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18th May 2018 No Comments

The Importance of a Non-Disclosure Agreement

Being presented with a confidentiality agreement, or non-disclosure agreement (NDA) as they are usually known, can sometimes feel like having a prenuptial agreement put in front of you. Most people don’t like the idea that a person they are doing business with (or planning to marry) does not trust them to do the right thing. However, like prenuptial agreements, NDAs are a fact of modern life, and in many cases, business owners have made millions by ensuring their confidential information is protected; Colonel Sanders being one of the best-known examples.

NDAs can be confusing for the drafter and the signer. The more complex the information, the greater the detail that needs to be included. And, sometimes, an NDA is not appropriate – but there are other ways of protecting your trade secrets, customer lists, and sensitive data.

An NDA is a legally enforceable contract. One or more parties to the NDA will agree to disclose confidential information to the other parties, who in turn, agree not to divulge the information to anyone else.

NDA templates are widely available online; however, as some recent cases have illustrated, NDAs which contain ambiguous clauses can end up costing the disclosing party both time and money to obtain a court ruling to determine whether what was disclosed was technically ‘confidential’. Therefore, it is worth investing in professional legal advice when drafting an NDA, especially if the breadth of confidential information is complex and disclosure could result in significant financial loss.

Key terms of an NDA

A robust NDA should consist of the following clauses:

  • The full names of the parties to the agreement and their addresses.
  • A definition of ‘confidential information’. This is the clause that has the greatest potential to cause a dispute, therefore it’s vital to spell out exactly what amounts to confidential information.
  • Under what circumstances is the confidential information allowed to be used for a ‘permitted purpose’. One of the most common reasons for NDAs to be used is when a company is being sold. A potential buyer would want to see a great deal of confidential information such as company figures, employee details and descriptions of stock and trade secrets. The permitted purpose of the confidential information would, therefore, be to conduct due diligence on the company for the purpose of buying the business.

It is worth noting that most venture capitalists and angel investors will refuse to sign an NDA; presenting them with one may risk you looking like an amateur.

  • What the recipient of the information can and cannot do with the information. This clause should include who in the company can have access to the information and whether it is to be returned or destroyed after it has been used for its permitted purpose.
  • The duration of the NDA. In most cases, NDAs cease to be valid after the confidential information is made public. You can impose a time limit, commonly three to five years. However, in some cases, the NDA can last forever, e.g. in the case of the recipe for Coca-Cola or KFC’s 11 secret herbs and spices (although the latter was revealed to the public last year).
  • An exclusivity agreement – these are sometimes used in major corporate deals and M&As where one party is tied to negotiations while due diligence is taking place. If the deal does not go through, one party may be required to pay the other a ‘break fee’ to end the obligations laid out in the NDA.

The enforceability of an NDA

The law can, in some circumstances, still provide protection if confidential information is disclosed by someone who has not signed an NDA. It must have been made clear to the recipient of the information that the knowledge they received was not to be divulged and the owner of the information must have suffered damage as a result of the unauthorised disclosure. Don’t rely on this, though. You’ll face an uphill and costly legal battle. It’s far simpler and much more cost-effective to use an NDA.

The advantage of a formal NDA is:

  • the NDA will provide written proof of what is considered confidential information, the permitted purpose, and how the information can be used
  • NDAs are contracts; therefore, if it is breached, the provider of the information may have an action for damages and an injunction
  • other clauses such as non-competition and non-solicitation clauses can be added into the NDA to provide further protection

In summary

NDAs are not always necessary; sometimes marking information ‘confidential’ or using secure data rooms to exchange information will provide sufficient protection. But in cases where disclosure puts your invention, trade secrets, or clients at risk, an NDA is essential.

Technical Terms provides in-depth legal advice on drafting and negotiating commercial contracts. If you require further information regarding confidentiality agreements, please contact us on 01904 899794.

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