Expensive Secret Telling: When Damages May Be Available for Breach of a Confidentiality Clause in a Settlement Agreement

Previously printed in the CCH’s Focus on Canadian Employment and Equality Rights Newsletter .

Employers often enter into settlements in order to avoid litigation. Sometimes, the confidentiality of the settlement is crucially important to the employer. While simple confidentiality clauses are often included in settlement terms and coupled with enforcement mechanisms (what happens if a breach occurs), it is uncommon to see cases that address the enforceability of these clauses. In Jan Wong v. The Globe and Mail Inc., 2014 ONSC 6372, the Ontario Divisional Court dismissed with costs an application for judicial review of an arbitrator’s decision that required a former employee to repay over $200,000 paid under a settlement agreement when she made statements confirming that she had received a payment.

Background

Jan Wong was a former Globe and Mail columnist who was the subject of an unjust dismissal grievance. The grievance was settled and the settlement agreement included a confidentiality clause. The confidentiality clause itself was typical in that it required the parties not to disclose the terms of the settlement. Included in the terms, however, was a somewhat atypical provision that arose from the fact that Wong intended to write a book about her experience of depression in the workplace. She was concerned about her right to speak frankly about her experience and, as a result, the settlement agreement included a provision that until a particular date that was approximately a year from the settlement, she would not disparage the employer regarding “any issues surrounding her employment and termination”. The consequence for breach of these provisions was also spelled out in the settlement agreement which provided that if there was an alleged breach, the arbitrator would remain seized to determine if there was a breach and, if so, Wong would have an obligation to repay the employer a lump-sum payment that was made to her under the agreement that was the equivalent of two years’ salary (just under $210,000).

Wong went on to write her book entitled “Out of the Blue” and contracted for its publication. As part of the pre-publication advertising, Chatelaine magazine published an article in which Wong commented on the Globe and Mail’s reasons for firing her. The Globe and Mail objected to the characterization of these reasons and contacted the publisher which subsequently chose not to publish Wong’s book. Wong then elected to self-publish and did so in 2012, after which the Globe and Mail immediately applied to the arbitrator for a determination that 23 phrases in the book breached the confidentiality provision in the settlement agreement. As a result, the Globe and Mail sought an order for repayment of the lump-sum amount.

Arbitration – Spilling the beans

The arbitrator held a hearing on the application and concluded that at least four of the impugned statements in the book were in breach of the settlement agreement because they disclosed the fact that a payment had been made by the Globe and Mail to Wong. The four statements were:

• … I can’t disclose the amount of money I received
• I’d just been paid a pile of money to go away …
• Two weeks later a big fat check landed in my account.
• Even with a vastly swollen bank account …

As a result, Wong was ordered to repay the full lump-sum amount.

Judicial Review – When is a deal a deal?

Wong herself, without her trade union’s support, applied for judicial review of the arbitrator’s order. The Court addressed a number of administrative law issues in its decision, including the fact that because the primary parties to the grievance were the employer and the union, a grievor such as Wong did not have standing to bring an application for judicial review. The exception to this would be circumstances where the union’s representation was sufficiently deficient.

Most notably for employers, the Court confirmed that confidentiality clauses in settlement agreements can be strongly enforced. Wong argued that the repayment provision in the agreement was an “oppressively punitive forfeiture provision” and the union improperly presented the provision to the arbitrator as being a “penalty clause” which resulted in a fundamentally flawed analysis and conclusion.

The Court held that the arbitrator conducted the proper analysis by considering whether the clause was a penalty clause or a forfeiture provision. While the arbitrator did not directly refer to the leading decision in Peachtree II Associates – Dallas, L.P. v. 857486 Ontario Ltd. (2005), 76 O.R. (3d) 362 (C.A.), she did consider the applicable analysis. This includes the distinction between a penalty provision, which involves a payment of money “stipulated as in terrorem of the offending party” and a forfeiture provision which involves the loss of something, often money, held as security for the enforcement of an obligation. Forfeitures often have penal consequences because the right or property forfeited may bear no relation to the loss suffered by the innocent party. Peachtree cautions however, that courts should avoid classifying a clause as a penalty. In considering this, the Court concluded that the clause in the settlement agreement requiring repayment upon breach of the confidentiality provision was a forfeiture provision and not a penalty. While a penalty clause would require proof of damages, the clause in the agreement was properly characterized as an enforcement mechanism that sought to ensure the grievor lived up to a component of the deal that was key to the Globe and Mail.

The Court went on to consider the circumstances identified in Peachtree where a penal forfeiture provision will not be enforced: where the clause is penal in the sense that the sum forfeited is out of all proportion to the damage and where it would be unconscionable for the party to retain the money.

While there was no evidence before the arbitrator regarding any damage suffered by the Globe and Mail as a result of Wong’s breach, the arbitrator remarked on the difficulty inherent in quantifying damages that arise from disclosure of information that was supposed to be kept confidential, stating that such harm is “intangible and not easily or readily quantifiable”. The Court accepted that while the lump-sum amount at issue would likely bear no relationship to any actual loss suffered by the Globe and Mail, it was not unconscionable for the Globe and Mail to recover the money.

The Court cited the test in Birch v. Union of Taxation Employees, Local 70030 (2008), 93 O.R. (3d) 1 (C.A.) for establishing that a forfeiture provision is unconscionable. This test involves a two-part analysis – “a finding of inequality of bargaining power and a finding that the terms of an agreement have a high degree of unfairness”.

Applying the test to Wong’s circumstances, there was no evidence of an inequality of bargaining power. She was represented by counsel throughout her grievance and the settlement process, and the settlement agreement was subject to significant back-and-forth negotiations. There was also no evidence of a high degree of unfairness inherent in the repayment provision. Confidentiality was the one thing that the Globe and Mail wanted out of the settlement agreement and repayment of the lump-sum amount was the mechanism to be used to enforce the requirement. The Court concluded “it was an entirely reasonable enforcement mechanism” because if Wong failed to meet her main obligation under the agreement, the Globe and Mail would be relieved from its main obligation.

Upon dismissing Wong’s application, the Court went on to order her to pay $15,000 in costs to the respondents.

Lesson for HR Professionals

The Divisional Court’s decision reinforces fundamental aspects of labour relations, including the exclusive representation of unionized workers and the deference that is afforded to arbitrators in addressing labour relations matters. The case is also important in the employment relationship with any employee in light of what it says about the enforceability of settlement agreements.

In order to best ensure your deal remains enforceable, keep these tips in mind:

• Play fair and draft your confidentiality and enforcement clauses with care. You want to be sure to avoid an enforcement clause that is overly penal and completely disproportionate to the harm you are seeking to avoid.
• Ensure that there is sufficient give and take in the agreement. Do not ask for more than you need if you want to protect your interests in a confidentiality clause.

Address any inequality in bargaining power at the time you enter into the settlement agreement. If your employee is not represented by a union, consider including an opportunity (and possibly even a payment) for the employer to obtain independent legal advice.