Settlement agreements: the all-important confidentiality provisions

Confidentiality is usually at the forefront of an employer’s mind when entering into discussions with a current (or former) employee around a possible settlement, negotiating the terms of a settlement and drafting the agreement.

The confidentiality provisions are often a desirable part of the agreement, allowing both parties to move on with a clean break, either after a dispute or at the end of the employment relationship.

As such, typically, agreements of this kind will usually include restrictions on the parties’ ability to disclose the existence and terms of the agreement to others and, where applicable, the circumstances surrounding an employee’s departure.

There are sensible commercial reasons why such provisions are necessary for an employer too, including the fact that they are unlikely to want other employees to bring claims in the hope of getting a ‘payoff’.

It is fair to say that, the majority (if not all), employers would be keen to avoid making a termination payment to an existing or former employee if that individual has knowingly (and possibly intentionally) breached the confidentiality provisions within an agreement. For example, by informing a colleague of the ‘deal’ they have reached.

What if the employee (existing or former) breaches the confidentiality clause? Can the employer reclaim monies paid or refuse to pay any further monies due? A recent High Court case (Duchy Farm Kennels Ltd (DFK) v Steels) considered this point.

Mr Steels had been employed by DFK and it was widely known that his employment had terminated on acrimonious terms.

Nothing in particular is known about the nature of the underlying dispute, only that it was ultimately compromised for the sum of £15,500 to be paid in 47 weekly instalments of £330.

The method of settlement was by way of COT3 agreement (a legally binding agreement to settle any actual or potential claims in the Employment Tribunal via ACAS) but the decision will apply equally to settlement agreements under the relevant statutory provisions.

The agreement included express confidentiality provisions, which were as follows:

“The parties will treat the fact of and the terms of this agreement as strictly confidential and the parties will not disclose them to any other person or entity, save as set out in this clause or as may be required by law or to any regulatory authority or to professional advisers subject to them maintaining the same level of confidentiality.”

After paying a number of instalments, DFK became aware that Mr Steels had disclosed the terms of the agreement to a former colleague. DFK therefore stopped any further staged payments under the COT3.

Mr Steels issued proceedings in the county court for payments to continue. DFK defended the proceedings by claiming that Mr Steels was in breach of the confidentiality clause and, under the general law of contract, DFK had been released from its obligation to continue paying the instalments.

County Court decision

The County Court found that it was not possible for DFK to cease making the payments, even though the employee had breached the confidentiality clause, because the clause was not expressed to be a condition of the contract (i.e. a term which is of such vital importance that it goes to the root of the contract) nor was the breach a repudiatory breach (i.e. the breach did not go to the root of the contract).

DFK appealed to the High Court.

High Court decision

The High Court agreed with the finding of the County Court and dismissed the appeal.

It reiterated that, applying the general law of contract, there are two ways in which a breach by one party means that the other is freed from their contractual obligations; establishing that the term is a condition of the contract, or if it is not, that the term is an intermediate term and the breach was a repudiatory one.

It held that the clause in the COT3 agreement was a ‘boilerplate’ clause – it was of a standard nature and did not relate to the substantive parts of the agreement. Therefore, it was not a condition of the agreement; it was an intermediate term.

The judge noted that a confidentiality clause could be expressly made a condition of a COT3 agreement (or a settlement agreement) if confidentiality was one of the significant benefits that the employer got under the settlement; for example, if there was a significant commercial risk to the employer of a breach of confidentiality.

On the point of whether Mr Steels’ actions amounted to a repudiatory breach of contract, the High Court held that the test is from the perspective of a ‘reasonable person’ – whether Mr Steels had “clearly shown an intention to abandon and altogether refuse to perform the contract?” The High Court considered this to be unlikely. As such, Mr Steels’ breach was not a repudiatory breach and did not entitle DFK to cease payment.

Overall, the 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 was low.

Impact on schools

This decision acts as a useful reminder to schools (and their legal advisers) to carefully consider the drafting of the confidentiality provisions within COT3 or settlement agreements.

Where confidentiality is of key importance to a school settling actual or potential claims, it is important that the wording of the agreement makes this clear.

Ideally, a confidentiality clause should be expressed as a condition of the agreement, with payment of the settlement sum being conditional upon that clause being adhered to. From a practical perspective, the difficulty is that most payments under a settlement agreement are made as a lump sum (rather than by way of instalments) and so, if payment has already been made at the time of the breach, a school will need to litigate in an effort to reclaim the monies paid. At that stage, a court will consider the losses sustained by the employee (or former employee) when assessing compensation and this is often difficult to quantify, unless there have been a number of copy-cat claims.