The High Court in Duchy Farm Kennels v Steels has handed down a decision on the nature of the confidentiality clause in a settlement agreement that might leave some employment lawyers scratching their heads.
A breach of confidence
In this case, Mr Steels, a former employee of Duchy Farm Kennels, left his employment having signed a COT3 settlement agreement, negotiated by the parties’ respective lawyers and blessed by ACAS. A term of that COT3 was that he would not reveal the fact of or amount of the settlement.
A few months later, Mr Steels was visited by Mr Mulliner – another ex-employee of Duchy Farm Kennels, who had also left on “bad terms”. Through a convoluted “chain of communication”, word of Mr Steels’ indiscretion got back to Duchy Farm Kennels, who promptly ceased paying the compensation instalments it was bound to pay under the COT3.
Mr Steels brought a claim for his compensation, which Duchy Farm Kennels defended on the basis that the confidentiality obligations were conditions of the agreement, and therefore Mr Steels’ breach absolved Duchy Farm Kennels of its obligation to pay compensation. At first instance, HHJ Wall did not agree. Rather, she held that the confidentiality provisions were intermediate or innominate terms and that Mr Steels’ breach of confidentiality did not amount to a repudiatory breach.
Duchy Farm Kennels appealed the decision.
Was confidentiality a condition?
Often, these sorts of confidentiality obligations will be specifically expressed in settlement agreements as being conditions. That was not the case here – although that would not be fatal. Equally, merely labelling the term a condition will not render it one. Per Lord Reid in L Schuler AG v Wickman Machine Tools Ltd  UKHL 2: “we must remember that we are seeking to discover intention as disclosed by the contract as a whole. Use of the word ‘condition’ is an indication—even a strong indication—of such an intention but it is by no means conclusive”.
Mr Justice Cavanagh agreed with HHJ Wall that the confidentiality obligations in the COT3 were “ancillary to the main part of the contract” and “not at the core of the agreement”. He went on to explain his thinking as follows:
“The most important obligations of the contract, on the Respondent’s side, were that he would give up his Employment Tribunal claims, thereby foregoing the opportunity to recover more money through the tribunal claim, and that he would not bring any other claims in relation to his employment or the termination of it. In return, he was guaranteed a sum of money. On the Appellant’s side, the most important obligation was to make payments to the Respondent, and the Appellant benefitted from avoiding Employment Tribunal proceedings and the attendant risk, cost, and inconvenience, without having to make admission of liability.”
So when would a confidentiality clause amount to a condition, such that the employer would be entitled to cease any compensation payment? Well, it seems that the answer is vanishingly rarely. Specifically, it would be in cases where the “identity of the Claimant or Respondent, are so sensitive that the achievement of confidentiality is the very essence of the benefit for the employer from the agreement”. He went on to say that the present case (and, respectfully, this will be true for the vast majority of employment disputes) was one involving “a fairly standard employment dispute” between parties who were not well known – and in such circumstances, there was little basis to be concerned about the risks associated with a breach of confidentiality.
How can this be addressed?
That confidentiality is not, apparently, a core element of the bargain the employer enters into will no doubt come as a shock to many businesses. Having advised countless employers on the terms of settlement agreements, I am surprised by the conclusions reached by the court.
My experience is that confidentiality is very often at the forefront of the employer’s mind. It is right, of course, that the employer is looking to avoid Tribunal proceedings – but that does not, in my view or my experience, mean employers are not also looking, as a principle reason why they are prepared to pay over compensation so early in proceedings, to ensure confidentiality.
The question on numerous clients’ lips will be “How do we make sure that confidentiality becomes a condition of the agreement?”
One solution is to state, expressly, that it is a condition. However – as pointed out by Lord Reid in Schuler, doing so will not by itself turn the provision into a condition. The settlement agreement will need to make it clear and unambiguous that these issues go to the heart of the bargain the employer is making. If they are supported by discreet consideration, that might also be helpful – although that, in turn, creates its own issues (see below).
Tax and consideration
There is also one other tricky issue: The favourable tax treatment of settlement payments only applies to money that is paid to settle claims. It does not apply to money that is paid as consideration for confidentiality obligations. So herein lies the rub: if the confidentiality terms are crucial to the agreement, what part of the compensation is properly taxable?
One traditional approach has been to carve out a nominal payment – sometimes as little as £1 – and say that that is the consideration for the confidentiality obligations. Does that suggest, however, that the confidentiality is not in fact central to the contract? When the court considers whether these obligations are conditions or mere innominate terms, is it realistic to suppose that something supposedly so important to the agreement as to amount to a condition would be supported by so little consideration?
The first of its kind?
Astonishingly, there seems to have been no reported case before now that has dealt with this issue. Can it really be that there has never been a dispute about whether an employee has breached the confidential terms of their settlement agreement that has ended in court? If anyone reading this knows of such a case, we would be grateful to hear of it.
If this case is followed, it is likely that the power behind the commonly included and quite often onerous confidentiality obligations set out in settlement agreements will be at lease diminished. Instead, employers – or rather, those drafting their agreements and negotiating on their behalf – will need to think carefully about how confidentiality can be placed at the heart of the settlement and the consequences of doing so.
This article was written by Tim Goodwin, a tenant of 12KBW.
Read the judgment here: Duchy Farm Kennels Ltd v Steels ( EWHC 1208