A non-disclosure agreement (NDA) is an important legal document for businesses and business owners in the UK.
It helps protect confidential information shared between parties, ensuring that it isn't used or disclosed without permission. With a properly drafted NDA, you can protect your valuable intellectual property from competitors or other third parties who may benefit from its disclosure.
In this article we will explore the different types of NDAs available, their benefits and how to create an NDA that works best for you. We'll also look at potential pitfalls to avoid when entering into an NDA, so you can ensure maximum protection of your confidential information.
What is a non-disclosure agreement?
An NDA, also known as a confidentiality agreement, is a legal contract between two or more parties that outlines how they should handle and protect confidential information. The primary purpose of an NDA is to establish a confidential relationship between the parties involved, to protect any type of confidential and proprietary information or trade secrets.
NDAs are typically used when a business or individual has a concept or idea that they want to protect while sharing with another party. This could be in various situations such as during mergers and acquisitions, vendor relationships, product development collaborations or even employee hiring.
Defining Confidential Information in an NDA
Confidential information, as defined in an NDA, can cover a wide range of information. It could include business strategies, financial data, customer lists, proprietary technology, product designs, marketing plans and more. The specific definition of what constitutes confidential information can vary from one agreement to the next, depending on the nature of the information and the business. Therefore, it's crucial to clearly define what is considered confidential in the NDA.
Protections for Confidential Information
The NDA provides protections for confidential information by legally binding the recipient not to disclose or misuse the information. If the recipient breaches the agreement, the disclosing party can take legal action, which could result in penalties or damages.
Who Can Receive Confidential Information?
In an NDA, the recipient of confidential information is explicitly named. This could be an individual, a company, or a group of individuals or companies. The agreement will specify who is allowed to receive the information, ensuring that the information isn't disclosed to others without permission.
Purpose of Disclosure in an NDA
The disclosure clause in an NDA specifies why the confidential information is being shared. This could be for a potential business deal, a partnership, an investment or for another specific reason. This clause helps ensure that the recipient uses the information solely for the purpose stated in the agreement, providing an additional layer of protection for the disclosing party.
What types of sensitive information are covered in an NDA?
Confidential information can vary greatly depending on the industry, the company, and the specific agreement. However, here are some common examples of what might be considered confidential information in an NDA:
- Business Plans: This could include strategies for marketing, growth, operations, sales or any other aspect of running the business.
- Financial Data: Company revenue, profits, financial forecasts, budgets and other financial details.
- Product Information: Details about new products or services under development, including designs, specifications and launch plans.
- Intellectual Property: Patents, copyrights, trade secrets, proprietary methodologies and unique business processes.
- Customer Lists: Information about customers, including their contact details, preferences, purchase history and any other data collected.
- Supplier Information: Details about suppliers, contractors or any third-party companies that a business works with.
- Employee Information: Personal information about employees, their salaries, employment contracts and performance reviews.
- Software Code: Source code, algorithms and other technical information related to software.
- Market Research: Data collected about competitors, industry trends, customer needs and market opportunities.
- Legal Documents: Contracts, agreements and other legal documents that have not been made public.
- Protect trade secrets: a trade secret is defined as confidential business information.
What types of sensitive information are covered in an NDA?
NDAs can cover anything that is considered commercially sensitive information including;
- financial information
- customer information
- accounting information
- sensitive information
- trade secrets.
Benefits of using a Non-Disclosure Agreement
Non-disclosure agreements are important for businesses of all sizes. By using an NDA, a business can protect confidential information from unauthorised use and maintain a competitive edge.
The agreement is also beneficial in preventing industrial espionage and other forms of theft, as it serves as a deterrent to those seeking to gain access to the confidential information.
NDAs can be used to prevent current and former employees from sharing or using trade secrets or proprietary information for competitive advantage. This ensures that a business’ intellectual property remains secure and allows them to benefit fully from their discoveries or inventions.
In addition, NDAs can help create trust between two parties entering into an agreement by ensuring that each party respects the confidentiality of the other party’s confidential information.
As such, NDAs are often used in collaboration agreements to ensure each business partner has confidence that they will not be taken advantage of by the other party.
NDAs may be necessary in certain industries where regulated data needs to stay secure between businesses. For example, healthcare providers must abide by strict regulations when it comes to sharing patient data with other providers or third-party vendors.
An NDA can help ensure compliance with such regulations and provide additional assurance for both parties involved in the agreement.
Types of non disclosure agreements
There are several different types of non-disclosure agreements that businesses may use depending on the specific needs of the situation.
Unilateral NDA
This is an agreement between two parties where only one of the parties discloses confidential information.
In this case, the receiving party has a duty to maintain secrecy and protect sensitive data from unauthorised use or disclosure.
Mutual NDA
A mutual NDA involves both parties disclosing information.
This type of agreement may be used when two companies wish to work together or form a partnership and would be sharing confidential information. Both parties have agreed upon duties to protect each other's secrets and confidential information throughout the duration of the relationship.
Confidentiality agreement
Confidentiality agreements apply when a disclosing party wishes to disclose information with another party without requiring any exchange in return. The receiving party agrees not to reveal or make public any portion of the disclosed information and usually has limited rights related to using or sharing it with others. Confidentiality agreements ensure a confidential relationship is created between the two parties.
One-way and two-way NDAs
A one-way NDA is an agreement between two parties in which only one party discloses confidential information. The receiving party has a duty to keep the information protected from the public domain.
A two-way NDA involves both parties disclosing information, such as when two companies wish to work together or form a partnership and need to disclose confidential information or proprietary information. Both parties agree to certain duties that will help protect each other’s secrets and keep confidential information secure throughout the duration of the relationship.
