The High Court recently considered the status of confidentiality terms in employment settlement agreements.

First, a reminder of the main types of terms of contracts:

• Condition: a fundamental term (i.e. something that goes to the contract’s heart); the breach of which entitles the other party to terminate the contract.
• Warranty: an ancillary term; the breach of which only entitles the other party to claim damages (i.e. money) and he or she must continue to comply with their obligations.
• Innominate Term: midway between a condition and a warranty; the breach of which may or may not (depending on the circumstances) entitle the other party to terminate the contract.

In the Duchy Farm Kennels case (click here to see the full judgment), the former employee breached the confidentiality clause of the settlement agreement and, in turn, the employer stopped paying the staged settlement payments.  The question for the High Court: was the confidentiality clause a condition of the settlement agreement; meaning that the former employee’s breach entitled the employer to terminate the agreement and cease making any further payments?

The High Court reminded us that a term is a condition in any of the following five situations:

1. statute explicitly classifies the term in this way;
2. there is a binding judicial decision supporting this classification of a particular term as a “condition”;
3. a term is described in the contract as a “condition” and upon construction it has that technical meaning;
4. the parties have explicitly agreed that breach of that term, no matter what the factual consequences, will entitle the innocent party to terminate the contract for breach; or
5. as a matter of general construction of the contract, the clause must be understood as intended to operate as a condition.

The parties did not expressly state (in either the agreement or elsewhere) that confidentiality was a condition of the settlement agreement and therefore the High Court had to decide whether such status was implied by the relevant circumstances.  These circumstances included that: (i) the dispute was fairly standard; (ii) neither of the parties were high profile; (iii) the settlement payment was a relatively low sum of money; (iv) the confidentiality clause was a generic clause found in standard employment settlement agreements; and (v) the employer did not face any commercial risk as a result of the former employee’s breach.  Accordingly, the High Court found that the clause was not a condition.

This decision might surprise some, particularly employers, who consider confidentiality a key part of any settlement agreement.  The lesson: if you want confidentiality to be a condition of the contract, then expressly say so and do not rely on generic clauses.

James Clark is an associate in Grosvenor Law’s civil and criminal teams and regularly advises clients on contractual disputes and terms of settlement.

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