What happens when a confidentiality clause in a settlement agreement is breached?

A settlement agreement will nearly always contain a clause that requires the parties to keep the existence of and terms of the settlement confidential.  

From the employer’s point of view, they will not want any financial settlement to become widely known, particularly among their staff, because of the risk this may cause disquiet among the workforce (e.g. if the recipient of the settlement has left work under auspicious circumstances) or the risk that it may lead to an expectation of similar pay-outs in the future.  

From the employee’s perspective, a confidentiality clause can be equally important as, understandably, they may not want former colleagues knowing about their personal information or that they may have accepted a settlement that was below their expectations.

Given the importance of maintaining confidentiality in settlement agreements it is not surprising that when it is breached by one party, it can cause a great deal of upset and we often get asked what, if anything, can be done where such a breach occurs. 

Breach of contract claim

A breach of a term of a settlement agreement will give rise to a claim for breach of contract.  Where the settlement agreement is entered into after termination (which most are), the claim must be pursued in the civil courts.   The Employment Tribunal has no jurisdiction to hear breach of contract claims where the employment relationship has terminated. 

However, such a claim would probably not be worth pursuing unless you, as the wronged party, have suffered financial loss or reputational damage, as the main remedy in breach of contract claims is damages.  Obviously, this depends on what information has been leaked and to whom, as there will be circumstances where a party will be able to show they have suffered quantifiable financial or reputational loss.  

However, in most cases concerning the unauthorised disclosure of the terms of the settlement, it is likely to be difficult to demonstrate that you have suffered any tangible damage.   Where there is no financial loss, your remedy would be for a declaration that the other party breached the agreement – and that, for a lot of individuals or businesses, will not be worth the trouble of bringing a claim. 

What if the breach occurs before payment is made under the agreement?

If an employee breaches a confidentiality clause before the settlement payment has been paid under the agreement, an employer may seek to argue that they are no longer obliged to pay the settlement monies.   Whether they can do this depends on the wording of the settlement agreement and whether the payment of the settlement money is stated to be conditional on the employee’s compliance with the confidentiality clause.   If payment is conditional on this, then the employer is entitled to withhold the settlement payment. 

If, however, payment is not explicitly stated to be conditional on the employee’s compliance with the confidentiality clause, then the situation is more complicated.  The employer will need to seek advice on the confidentiality clause because the remedy available will vary according to the classification of the clause it is. 

The most likely scenario is that the confidentiality clause will be classified as a “warranty”, meaning the employer’s remedy will be for damages for breach of contract and they will not be entitled to withhold any of the compensation payment.

Of course, even if the settlement agreement enables the employer to withhold payment of compensation due to an employee’s breach of a confidentiality clause, it is highly likely that the employee will sue for breach of contract for payment of the settlement sum, together with interest and costs.   It stands to reason, therefore, that an employer should not make such a decision lightly and must be satisfied that the employee has breached the contract, and have good evidence to support this belief, in case the employee decides to take the matter to court.

What steps can be taken if a breach/suspected has occurred?

If the breach is discovered after the employee has been paid, the first step is to protect against any further/repeated breach.  

Whilst it is possible for a business to seek an injunction to achieve this, this is unlikely to be appropriate where the breach relates to the confidentiality of the terms of the settlement agreement.  The normal course of action would be to:

1. Put the ex-employee on notice that they are in breach of contract, entitling you to pursue a claim in the civil courts for damages; and

2. seek written undertakings from the employee that they will comply, henceforth, with the terms of the settlement agreement.  

If the (ex) employee refuses to sign the undertakings and/or commits a further breach, the employer will need to decide whether or not to issue proceedings.  This will involve weighing up the severity of the breach (e.g. who the disclosure was made to/ how many were told) and the degree of financial and/or reputational loss suffered against the time and associated costs of bringing such a claim.     

What if you are accused of breaching confidentiality?

If you, the employer, are accused of breaching the confidentiality terms of a settlement agreement, you will need to act quickly to investigate the alleged breach and to contain it.   This will typically involve:

1. interviewing the individual(s) alleged to have disclosed the confidential information (if they have been identified by the (ex) employee);

2. speaking to all the employees who they divulged the information to;

3. requiring all individuals involved in the breach to sign confidentiality agreements;

4. invoking disciplinary proceedings, if appropriate; and

5. reinforcing the need to keep the settlement agreement terms confidential to all employees who are aware of its terms. 

Taking these early steps should contain the breach and prevent any further damage occurring, which in turn should reduce the risk of the employee bringing a claim of breach of contract.

Practical tips for protecting the confidentiality of settlement agreements

The following are some practical steps that employers can take to ensure that settlement agreements are kept confidential:

• Ensuring that knowledge of the settlement agreement is kept to a limited number of employees and that its terms are only disclosed internally a strictly “need to know” basis.

• Impressing on those employees of the need to keep the fact of and terms of the agreement confidential.

• If it is a commercially sensitive case, consider putting in place individual confidentiality agreements.

• Marking all internal correspondence, emails etc regarding the agreement as “confidential”.

If you need advice on any of the issues in this article or need help with a settlement agreement, please get in touch with us.