Key Clauses in an NDA
Each non disclosure agreement is different, depending on the circumstances. You should seek independent legal advice to ensure that your business interests are protected and to get help determining which information should be considered confidential.
Here are some common things to include in a non disclosure agreement:
- An exact description of the confidential information that is being protected.
- A definition of what qualifies as a breach of the agreement and any consequences for breaching the agreement.
- The duration of the non disclosure agreement - i.e. when it will start and when it will end.
- A designated recipient - who is allowed to receive and use the shared confidential information?
- Exclusions to the NDA - which specific types of information are not covered by this agreement?
- Non-compete clause - what restrictions, if any, do both parties agree upon regarding competitive activities during or after the term of the agreement
- Choice of law and jurisdiction clause – which legal system and court has jurisdiction in case a dispute needs to be resolved or legal action taken?
- Signatures – both parties must sign off on the agreement in order for it to be valid and legally binding.
Drafting and negotiating a NDA requires careful consideration of the information being transferred and an understanding of the legal implications of the agreement. It is important to define the confidential information that is being shared and establish conditions under which such information may be used.
Non-Circumvention Clause
A non-circumvention clause is a key component in many NDAs. This clause is designed to prevent one party from going directly to the other party's suppliers, clients, employees or other contacts with the intent to bypass (or "circumvent") the original party in business dealings. In other words, it protects the rights of the intermediary who brought the deal to fruition.
For example, let's say a company, Company A, introduces another company, Company B, to its valuable supplier. A non-circumvention clause in their NDA would prohibit Company B from cutting out Company A and dealing directly with the supplier.
Importance of Non-Circumvention Clause
It offers vital protection for businesses that rely on third-party relationships. Without such a clause, there's a risk that the recipient party could use the disclosed confidential information to cut the disclosing party out of business opportunities, causing potential financial loss.
This clause ensures that all parties respect the business relationships and integrity of operations, fostering a fair and trustful business environment. It also encourages open sharing of resources and contacts, as parties can be assured that they will not be sidelined in future transactions involving those contacts.
In conclusion, a non-circumvention clause in an NDA helps maintain the balance and fairness in business relationships by providing assurances that shared contacts, clients, or suppliers will not be used to bypass the party that originally disclosed them.
Potential pitfalls of a non disclosure agreement
It's a good idea to consider whether disclosing confidential information is necessary in the first place.
When creating non disclosure agreements, there are some potential pitfalls to avoid.
Ensure that both parties have agreed upon and understand the scope of the confidential information covered by the agreement. Carefully consider any exclusions from the agreement as this can affect its enforceability. Lastly, ensure that both parties agree to a suitable choice of law and jurisdiction for resolving disputes that may arise in the future.
Are NDAs enforceable?
This depends on how well the non disclosure agreement has been drafted, as well as the scope of the agreement and jurisdiction.
For example, when an employer implements an NDA with their employees, the employer gets the protection of confidential information while the employee agrees to continued at-will employment as their benefit. It is important to ensure that NDAs are properly drafted and executed in order for them to be enforceable under the law.
An unenforceable NDA
There are some instances where the agreement may be deemed unenforceable:
- If the NDA's terms are too far-reaching and excessive, a court is more likely to find fault with it - particularly if there are no definite boundaries in place regarding duration or scope.
- If the information is not kept confidential, it will be more difficult for the company to demand that an employee or other party adhere to a non-disclosure agreement: if facts are already disclosed and well known, courts would struggle to honour such agreements.
- If the agreement is asking the employee to perpetrate an illicit act: e.g., requesting that they keep silent about a matter for which they are legally obligated to report.
Expiration/Termination of an NDA
A pivotal aspect to note about a Non-Disclosure Agreement is its termination clause or the 'long stop date'. The long stop date is essentially a deadline set for the confidentiality obligations imposed by the agreement. The term can vary and largely depends on the nature of the information and the agreed length of time between the parties involved. Upon reaching the long stop date, the receiving party is no longer obliged to maintain the confidentiality of the shared information.
Consequences of Breaching an NDA
The violation of the terms stipulated in a Non-Disclosure Agreement can result in severe consequences. Penalties may include monetary damages, injunctive relief to halt any further breaches and, in egregious cases, even criminal charges. Businesses should understand the gravity of a breach and the potential reparations involved to foster a culture of compliance.
The Concept of a Permitted Purpose
An integral part of an NDA is defining the 'permitted purpose' for the shared information. The 'permitted purpose' pertains to the specific reason or context within which the confidential data can be utilised. Explicitly stating the purpose limits the scope of how the information can be used, providing an additional layer of security for the disclosing party.
Obligations Under an NDA
An NDA places several obligations on the involved parties. The disclosing party is mandated to clearly define the information to be protected, while the receiving party must respect the confidentiality of the information and refrain from using it outside the agreed purpose. Additionally, the receiving party must take reasonable steps to protect the information, limiting its dissemination and ensuring it isn't inadvertently disclosed.
Practical Guidance for Making an NDA
Drafting a robust NDA requires careful attention to detail. It is advisable to clearly outline the information covered, the purpose for which it is disclosed, and the duration of the agreement. Including a comprehensive clause detailing the consequences of breaches can enforce a sense of seriousness and caution. Creating an NDA online can be a straightforward process, and various templates are available. However, customisation based on specific needs is recommended, and seeking legal counsel can be a wise step.
Seeking a Lawyer's Advice
Although standard templates can serve for routine transactions, more complex scenarios may warrant seeking a lawyer's advice. Examples include negotiations with a larger entity, situations where trade secrets are involved, or when dealing with international parties with different jurisdictions. Legal advice can ensure your interests are well-protected and can help avoid potential legal pitfalls.
For advice on confidential agreements or for an NDA template, contact us here.
To create your own non disclosure agreement or get help reviewing agreements, contact us here.