Breach of Confidentiality Clause did not entitle employer to default on payments under a Settlement Agreement

In the recent case of Duchy Farm Kennels Ltd v Steels, the High Court decided that a former employee’s breach of a confidentiality clause in a settlement agreement did not relieve his former employer of the obligation to pay the outstanding sums provided for in the agreement.

The confidentiality clause was not a “condition” of the agreement and therefor breach of it would not entitle the employer to bring the contract to an end. Instead,  it was an intermediate term or innominate term”the breach of which was not so serious as to amount to a repudiatory breach, allowing the other party to consider themselves free of further performance.

The employee in this case had brought employment tribunal claims against his former employer, DFK Ltd. A settlement was agreed with the assistance of Acas and recorded on a COT3 form, a settlement agreement. The Employer agreed to pay the employee the sum of £15,500 in 47 weekly instalments of £330. The employee agreed that the payment was in full and final settlement of his outstanding tribunal claims and agreed that he would not bring any other proceedings relating to his employment with the employer or its termination, other than in respect of personal injury claims which had not arisen at the time of the agreement and any accrued pension claims.

The agreement also included a clause under which both parties agreed to treat the fact of and the terms of the agreement as strictly confidential. Such clauses are very common in such agreements.  The Employer also agreed to provide the employee with with an agreed reference.

The Employer paid a total of £2,960 in instalments. The last one being paid on 29 March 2019. After this it stopped paying the employee so the employee brought a claim to recover the outstanding amount.

The Employer defended the claim and asserted that because of the breach of the confidentiality clause, the outstanding sums were no longer payable.

The High Court decided that there were two routes by which the Employer could potentially establish that the employee’s breach of the confidentiality clause meant that, applying the general law of contract, it no longer had to make any further payments under the agreement.

Firstly, by establishing that the confidentiality clause was a “condition”. It is possible for the parties to a contract to state expressly that a term is a condition, but that had not happened in this case. The question was therefore whether in light of all of the circumstances, the confidentiality clause should be regarded as being a “condition”. The High Court reached the decision that it should not.  The clause was a generic confidentiality clause, such as is seen in almost all settlement agreements.

The fact that there is a confidentiality clause in such an agreement does not indicate that confidentiality is of significant importance to the parties. Confidentiality was not central or fundamental to the agreement in this case. The most important obligations of the contract were the employee giving up his tribunal claims and the employer making payments in return. This is the crux of almost all settlement agreements; the employee agreeing not to pursue their potential employment claims and the employer paying for this waiver.

Whilst, here may be cases in which a confidentiality clause in a settlement agreement might be of sufficient importance to achieve the status of a condition, in most cases, the agreement will then expressly stipulate that the term is a condition, although that alone won’t necessarily mean that it acquires that status. In such cases there must be a clear intention that confidentiality is of such importance and that breach of it would significantly harm the employer. No such intention was found here.

Secondly, the employer could be relieved of the continuing obligation to pay the outstanding instalments by showing that the breach of the confidentiality clause had been repudiatory. The test in this case would be whether, from the perspective of a reasonable person in the position of the employer, the employee had ‘clearly shown an intention to abandon and altogether refuse to perform the contract’.  In this case this had not been shown.

The breach was never likely to, and had not, resulted in any significant issues or commercial loss for the employer.

The decision will be of significant concern to employers who will need to carefully draft confidentiality clauses in such agreements if they wish to seek to rely on them in such a way in the future.