The majority of commercial contracts contain confidentiality obligations on one or both parties. If these are common in your contracts, consider what would you expect to happen if the party you enter into a contract with breaches such obligations?
In the recent case of Duchy Farm Kennels Limited v Graham William Steels [2020] EWHC 1208 (QB), it was held that the confidentiality obligations were not conditions of the contract and therefore a breach of the confidentiality obligations did not entitle the non-defaulting party to terminate the agreement.
Background
By way of background, contract terms can be classified as a condition, a warranty or a so-called intermediate (or innominate) term. The classification of a term is significant as it affects the remedies available to the non-defaulting party where the other party is in breach. If the term is a condition of the contract, the non-defaulting party is entitled to terminate the contract and claim damages whereas if a warranty is breached, the non-defaulting party can only bring a claim for damages. If a term is an intermediate term, the remedy for its breach depends upon the effect of the breach at the time it happens. If the effect of the breach substantially deprives the non-defaulting party of the whole of the benefit of the contract, then it will be treated as a condition of the contract. If this is not the case, then the remedy will be for breach of warranty.
In the above case, the High Court had to decide whether a confidentiality clause in a settlement agreement was a condition with the result that breach by the employee would entitle the employer to cease making payments under the agreement.
Summary of the case
Mr Steels had brought an employment tribunal claim against his former employer, Duchy Farm Kennels Limited (Duchy). A settlement was negotiated and recorded on a COT3 form under which Duchy agreed to pay to Mr Steels a sum in instalments. The COT3 agreement included a confidentiality clause commonly used in settlement agreements under which the parties agreed to treat the terms and existence of the agreement as strictly confidential. Part-way through payment of the instalments, Duchy stopped paying the instalments on the basis that Mr Steels had breached the confidentiality clause by disclosing the existence and sum of the settlement agreement to a former colleague.
Mr Steels sought enforcement of the COT3 agreement, and the case came before the county court who found that whilst Mr Steel’s disclosure did not cause any commercial harm to Duchy, there was a risk that other disaffected employees might rely on the information as encouragement to bring claims against Duchy. Significantly, the county court held that the confidentiality clause was not a condition of the contract and that it was an intermediate term. The court found that the breach did not go to the heart of the contract and so was not a repudiatory breach, which would have entitled Duchy to treat the contract as terminated. Therefore, Duchy’s obligation to pay the instalments continued despite the breach.
Duchy appealed to the High Court who dismissed the appeal. The High Court held that Duchy would need to establish that the confidentiality clause was a condition of the contract or that it was an intermediate term and there had been a repudiatory breach. The High Court noted that the parties had not expressly stated that the confidentiality clause was a condition of the contract and found that the confidentiality clause was a generic clauses, common to employment settlement agreements but that confidentiality was not at the core of such an agreement. Therefore, in light of all the relevant circumstances the County Court was right to characterise the clause as an intermediate term. The High Court then considered whether the breach was a repudiatory breach of an intermediate term and considered whether Mr Steels had demonstrated an intention to “abandon and refuse to perform the contract” and found that the County Court had been right to conclude that this test was not met. Therefore, notwithstanding Mr Steels’ breach of the confidentiality clause, Duchy was not entitled to treat the agreement as repudiated and its obligation to pay the further instalments under the agreement continued.
Conclusion
Whilst the circumstances of this case relate to a settlement agreement arising out of an employment claim, we should be aware that confidentiality clauses which are included in the vast majority of commercial contracts may not have the effect intended by the parties. As a result of this case and the comments by the Judge in the High Court, if the parties intend for confidentiality obligations to be treated as a condition of the contract, then that should be expressly provided for in the contract. The parties could also expressly include in the contract the remedy they agree should apply if either of the parties are in breach of the obligation.
If you would like further information about this or any other contract law issues, please get in touch with Victoria Trigwell or any member of our Commercial team.
