Confidentiality is key to the settlement of many disputes – most parties don’t want the wider world to know the details of the settlement reached with their counterparty. But how effective are confidentiality clauses?
A recent case highlights the need to draft confidentiality clauses carefully. In Duchy Farm Kennels v Steels  EWHC 1208 (QB) an employer decided to stop paying settlement sum instalments to a former employee because he had breached confidentiality by telling another employee about the settlement. The court held that the employer could not do so because the confidentiality clause was not a condition of the contract and its breach was not serious enough on its own to allow termination of the contract. Unable to terminate the employer was left with only two options:
- Seek injunctive relief to prevent further breaches – in this case the damage was already done and such relief would have been expensive and ineffective.
- Seek damages from the employee in breach – the amount would be limited to the direct financial loss suffered as a result of the breach which would be hard to prove even if it had been suffered.
The case means it is all the more important to ensure that confidentiality clauses and settlement agreements are drafted carefully to avoid such issues. Parties should consider the following options:
- Make the confidentiality clause a condition of the contract allowing the aggrieved party to terminate for breach – this will only relieve the aggrieved party of performance of future obligations – so if the settlement sum has already been paid this will not help.
- Include a liquidated damages clause in the settlement agreement under which the parties agree that in the event of a breach the party receiving money must repay all or a proportion of the money already paid over. The penalty must be proportionate to the breach.
- Allow the aggrieved party to discard the settlement and continue with litigation if the clause is breached – this may be an unattractive option for both sides but could serve as a deterrent.