Settlement payment still due, despite employee’s breach of confidentiality clause

The High Court has ruled that an employer remained legally liable to pay the remaining sums due under a COT3 settlement, despite the employee’s breach of a confidentiality clause in the settlement agreement. This decision doesn’t establish any new law, but is a useful reminder of the contractual framework within which these agreements operate.

The COT3 agreement reflected the terms of settlement of employment tribunal proceedings reached with the assistance of ACAS. It contained a number of relatively standard provisions, including a confidentiality clause. Under this clause, both parties agreed, subject to limited exceptions, to keep “the fact of and terms” of the agreement “strictly confidential”. The only unusual feature of the agreement was that that settlement sum was payable in 47 weekly instalments, rather than as a single lump sum.

After paying a number of instalments, the employer discovered that the employee had breached the confidentiality clause by disclosing the fact of the settlement and the amount of the payment to a single third party. It then stopped making any further payments. In response the employee issued proceedings in the county court to recover the balance of the agreed settlement sum. The employer countered by seeking a declaration that no further sums were due because of the breach of the confidentiality clause. The county court judge ruled in favour of the employee, and this has now been confirmed on appeal.

The key point was that the confidentiality clause could not be regarded as a “condition”, so that any breach, however minor, by one party, would relieve the other party of its obligations under the agreement. Instead, it was an “intermediate term”, which meant that the impact of a breach would depend on its gravity. If it was particularly serious, that would amount to a “repudiatory” breach, which if “accepted” by the innocent party would relieve it of any further obligations under the agreement. Otherwise the innocent party would need to bring a claim for damages, or perhaps proceedings for an injunction, to enforce the clause.

For an employer’s perspective, this case illustrates the difficulty of enforcing confidentiality obligations in settlement agreements. It is true that the drafting can be altered so that the payment of the settlement sum is made conditional on the employee complying with their confidentiality obligations, but this is not a particularly practical solution if the breach occurs after the full settlement sum has been paid, since the employer would then be obliged to issue proceedings to recover the money.

Another approach is to stipulate in the agreement exactly what happens if an employee fails to comply with their confidentiality obligations, with a proportion of the settlement money being repayable, depending on the seriousness of the breach. However, such wording can be tricky to draft and time-consuming to negotiate. In any event it can be difficult to recover money from a former employee, once the settlement sum has been paid over.

Employers should be alive to these considerations when deciding whether to include confidentiality obligations in settlement agreements in the first place. In the light of recent experience and regulatory guidance, in many cases it may not be appropriate to include confidentiality obligations at all. In others, careful drafting may be required to make it clear to the employee exactly what the clause requires, and the scope of the permitted exceptions. These related issues are explored in more detail in our earlier article here.