Confidentiality Clauses and Duchy Farm Kennels v Steels - What Just Happened?

Notwithstanding that public opinion has shifted in recent years on the use of confidentiality clauses, they have remained a stable feature of almost every compromise of Employment Tribunal proceedings.

However, the recent High Court decision in Duchy Farm Kennels v Steels [2020] EWHC 1208 (QB) (https://www.bailii.org/ew/cases/EWHC/QB/2020/1208.html) has thrown a particularly unwanted spanner in the works, with the Court finding that the employee’s breach of a standard-form confidentiality clause did not release the employer from the obligation to continue to pay the settlement sums.

The implications are fairly apparent – claims may now follow from employees (with the benefit of a six-year limitation) looking to enforce, and all parties settling cases will need to take additional care as to how to draft their negotiated agreements to achieve their intentions.

What follows is a short précis of the decision and some thoughts on how, if at all, an employer may be released from their obligations should confidentiality be breached.

The Decision in Duchy Farm Kennels v Steels

Mr Steels had been employed by Duchy Farm Kennels, 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. This was described by the Court as “not… a large sum of money”, albeit with the average and median awards for successful unfair dismissal claims in 2019 being £13,704 and £6,243 respectively (discrimination is higher or lower depending on the protected characteristic relied on), it could perhaps more accurately be described as a claim of moderate value. The method of settlement was by way of COT3 terms, but the decision would apply equally to settlement agreements under the relevant statutory provisions.

The agreement contained a standard confidentiality clause drafted in terms that:

“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.”

Mr Steels did not abide by this confidentiality clause, disclosing the terms of the settlement to a former colleague. This made its way to his former employer (through a chain of around four people) in a matter of weeks, whereupon payment of the instalments was stopped. The employer maintained that breach of the confidentiality clause was sufficient to terminate the agreement.

Termination for Breach – The Law

The law in this area is well-trodden and applies to contracts of all kinds, including settlement agreements and COT3 terms. In order for breach of contract to bring that contract to an end, the term in question must either be:

(i) a condition, colloquially described as a fundamental term “going to the heart” of the contract; or

(ii) an innominate (or intermediate) term, which may act as a condition if the breach is particularly serious.

The status of a term as a condition or otherwise is a matter of fact, and the parties’ own descriptions are persuasive only. 

The test is fact-sensitive, and depends on factors such as the parties’ intentions, the nature and subject matter of the contract, whether damages are an adequate remedy for breach, and whether treating the term as a condition would produce a “reasonable” result. The time for assessment is the time the agreement was entered into.

If a party is entitled to, and in fact does, terminate a contract for breach, then future (but not past) obligations come to an end. This would involve the cessation of future payments, and also the discharge of the duty of confidentiality.

The Basis for the Decision

The Court rejected the employer’s suggestion that confidentiality was “at the core” of the COT3 terms, or alternatively that Mr Steels’ breach had been particularly serious. In particular, the Court found that:

(i) the confidentiality clause was “ancillary” to the main purpose of the settlement, whereby the employee gave up his Tribunal claim and the risk of uncertain recovery in return for a guaranteed sum, and the employer benefitted from avoiding the “risk, cost and inconvenience” of defending proceedings without admitting liability;

(ii) the claim did not involve allegations of particular sensitivity, or well-known parties, but was simply a “fairly standard employment dispute”;

(iii) the risk of “copy-cat claims” was “very remote”, particularly given that “the very fact that the parties were in dispute was already well known in the locality and amongst the [employer’s] workforce” and the sum was “not large”;

(iv) the proportion of the agreement devoted to confidentiality was not relevant. Neither were the fact that the agreement was legally drafted nor the use of the phrase “strictly confidential” (which did not add anything of substance). It was also commented that the clause was “generic”;

(v) it would not be reasonable for the employee to forfeit the benefit of the settlement for any disclosure, however minor. 

The result was that the confidentiality clause was an innominate (or intermediate) term only, and that Mr Steels’ breaches were not sufficiently serious to terminate the agreement.

The Court’s judgment explicitly acknowledges that, absent the ability to terminate for breach, confidentiality clauses may be in practice unenforceable (particularly where it is “often impossible” to quantify damages). Various solutions are proposed, which are discussed below.

Finally, in perhaps the biggest challenge to litigation orthodoxy, the Court commented that:

“parties often overestimate the harm that can be done by a relatively minor breach of a confidentiality clause”. 

