There have been discussions in the public domain recently on the topic of ‘non-disclosure agreements’. What are these? And when should they be used? Non-disclosure agreements sometimes are referred to as confidentiality agreements or “NDA’s”. An NDA is a binding contract used when two parties enter into discussions in which confidential information is disclosed or shared and there is a need to protect that information from disclosure to outsiders.
There are many circumstances generally where it is a sensible and strategic move to put in place a legal framework to maintain trust and confidence. In a business context, the NDA prohibits the parties from disclosing information to anyone else, either during the negotiation period before the contract is signed and/or after the contract is signed. An NDA may be used when the following is shared: a business idea to a potential partner or investor, financial and marketing know-how with a potential buyer (including client databases), new technology or software or when discussing the sale or licensing of a product or technology. NDA’s are useful also when employees have access to confidential and proprietary information and an employer needs to protect that information from disclosure to outsiders. An NDA can also be employed to assist parties in a dispute to reach a confidential and binding resolution. In this regard, many settlement agreements include clauses where the parties are obligated to not disclose or publish the terms of the agreement to any third party.
Mutual vs. Non-Mutual NDAs
There are two main forms of a non-disclosure agreements, a mutual agreement or a non-mutual or a one-sided agreement. A mutual agreement occurs where both parties are sharing confidential information and the non-mutual agreement is applicable when it is contemplated that only one side will be sharing confidential information with the other side.
The Details of Confidentiality
An NDA should clearly set out exactly what is confidential, the scope of the confidentiality obligation, the term of the agreement and the exclusions from confidential treatment.
Term of the Agreement
An NDA can last indefinitely or for a specified period of time. What is a reasonable term would really depend on the type of information that is being shared. In some businesses, a few years may be reasonable as the information could be rendered useless with the passage of time if the information relates to technology, for example. It is important though that if there is an expiry date, the disclosing party does not relinquish any other rights that it may have under copyright, patent, or other intellectual property laws.
There are certain standard exclusions from a confidentiality obligation under an NDA. For example, if the information is already known to the other party or the information is already in the public domain (due to no actions of the recipient) then that information is not caught under the confidentiality terms of the NDA.
There may also be certain circumstances where the receiving party is compelled to disclose the confidential information through a legal process or a court order. If compelled by the Court to do so, this will not constitute a breach of the NDA. The NDA may cover this circumstance and include an obligation on the other party to inform the disclosing party in advance of the legal proceeding.
An NDA will set out typically the consequences of breach of the agreement. As with any other contract, if there is a breach, the aggrieved party would be entitled to file a claim into court against the other party to be awarded damages by the Court as a result of the breach. The offending party may also be confronted with challenges to their credibility and reputation.
Real Life Example
As we have seen with vaccine procurement around the world, an NDA is usually part and parcel of preliminary contracts between governments and pharmaceutical companies. The confidential information which an NDA protects can extend to medical trade secrets, commercial terms including pricing, time-lines and any other matters involved in recommending or guaranteeing the deal.
What should I do if I am asked to sign an NDA?
If you are being asked to sign an NDA, it is crucial you understand what you are signing. In some cases, legal advice is necessary in order to determine that the terms go no further than what is reasonably necessary and you are also protecting yourself.
It should be noted that NDA should not prevent anyone from not reporting criminal conduct to the police or an industry regulator or from blowing the whistle. It can be however an important tool in commercial negotiations and crucial if sensitive information is to be shared. It can go a long way in establishing mutual trust and confidence and potentially aid in negotiations to close that deal.