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  • Overview

    Settlement agreements are a highly important aspect of employment relations. They have been around in some form or other since the 1990s and are an appropriate way of managing employees’ exits on financial terms.  They are also used as an opportunity for employers to ensure that certain confidential information including the terms of the settlement agreement themselves do not get disclosed by the employee and risk damage to reputation for the employer as well as revealing the employer as having a propensity to trot out settlement agreements in all situations when employees need to be managed out.

     

    In the case of Mr Steels v Duchy Farm Kennels Ltd, the Claimant brought a claim against his employer and a settlement was negotiated with the assistance of ACAS and recorded in what is known as a COT3 settlement agreement form.  DFK agreed to pay Mr Steels £15,500 in 47 weekly instalments of £330.  He agreed that the payment was in full and final settlement of his Employment Tribunal claims and agreed that he would not bring any other proceedings of any nature relating to his employment except in respect of personal injury claims which had not arisen at the time of the agreement and any claims relating to his pension entitlements.

     

    The COT3 agreement also included a provision under which both sides agreed to treat the fact of and terms of the agreement as strictly confidential (the confidentiality clause), a warranty that Mr Steels had not previously disclosed the facts and terms of the agreement to any other person and a mutual non-derogatory remark clause.  DFK also agreed to provide potential employers of Mr Steels with a reference and agreed terms.

     

    DFK paid all but the last instalment being due on 29 March 2019.  After it stopped paying the instalments, Mr Steels issued proceedings for enforcement in the County Court and DFK defended the proceedings by seeking a declaration that because of the breach of the confidentiality clause on his part, the outstanding sums were no longer recoverable by him under the general law of contract.

     

    The Judge at the County Court found that Mr Steels had mentioned the fact that he had entered into a settlement agreement with DFK and the terms of the settlement including the total sum in the instalments and the conversation with a former colleague on 3 April 2019.  There followed a chain of communication when that employee passed the information onto his boss and that information then made its way via 3 more people who were employees of DFK to the managing director.  The Judge found that Mr Steels had previously mentioned the settlement terms to his wife and his brother in law, but the only breach relied upon by DFK was the disclosure to the original other employee. 

     

    Disclosure of the fact of and sum of settlement did not cause any commercial harm to DFK, but the Judge accepted that it created a risk that other disaffected employees might rely on the information as encouragement to bring unmeritorious claims against DFK in the hope that they would obtain a settlement.  If such an eventuality transpired, DFK would be able to bring a claim for damages by reference to the costs incurred in defending the unmeritorious proceedings.  However the confidentiality clause was not a condition of the contract, any breach of which would automatically give the employer the right to bring its contractual obligations to an end.  Instead, it was what was known as an intermediate term.  The breach did not go to the root of the contract and so was not a breach that DFK could rely upon as a repudiatory breach and therefore treat itself as being discharged from any further obligation to pay instalments.  Finally the breach did not mean that Mr Steels has renounced the contract such that a reasonable observer would think that he no longer regarded himself as being bound by it.  The obligation to pay the instalments therefore was enforceable, notwithstanding the breach.

     

    When DFK appealed to the High Court, the High Court Judge observed that there were two routes by which DFK could potentially establish that Mr Steels’ breach of the confidentiality clause meant that, applying the general law of contract, they were freed from the obligation to pay the instalments:
     

    1. By establishing that the term was a condition, it is possible for both sides to a contract to state expressly that a term is a condition, but that did not happen here. 

    Whether, by necessary implication, in light of all of the relevant circumstances, the confidentiality clause could be regarded as being a condition? The High Court came to the clear conclusion that it was not and the Judge was right to characterise the confidentiality clause as an intermediate term.  This was a generic clause that was inserted as a matter of course in an employment settlement agreement.  The fact that there is a confidentiality clause in such an agreement does not indicate the confidentiality is of paramount or even major importance.  Confidentiality was not at the core of the agreement.  The most important obligations of the settlement agreement were that Mr Steels gave up his Tribunal claims and rights and remedies in respect of his employment termination in return for DFK making payments.  There may well be cases in which a confidentiality clause in a COT3 or settlement agreement might be of sufficient importance to achieve the status of a condition but in most cases of that nature, the agreement will stipulate that the term is a condition.

    1. The second route by which DFK can be relieved of the obligation to pay further instalments was by showing that the breach of the confidentiality clause was repudiatory.  The relevant test from the perspective of reasonable person in the position of an innocent party was whether Mr Steels had clearly shown an intention to abandon and altogether refuse to perform the contract.  The Judge had been correct to conclude that this test was not met.  The 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 initially was not very large.

    Since the breach was of an intermediate term and was not repudiatory, the High Court held that DFK were bound to pay the instalments and dismiss their appeal. 

     

    Settlement agreements include confidentiality clauses for very good reasons, like the ones set out above in this particular case.  The message to employers is clear.  If you value these confidentiality clauses, then they must be made a condition of the settlement agreement or COT3 agreement and if not, then if they are broken then employers will not be able legally to refuse to pay or claw back monies paid under a settlement agreement.  Only if the confidentiality is a condition or a condition precedent to the payment of money will employers be entitled to withhold monies or even sue for monies paid over. 

     

    This is a message to all employers to look at your template settlement agreements very carefully and if they have not been reviewed within the last 6 months, then they need urgent review.  Do not leave this to chance.  The same applies to any COT3 ACAS wording where you reach settlement with employees via ACAS.  Get the wording checked out by us.

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