to conclude that S's breach was not a repudiatory breach (the breach did not go to the root of the contract) and as such, DFK was not released from its contractual obligation to pay the remaining instalments. The only remedy open to DFK in respect of S's breach would be damages if DFK could demonstrate that the breach resulted in financial loss such as the cost of defending copycat claims.

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High Court Conclusion

On appeal, the High Court held that the conclusion of the county court was correct. It added guidance on the two routes that DFK could have established a breach of contract:

  • if the confidentiality clause was as a condition whether express or implied, or
  • if the breach of the confidentiality clause was repudiatory

The High Court explained why both routes were not successful in this case. As to the first route, the contract did not expressly state that the clause was a condition. It was not considered to be an implied condition as it was a generic 'boilerplate' clause that was included in most settlement agreements. No specific thought had gone into its drafting, indicating that DFK did not consider confidentiality a key term of the agreement or a commercial risk that was sufficiently serious to make payment contingent on compliance. The second route failed as the relevant test was not met - did S show an intention to abandon and altogether refuse to perform the contract? S had not sought to revive his claim against DFK and save for the disclosure to his former colleague, had continued to observe his other obligations.

In this case, disclosure of the fact and terms of the settlement did not cause any significant commercial harm to DFK and the risk of any copy-cat claims from other disgruntled employees who may have heard about the settlement was low. Since the breach was of an intermediate term and was not repudiatory, the High Court dismissed the appeal.

Considerations for Employers

The principles in this case will apply to all settlement agreements. This case acts as a reminder to employers to think about the wider implications of what the settlement agreement is trying to achieve. Employers should take care when drafting and/or negotiating to ensure that there is sufficient scope for any payments due under the agreement to be conditional on the terms of the agreement being fulfilled by the employee. Generic settlement agreement templates often contain standard boilerplate clauses, but the wording is not always effective to ensure that any breach of the term would mean breach of the contract.

For specialist advice on settlement agreements, please contact Joanne Oliver in our Employment Law team on 07909 547537, or complete the form below.

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