A Non-Disclosure Agreement is a form of contract a party can use to protect their confidential information from disclosure. In this article, we briefly describe a Non-Disclosure Agreement, when it makes sense to use one and the key terms it should include.
A Non-Disclosure Agreement is also known as a confidentiality agreement or an NDA.
When To Use a Non-Disclosure Agreement
In principle, a Non-Disclosure Agreement is able to protect any kind of information. But typically, a party uses one to safeguard their business' inventions, patents, client lists, financial matters and other secrets. All types of parties can negotiate a Non-Disclosure Agreement. They are a useful tool governing the relationship between two private individuals, an employee and an employer, two companies or a company and an investor.
A Non-Disclosure Agreement is always a good idea if a party is giving others access to information that, if released to the public, could harm their business. It also makes sense if a party does not want another party benefitting from the information it shares with it. For example, a party transferring its business may need to enter into a process of due diligence and a letter of intent. It would be prudent in this instance for the transferring party to insist on a Non-Disclosure Agreement. So, in the event the deal falls over, the agreement will protect all confidential information and trade secrets that the business shared during the due diligence process.
A Non-Disclosure Agreement is also an excellent measure for business partners who wish to formalise the trust between them.
A Non-Disclosure Agreement Only Protects Confidential Information
It is important to note that a Non-Disclosure Agreement only protects information that is not already public. Therefore, a party cannot enforce an agreement in relation to information already in the public domain. Although it can still enforce the agreement in relation to other information that is not already publicly disclosed.
Key Elements to Include in a Non-Disclosure Agreement
There are no formal requirements for a Non-Disclosure Agreement except that both parties must sign it. As such, there is great freedom in drafting an agreement. Having said that, a well-drafted Non-Disclosure Agreement will include the following elements:
Term or duration
An agreement should specify the term or duration of the agreement; how long do the parties intend it to last? By being specific about the agreement's duration, a party ensures that it keeps its information confidential for a sufficient period. At the same time, it also ensures it is not bound by the agreement forever.
The confidential information
An agreement should also define and describe the nature of the information that the agreement relates to. It is a good idea to be as precise as possible about this. The definition of the confidential information should spell out not only the categories of the confidential information but the formats in which the information can appear - for example, are emails, oral conversations, hand-written notes and letters included?
An agreement should also spell out which information is excluded from confidential treatment - such as information already known to the receiving party or already in the public domain. A well drafted contract that is specific about what is and what is not confidential information will help avoid later disputes over interpretation.
Remedies for breach
In addition, a Non-Disclosure Agreement should describe what happens if the parties do not comply with their obligations under the agreement. The consequences of non-compliance will typically be in the form of remedies or compensation. Often, the parties will pre-agree to a fair remedy and include this in a Non-Disclosure Agreement. This is because the costs of a breach can be hard to calculate or prove. The pre-agreed remedy can be an amount of money, for example. Or it could be an amount that corresponds to the damage caused by the breach.
Finally, a Non-Disclosure Agreement should describe the procedures that will govern a dispute. For example, an agreement may stipulate that a court must revolve the dispute. Or it may prohibit legal proceedings and stipulate settlement through an arbitration. And a Non-Disclosure Agreement should always specify the jurisdiction in which a dispute will be resolved.
Remember, a fundamental element of all contracts is that they are enforceable; otherwise, they are pointless. This means that every contract should provide for the consequences of a breach.
Mutual v. One-sided Non-Disclosure Agreement
A Non-Disclosure Agreement can come in two basic formats: a mutual agreement or a one-sided agreement. A one-sided agreement contemplates that only one party will be sharing confidential information with the other party. A mutual Non-Disclosure Agreement is for when each party may potentially share confidential information.
The nature of the relationship between the parties will determine the type of Non-Disclosure Agreement. For instance, a mutual agreement is used if there is a collaborative relationship between the parties. And where the parties will have insight into each other's business affairs. But if the parties share a simple customer-supplier relationship, for example, a one-sided Non-Disclosure Agreement is more appropriate. Employer-employee relationships typically use a one-sided confidentiality agreement. Although, bear in mind, the General Data Protection Regulation (GDPR) 2018 requires an employer protect the confidential personal data of an employee.
Confidentiality in Employment Contracts
Under a typical employment contract, an employee will agree that they owe their employer a duty of loyalty and confidentiality. In keeping with the duty, an employee must act in the best interests of their employer. This means not speaking negatively about the business or saying anything that might harm its reputation. Moreover, an employee must not compete with their employer or divert business to a competitor.
An employee also has a duty to protect their employer's confidential information. As such, an employee must not improperly use or disclose confidential information and trade secrets of their employer. This duty will apply whether or not an employee has entered into a separate confidentiality agreement. Furthermore, the duty extends beyond the period of employment; it also prohibits an employee from using a former employer's confidential information for the benefit of a subsequent employer. However, an employee will not breach the duty simply by using the experience, general industry knowledge or skills he or she has obtained in their former employment.
Many businesses opt to use a confidentiality agreement in addition to an employment contract. An employee confidentiality agreement normally specifies the precise information and know-how that the employee may not publish. Some categories of jobs actually require a confidentiality agreement. An employee working with a large amount of sensitive personal data, for example, will be obliged to enter into a confidentiality or Non-Disclosure Agreement.
Templates for Non-Disclosure Agreements
You can find a generic template for both a mutual and a one-sided Non-Disclosure Agreement here. The templates are free of charge. You just need to create a user account with Contractbook to access them. The user account will allow you to draft a Non-Disclosure Agreement, sign it with a digital signature and store it in the cloud.
You can use the templates in connection with permanent employment, hiring consultants, engaging an internee or collaborating with another company.
Nonetheless, it is may be wise to seek a lawyer's advice about the agreement. Particularly if your confidential information is highly valuable. The greater the value of the deal, the greater the importance of having a watertight Non-Disclosure Agreement.
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Disclaimer: This overview is for informational purposes only and cannot be counted as legal advice.