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Breach of confidentiality clause did not entitle an ex-employer to stop making payments under a COT3 agreement

08 June 2020

Decision highlights the limits of a generic confidentiality clause in settlement agreements.

When using settlement agreements, employers are primarily concerned to settle any actual (or potential) employment tribunal claims in exchange for payment. Depending on the circumstances, employers may also be keen to keep the existence and details of such settlements confidential, perhaps because of reputational risks and / or because of the risk that other employees will be encouraged to bring claims against the employer.

However, most settlement agreements contain confidentiality clauses as standard, whether or not confidentiality is among the chief concerns of the parties.

It is a common misconception that breach of a confidentiality clause contained in a settlement agreement automatically entitles an employer to recover, or cease paying, sums due under a settlement agreement. As highlighted by a recent decision of the High Court, the options available to an employer in these circumstances will vary depending on the importance placed on confidentiality by the parties.

Case details: Duchy Farm Kennels Limited v Steels [2020]

Mr Steels brought a number of claims in the Employment Tribunal against DFK, including unfair dismissal. A settlement was negotiated with the assistance of ACAS and recorded on a COT3 form (a simple form of settlement agreement ratified by ACAS).

Under the terms of the COT3, DFK agreed to pay Mr Steels £15,500 by way of 47 weekly instalments in full and final settlement of his claims against DFK. It included a standard confidentiality clause stating that both parties would not disclose the fact or terms of the agreement to anyone else, unless required to so by law or a regulatory authority or to a party's professional advisors.

After several weeks the Managing Director of DFK heard that Mr Steels had told a third party about the settlement and the money he was receiving under it. As a result, DFK stopped paying the weekly instalments and Mr Steels issued proceedings in the County Court to enforce payment of the settlement monies.

At first instance, the judge held that Mr Steels had breached the confidentiality clause but that the nature of the clause meant DFK was not entitled to stop paying the settlement monies. DFK appealed the decision.

The High Court concluded that the County Court was correct that the confidentiality clause was not a condition (or fundamental term) of the contract. This was on the basis that the core issue of the COT3 was to settle Mr Steel's Tribunal claims and neither party had placed any importance on the confidentiality clause at the time the COT3 was entered.

The High Court also agreed with the County Court that the breach of confidentiality in this case was not serious enough to entitle DFK to 'repudiate' the contract, in other words to treat the contract as terminated, and to stop paying Mr Steels. It held that the breach of the confidentiality clause was unlikely to result in significant damage to DFK. As the High Court judge noted, the core of the disagreement between the parties, an unfair dismissal claim, was a common issue and the risk of reputational damage was minimal. In addition, evidence suggested that third parties were already aware of the circumstances surrounding Mr Steel's departure from DFK and that the parties had likely settled. In the view of the courts, there was minimal risk that Mr Steel disclosing the existence and terms of the COT3 to a third party would lead to unmeritorious claims by other employees against DFK because the sums involved were relatively small.

Conclusion

This case highlights the importance of parties clearly communicating what elements of a settlement agreement are important to them when negotiating terms. In this case, the COT3 used standard confidentiality wording and neither the surrounding circumstances nor the actions of the parties suggested that confidentiality was a key term of the agreement.

In such cases the innocent party is left to show that the breach is so serious that they are entitled to set aside the contract and no longer be bound by its terms. This is a fairly high bar and whether it is met will depend on the surrounding facts. It is also worth noting that the employer may not want to terminate the agreement entirely if it wants elements of the settlement agreement to remain in place, such as an agreement by the employee not to pursue any claim (which may in any event become time barred) or to make or publish adverse comments about the employer.  

The High Court judge noted that it is possible for employers to avoid this type of situation by expressly stating that confidentiality is a condition of the agreement or to making it clear in the agreement that there will be consequences (which may fall short of treating the agreement as terminated) for a party who breaches confidentiality.

However, this decision will no doubt cause some concern for employers that confidentiality terms in a settlement agreement may not be relied upon. There may still be steps employers can take to enforce confidentiality provisions, such as seeking an injunction against further breaches of confidentiality or to seek compensation for any damage. Such steps can of course be costly and may not be timely enough to limit reputational damage; it is also notoriously difficult to evidence any actual financial loss arising from the breach.

Employers should ideally seek advice on the terms of settlement and remember that ACAS will assist with reaching agreement but cannot provide independent advice.

Whilst bearing all the above in mind, employers also need to be careful how they set out confidentiality clauses, particularly when issues of discrimination, harassment or victimisation are factors in the wider settlement, as failure to do so may also result in the clause being unenforceable. For further information, we considered these issues in an article in November 2019

If you would like to discuss any aspect of this article further, please contact Michael Crowther or any other member of the employment team on 0113 244 6100.

You can also keep up to date by following Wrigleys employment team on Twitter

The information in this article is necessarily of a general nature. Specific advice should be sought for specific situations. If you have any queries or need any legal advice please feel free to contact Wrigleys Solicitors.

 

Michael Crowther View Biography

Michael Crowther

Solicitor
Leeds

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