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When does a breach of a contract entitle one of the parties to refuse to be bound by it any further? That was the question faced by Mr Justice Cavanagh in the High Court last April in an appeal brought against a judgment of HHJ Wall in Birmingham. The appeal was in relation to a settlement agreement in an employment dispute, known as a COT3. The COT3 is a private contract, and as such, many of the disputes that relate to COT3s address issues of contract law.

The background

The Appellant was the employer, a small kennel company, and the Respondent was a former employee. The Appellant had agreed to pay the Respondent around £15,000 in full and final settlement of an unfair dismissal claim. The COT3 included a confidentiality clause, which read as follows:

“9. The parties will treat the fact of and the terms of this Agreement as strictly confidential and the parties will not disclose them to any other person or entity, […]”

The Respondent breached the clause by telling another former employee of the Appellant that a settlement had been reached, and the amount thereof.

So the question for the judge was: was this breach of the contract enough to eclipse the whole thing and allow the Appellant to stop making settlement payments?

Contract terms

Contractual terms can, broadly, be defined into three categories: conditions, warranties, and intermediate terms. A condition, if broken, allows the innocent party to bring the contract to an end. A warranty does not, the only remedy is damages. An intermediate term, as the name suggests, is somewhere between the two, and the question becomes whether the breach was a repudiatory breach allowing the innocent party to end the contract.

In this case, the Appellant argued that Clause 9 was a condition of the contract, or in the alternative a repudiatory breach of an intermediate term. The Appellant’s reasoning was that, of 13 clauses in the contract, three of them related in some way to confidentiality, so there was a high degree of focus on it. Also, the Appellant argued that use of the word “strictly” before confidential had the same effect.

On the other side, the Respondent argued that it was clear the Appellant wasn’t really that concerned about confidentiality; it didn’t represent a fundamental part of the agreement, and there wouldn’t even be any tangible damage to the Appellant by a breach of the clause.

Judgment

Cavanagh J, after a discussion of the relevant contract law principles, agreed with HHJ Wall, and by extension the Respondent, that the clause was not a condition. On the question of whether it was a repudiatory breach of an intermediate term, it was held that was never likely to, and did not, result in any commercial embarrassment or other commercial problems for the employer. For these reasons, Cavanagh J dismissed the appeal.

As with most questions of contractual construction, the important thing is to look at clauses in the round, and their impact on the contract as a whole. Terms may not always be specified as conditions or warranties, and so it is important to consider their importance when assessing whether a party is able to walk away from the contract.

Link to judgment: https://www.bailii.org/ew/cases/EWHC/QB/2020/1208.html

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