This article is written by Laasya Swaraj, pursuing Certificate Course in Introduction to Legal Drafting: Contracts, Petitions, Opinions & Articles from LawSikho.
Table of Contents
Introduction
A non-disclosure agreement (NDA) is also called the confidentiality agreement or the secrecy agreement is a legally binding contract that establishes a legal relationship between two parties, in which one party discloses confidential information and the other receives the information usually in the course of business negotiations or proprietary information. The NDA should generally apply to information that is not already in the “public domain”.
The Indian Contract Act, 1872 governs this type of agreement related matter in India. And According to this Act, a non-disclosure agreement is a legally binding contract. And it is valid the Agreement is stamped.
NDA can be mutual or unilateral, where the party giving information is known as the “disclosing party” whereas the party who is receiving the information is known as the “ receiving party”.
NDA can also include security policies, long-term protection of the party’s intellectual property assets.
A party entering into a non-disclosure agreement (hereinafter referred to as the NDA) agrees to the confidential information. Its access will not be made available in a way that it would not otherwise have been permitted. This is because such unauthorized disclosure may expose the disclosing party to a great risk such as serious legal consequences and termination or litigation.
For instance, in the case of employing people in a particular firm, the firm will present the non-disclosure agreement, solely for protecting the firm from any abrupt disagreements that may arise between the employee and the firm. If the employee fails to adhere to such an agreement it can have serious legal implications and may result in termination or a lawsuit in a few cases. They can even sue for monetary damages.
Necessities of a non-disclosure agreement
Non-disclosure agreement is considered as one of the valuable tools for business whether it may be a startup or a big Firm. It is an ounce of prevention taken by the parties in business who are negotiating terms in order to reduce future disputes between the parties. Notwithstanding that a definite contract is made between parties or not, the parties shall enter into an NDA in order to protect confidential or sensitive information.
The NDAs are used for multiple purposes as it is used by investors, creditors, clients, partners, contractors etc. It is used by them to prevent business-sensitive information from becoming public knowledge. This is a positive step taken by the parties which reassure that they both are on the same page with the confidential information being protected.
In the absence of the NDA, the confidential information is more likely to be disclosed without either party’s permission and may lose the opportunity to patent the party’s invention or maintain information as the party’s trade secret. In addition to spending all the money the party can make on intellectual property, the specific party will be losing all the time and money that went into the development.
NDA is considered as a centre around some piece of intellectual property, such as proprietary information, inventions, designs, trade secrets, confidential documents etc. In addition to this, it legally protects the property rights of the business party and prevents the recipient from disclosing confidential information.
Even if the NDA is breached, the party will face legal penalties. When there is a dispute between the two parties, the parties can contact their alternative dispute resolution mechanism at any point in time, and the aggrieved party can claim the damages for such breach of the agreement.
Entering into an NDA is the most appropriate option that one could consider while negotiating terms before discussing partnership or merger etc. Therefore, it is necessary to enter into a non-disclosure agreement as the intentions of both parties are written ahead of time often greatly reduces the time for courts to make a ruling in many cases. Hence, here are some guidelines to follow before you sign or engage in an NDA.
The do’s of a non-disclosure agreement
- Prior to entering into an agreement, the parties must ascertain if there is any information that is of a particular nature that will not be disclosed to the other party, nonetheless an NDA.
- The details and address i.e., the identification of both the parties have to be clearly known and mentioned in the NDA.
- Before entering into an NDA, the parties should be clear about what information can and cannot or what information should be protected should be disclosed to third parties.
- It is important to cover what is important to the protection of your business and define it in the NDA. This is one of the most effective steps while drafting an NDA.
- One should remember that the parties can always enter into a NEW agreement in case of additional information which needs to be disclosed.
- The disclosing and the receiving party should take into account the distinction between oral and written disclosures.
- When it comes to the term of the NDA, the parties must consider the term depending upon the nature of the information which is being exchanged.