… along with a nod is to the perennial difficulty faced by claimants when considering the effect of confidentiality clauses, that:

“[it] would be very [surprising] if people who were familiar with the protagonists were unaware that an ET [Employment Tribunal] claim had been brought…anyone who was aware of the dispute and who thought about it would probably work out that there had been a settlement”.

What is the Impact?

The answer depends on the manner in which the confidentiality provisions are drafted and the timing of the employer’s obligations to make payment. 

Where payments are periodical, employers have previously relied on the leverage of refusing future instalments where there is a breach of confidentiality (as was the case in Duchy Farm Kennels). However it seems this will no longer be effective unless confidentiality is truly a core term, or breach is genuinely serious – perhaps because of:

• the nature of the allegations, the status of the parties, the genuine confidentiality of the dispute up to the point of settlement, or perhaps the sums involved;
• ramifications beyond the immediate dispute, for example discussions with the media or perhaps very widely shared social-media posts.

However, what is clear is that generic suggestions that settlement may encourage  “copy-cat” claims are unlikely to be successful absent evidence of a particular risk.

A workaround suggested in Duchy Farm Kennels was for the parties to expressly label the confidentiality clause as a condition. However, this rather ignores that even the most eloquent and accurately expressed intentions, although relevant and highly persuasive, are not binding and cannot create any guarantees. Caution in extremis would appear sensible.

Some guidance can also be drawn from the Court’s approach to the imprecision with which the confidentiality clause was drafted, a factor “strongly suggesting” that it was not a condition. In particular, the term as drafted made no provision for disclosure to anyone, including Mr Steels’ wife, a state of affairs found to be “nonsensical”. It seems to therefore be in employers’ interests to see that confidentiality clauses reflect reality if the intention is to enforce by withholding payment. 

Where payments are on a lump-sum basis, employers’ leverage has always been limited given that funds have usually been transferred before breach occurs. Some agreements attempt to denote confidentiality as a condition precedent to either receipt or retention of the settlement sums and, although the former may provide protection if breach occurs prior to payment, the latter does not sit at all comfortably with the usual principles for the transfer of / security over property.

Even if Duchy Farm Kennels can be distinguished and confidentiality is at the core of a particular settlement, payments already made at the time of the breach cannot be recovered unless there has been a “total failure of consideration”. Given that (at the very least) the underlying litigation will have gone away, this is very unlikely indeed.

Another of the Court’s suggested workarounds was for the parties to “make specific provision in the contract terms for what should happen if there is a breach of confidentiality… for example… the ex-employee must repay all or a proportion of the money already paid over”.

Unfortunately, in most cases such a term is likely to fall foul of the rule against penalty clauses, with ParkingEye v Beavis reaffirming that any predetermined contractual remedy must bear some link to the likely damage caused. Duchy Farm Kennels envisages this damage to be relatively minor (and in any event very difficult to prove) for a “standard” employment dispute. Unless perhaps the litigation falls in the territory discussed above, where particular circumstances render confidentiality a core component, the Court’s “solution” appears optimistic.

Finally, the Court suggested that employers could seek an injunction to prevent further breach. It goes without saying this cannot undo what has already happened, and would likely require circumstances where damages would not be an adequate remedy.

It seems that employers’ previous “safe haven” of delaying payments may not be as secure as hoped, and those drafting settlement agreements would be well-advised to stipulate very clearly in the relevant text (i) the reason why confidentiality is important, and (ii) the consequences of breach. This, along with ensuring there are sensible exclusions to the overall obligation, would maximise the prospect of enforcement but cannot of course create certainty.

Employers can still of course claim for losses arising from a breach of confidentiality, however these are likely to be impossible to prove in practice. If further claims are brought by disgruntled /  opportunistic employees, thorny principles of damages arise where such claims turn out to be well-founded (or at least arguable). Even if such further claims are very poorly founded, showing that their instigation was the result of the settlement rather than (for example) mere knowledge of another’s claim will be a very difficult hurdle to surmount.

And Finally…

… a word on Barbara Streisand, whose attempt in 2003 to suppress the publication of aerial photographs of her Malibu residence led only to an entirely unnecessary and avoidable flurry of interest. Similarly, it seems that Duchy Farm Kennels’ intent to keep the settlement out of the public domain has only ensured that articles such as this lay out the facts in the most public of forums – perhaps a timely reminder that the decision to enforce confidentiality clauses is often a fine judgment of risk and reward.

Mike Blitz practises in chambers’ specialist Commercial and Employment teams, and is happy to assist with any queries arising from this article.