To preserve a competitive advantage, businesses must maintain the secrecy of their ongoing projects, unique ideas, and intriguing innovation. Considering the cut-throat and competitive business ecosystem where innovative ideas are constantly being discovered, a Non-Disclosure Agreement (NDA) is a legally binding contract that establishes a confidential connection between the parties who are considering doing business together. The parties to such an agreement agree that they will not disclose any sensitive information they collect or receive to any third parties, thus allowing the transmission of sensitive and privileged information without the danger of it falling into the wrong hands, specifically that of a competitor.
Non-disclosure agreements are also known as Confidentiality Agreements.
Effectiveness of NDAs?
Sharing information is essential in circumstances such as seeking financing, locating possible business partners, acquiring new clients, and employing critical personnel to note a few. Without such a formal agreement, any confidential information could be utilised for nefarious reasons or mistakenly made public. The consequences for breaching an NDA will differ depending on what has been agreed by the parties to the contract, these generally include a fine and or damages for actual and future losses. Loss of commercial prospects, damage to commercial reputation and in some instances, criminal prosecution can ensue depending on the parties.
Types of NDAs
a. Unilateral- A unilateral contract binds only one party. Largely, NDAs are unilateral agreements, as they frequently involve employees, contractors, or clients. Examples of unilateral NDAs are used in recruiting employees where the company will share confidential information about the company.
b. Mutual or Bilateral - Multiple businesses involved in a partnership, collaboration, or merger enter into mutual agreements, which bind all parties in equal capacity to use confidential information beyond the authorised capacity. When selling a company, sensitive information is disclosed and as such mutual NDAs required.
A clear description of what constitutes Confidential information is important
The scope of the NDA will depend primarily on the information which is deemed confidential. The parties may agree that all information provided by either party is strictly confidential or may specify what constitutes confidential and the way in which such information is considered confidential, for instance by labelling a document as confidential. Typically, an NDA contains wording that classifies as confidential any information that a reasonable person would consider to be confidential. It is highly advisable to make this clause as broad as possible to protect trade secrets, intellectual property, and private information among any other information that may be considered confidential and proprietary, the disclosure of which shall cause either party any loss, commercial or otherwise. However, please note that the court will not uphold such a clause that is considered too broad. This will all depend on the interpretation of the specific clause and consideration of the information the party seeks to protect as confidential. It can be tricky achieving the balance with this, but there are acceptable industry standard definitions.
Requirements and Obligations of signatory parties
The NDA should outline the responsibilities and requirements of each party, particularly those of the party receiving the information. The party receiving the information should be required to maintain the information's secrecy and refrain from utilising this for their personal advantage. In most instances, keeping information confidential requires taking reasonable precautions to also prevent unauthorised access to this information, an important requirement for an NDA.
Term of the NDA
Normally, the party disclosing the information would seek to have an indefinite confidentiality arrangement whilst the party who is a recipient of the confidential information would rather be subject to a definitive term. Whichever time covers the anticipated relationship, that is how long the agreement lasts. Often an NDA lasts longer than the particular transaction or relationship itself, specifically, for as long as the confidential information remains secret.
It is advisable to include a provision that specifically states that the information must remain protected even after a business relationship or other contractual agreement has ended.
There are some exceptions to disclosure of confidential information/legal obligations despite having an NDA in place
The NDA should include a paragraph to deal with situations where it may become necessary to disclose the confidential information pursuant to a Court Order which compels the disclosure. A suitable clause to consider (and which would protect the party who ‘technically breaches the agreement due to the court order’ would be to provide that a legal obligation to reveal the confidential information does not constitute a breach of the agreement. Further it should be agreed that the recipient party, if compelled to disclose, will first notify the disclosing party of such a demand, and agree the information to be disclosed.
Consequences of breach
The agreement should specify the penalties for the party breaching the terms of the confidentiality agreement, as a deterrent. This may include seeking injunctive relief against the breaching party together with damages which the injured party has suffered or likely to suffer because of the breach, together with any legal fees resulting from the breach.
The effectiveness of NDAs as discussed above makes it a useful tool for people, businesses, and organisations in many ways, such as to present an invention or business idea to a potential partner and/or investor, for sharing financial marketing and other information with a prospective buyer for a business.
In conclusion, because NDAs foster open and frank disclosure between parties, and ensure that confidentiality of information shared during business negotiations is protected, it is therefore a useful tool to have.
Modupe qualified as a solicitor back in 2001 and has 23 years of experience working for private and public sector clients on both residential and commercial property. She is a certified Civil Mediator and is skilled at identifying issues, developing creative solutions to help parties reach their desired results. Modupe's specialisms also include civil matters such as landlord and tenant issues, neighbour disputes, breach of contracts general business disputes.