Employment Law Cases
COT3 agreements and confidentiality clauses
Duchy Farms Kennels Ltd v Steels
An employee’s breach of a confidentiality clause in a COT3 settlement did not free his employer of its obligation to continue making instalment payments of the agreed settlement sum.
Mr Steels and his employer DFK concluded a COT3 agreement settling his claims against DFK for various issues, including one of unfair dismissal. It was in standard terms and included, in clause 9, a fairly typical confidentiality clause. Unusually the payments made under the COT3 were by instalments (47 weekly payments of £330; total £15,500) – this was to help with DFK’s cash flow, it being a small business.
After a few weeks DFK stopped the weekly payments because it discovered that Mr Steels had disclosed the fact of the settlement to a third party and, it argued, this breached the confidentiality clause and therefore it wasn’t bound to continue making the agreed payments. The breach of confidentiality occurred when Mr Steels mentioned the fact of the settlement and the sums involved to Mr Mulliner (who’d come to his house to quote for a new fence) and who was a former employee of DFK who’d left on bad terms. By a circuitous route, news of this reached the MD of DFK.
DFK sought a declaration in the county court that because of the breach of the confidentiality clause, the outstanding monies were no longer payable under the general law of contract (it relied on s. 19A(4) of the Employment Tribunals Act 1996).
The county court judge held that the disclosure of the settlement did not cause any commercial harm to DFK. More importantly:
- the breach was a breach of an intermediate or innominate term of the COT3 agreement, rather than the breach of a condition, and so it did not automatically mean that the DFK was freed from its obligation to continue paying the monetary instalments, and
- Mr Steels’ actions did not amount to a repudiatory breach or a renunciation of the COT3 agreement (such that a reasonable observer would think he no longer regarded himself as bound by the contract)
The obligation to pay the instalments therefore continued, notwithstanding the breach. DFK appealed.
High Court decision
The appeal was dismissed.
The High Court began by remarking that the point at issue was an important and one which had not been the subject of any appeal ruling.
There are two ways in which someone can establish that a breach of a confidentiality clause means that, applying the general law of contract, the other party is freed from the obligation to pay:
- establishing that the term is a condition of the contract, or
- if it isn’t, that the term is an intermediate term and the breach was a repudiatory one
Was, or could it be implied that, clause 9 was a condition of the COT3 agreement? No. The parties could have expressly stated that clause 9 was a condition of the agreement but they did not. The clause was a generic clause that is seen almost as a matter of course in such settlement agreements. It did not indicate that confidentiality was of paramount or even major importance to the parties.
Were Mr Steels’ actions a repudiatory breach of an intermediate term? The test is: from the perspective of a reasonable person, had Mr Steels ‘clearly shown an intention to abandon and altogether refuse to perform the contract’? No. Mr Steels’ breach was never likely to, and did not, result in any commercial embarrassment or other commercial problems for DFK. The risk that it would trigger expensive unmeritorious copycat claims was very remote, especially as the sum in issue was not very large.
The High Court also commented that it ‘would be very surprised if people who were familiar with the protagonists were unaware that an ET claim had been brought. If the breach had not happened, anyone who was aware of the dispute and who thought about it would probably work out that there had been a settlement, even without a breach of the confidentiality clause’.
Link to judgment: https://www.bailii.org/ew/cases/EWHC/QB/2020/1208.html
The main learning point from this first case on the subject is that a confidentiality clause should be expressed as a condition of the COT3 or settlement agreement and that payment of the monies is conditional upon it being adhered to. The practical problem is that most payments are made as a lump sum and so if payment has already been made, a former employer is then left with having to litigate to return the sum paid. At that stage, a court will consider the losses sustained by the former employee when assessing compensation and this is often difficult to quantify, unless there have been a number of copycat claims. Therefore, in practical terms, this case will be limited to situations where compensation is being paid by instalments.