- As a part of an NDA, oral communications concerning “confidential information” should also be included.
- If it is an NDA for a start-up company, make sure this agreement outlines how and where the startup can exercise its right of recovery.
- The language used while drafting an NDA must be in simple terms, neat and short with proper labelling which will protect the eyes of the readers.
- Finally, it is very crucial to have an executed copy signed by the receiving party.
The don’ts non-disclosure agreement
- The parties have to be specific about confidential information but defining everything “CONFIDENTIAL” is being too specific which can be problematic for both parties in the future.
For example, in the case of Lasership, Inc. v. Watson, Lasership sued former employee, Belinda Watson, and Watson’s current employer for violating the non-compete, non-solicitation and confidentiality provisions in the contract between Lasership and Watson.
In this case, Ms Watson worked as a dispatcher. The Virginia court ruled that the NDA was unenforceable because the terms that prevent employees from sharing employer information are too broad; they cover non-confidential information and require these rules to apply for the rest of your life. To avoid such circumstances, one needs to carefully provide a context for the agreements and their terms. The less that is disclosed, the less amount can be stolen from you or disclosed by the recipient in the violation of the NDA.
2. Naming the wrong party on the NDA can result in detrimental consequences as few companies have different legal and trading names. Even spelling the name wrongly can lead to appalling situations.
3. The confidential information which is already known by the receiving party or in the public domain shall not be included in the NDA, as the essence of an NDA is to keep certain information “Confidential”.
In case, if the receiving party has not leaked the information in the public domain, the so-called confidential information becomes public knowledge, that same information would no longer be called confidential.
4. The information disclosed by the parties shouldn’t be communicated prior to the recipient or receiving party officially signs the confidential information before the NDA.
In case, if the disclosing party shares the information, then there is a chance that the receiving party could argue that the recipient did not accept the confidentiality of any disclosed information.
5. The disclosing party shall not agree to any provision that permits the receiving party to use the information which is not marked. “Confidential” as it is considered to be non-confidential and therefore, unprotected.
6. The parties shall not sign any agreement which assigns any of their company’s rights beyond the rights to evaluate the confidential information.
7. Applying bad jurisdiction is not meant for the type of agreement and the parties. This may invalidate the NDA as well as not easily enforce the agreement.
8. A major mistake when drafting the agreement is to not provide proper guidance in the event of a compelled disclosure.
Compelled disclosure is when a party is compelled by the legal procedure to disclose confidential information to the extent required by any applicable law. In such cases, the party should send a notice to the recipient about the disclosure of the confidential information before it becomes public knowledge.
For instance, if there is a dispute between the parties where the court is involved, the court orders the right to disclose the confidential information for the receiving party in the public domain, then the compelled disclosure can nullify the protection of an NDA.
9. Information provided by the third party to the receiving party, where the receiving party received it not by the disclosure but through an independent third party or supplier involvement. In such cases, NDA drafted can be invalidated.
In case, the receiving party had got the information independently on his/her own, then the receiving party cannot claim interest over that piece of confidential information.
Conclusion
NDA has become the most effective tool for an individual or an organization to protect its powerful confidential information or trade secrets which are actual reasons for the survival of the business. It can also be named as a contract of silence because the parties entering into the NDA shall not disclose any information whether it may be trade secrets of their business or anything else regarding business matters. Information is not a trade secret if it is not confidential. In India, The use of this particular agreement has significantly grown through the years. The laws of this shall be improvised and should have a new era of protection as most of the NDAs do not hold up in court as the information learnt independently can be proved but the information from a third party or an unknown cannot be protected as there will be no proper evidence in the court.
References
- https://www.forbes.com/sites/allbusiness/2016/03/10/the-key-elements-of-non-disclosure-agreements/?sh=13c931d5627d
- https://www.law.upenn.edu/clinic/entrepreneurship/startupkit/intellectual-property-kit.pdf
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