This article has been written by Sucheta Pravin Kudale, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution at LawSikho and edited by Shashwat Kaushik.
It has been published by Rachit Garg.
Table of Contents
Introduction
As we are all familiar with the phrase “failing to plan is planning to fail”. This is true when we specifically talk about business deals and investments. So if you plan in advance about your future goals, then there are very few chances of failure. A non-disclosure agreement is the perfect tool to protect you in this planning. In today’s world, information is valuable and many individuals and businesses have secrets that they want to keep private. An NDA is like a promise or a part that helps maintain confidentiality.
What is a non-disclosure agreement
A non-disclosure agreement is a legal agreement between the two parties where the company gives access to restricted information to the employee, preventing its disclosure by the employee to third parties. The confidentiality of secret information is protected through the non-disclosure argument. A non-disclosure agreement is a legal contract designed to protect confidential information. It is a document signed between two or more parties outlining the terms and conditions regarding the sharing and use of sensitive information.
It ensures parties keep information they share secret. It will be clearer with one example, let’s say you have a brilliant idea for an invention or a unique business plan. Before sharing it with others, you might want to make sure they won’t go and tell everyone about it, in this scenario NDA comes into picture.
The NDA specifies what information is considered confidential and should not be shared with anyone outside of the agreement. It also explains how the information can be used at all. E.g., if you share your idea for an invention with a company, the NDA might state that they can only use the information to evaluate whether they want to work with you, and they can’t use it to create a similar product themselves.
When can someone use or draft an NDA
NDAs are commonly used in industries like technology, entertainment and business. These agreements help to build trust between parties, encourage collaboration and safeguard sensitive information.
A non-disclosure agreement shall be signed in the following circumstances:
- Into a business deal.
- While taking expert’s advice on a new product.
- While starting a new project.
- When investigating the possibility of investment with another party.
- When providing employment.
- When signing contract workers for a sensitive project.
- While dealing with sensitive client information.
- While discussing commercially sensitive information with other parties, etc.
Benefits of drafting NDAs
The benefits of drafting a non-disclosure agreement are:
- It exactly defines what confidential information includes.
- It helps to keep information at utmost secrecy between parties by binding them legally.
- This agreement has a timeline up to which the parties have to maintain secrecy.
- NDA is legally binding and parties not abiding by it will be liable to pay compensation or damages (mostly by disclosing the party).
- Owners of confidential information are granted relief because disputes can be resolved by arbitration or by court.
Types of non-disclosure agreements
NDA
Unilateral Bilateral Multilateral
(Only one party) (Between two parties) (More than two parties)
Unilateral NDA
In this type of NDA, only one party discloses confidential information to another, such as in an employer-employee agreement, a seller-buyer agreement, an inventor-evaluator agreement or a company contract agreement.
Bilateral/mutual NDA
In this type of NDA, both parties share their confidential information with each other and both parties are obliged not to share such information with third parties. e.g., in the case of mergers, acquisitions, takeovers, joint ventures, etc.
Multilateral NDA
This type of agreement includes more than two parties and the disclosed information is protected by all the parties. This type of agreement is done only in cases of important or secret matters.
Important clauses of a non-disclosure agreement
There are a lot of clauses in the NDA, out of which some important clauses are as follows:
Confidentiality clause
This clause includes information that parties have to keep confidential. Not every kind of information can be protected under a confidentiality agreement. There are many different types of information that can be covered under the NDA. These are as follows:
Processes
Things like unique manufacturing and engineering processes.
Strategies
Marketing campaigns and launch announcements.
Designs
Blueprints or patent applications of a newly created design.
Formulas
Ingredients used to make products.
Customer and client lists
Names of clients or vendors used by a business.
Term of agreement
In every agreement, the terms of the agreement must be maintained; even after termination of the agreement, the confidentiality obligations can be maintained in certain cases. In general, the term has to be between 2.5 and 3 years
Dispute resolution and governing law
With this clause in the NDA, the parties will resolve their disputes through arbitration instead of getting into lengthy and expensive litigation. Along with set of governing laws, parties should choose the city, whose courts shall be conferred with the jurisdiction in case of disputes between parties
Remedies in case of breach
This clause states that the primary party has the right to get compensation legally in prescribed manner. This clause preserves the right of the disclosing party to seek equitable remedies. This clause shows possible consequences for a breach of agreement.
Exception to a non-disclosure agreement
There are certain exceptions as well. Generally, this agreement is made to protect the interests of a party who shares confidential information. But what information is not confidential can be disclosed and there will be no breach of the agreement.
Following are the exceptions to the confidentiality clause/NDA:
- Required by law: If any confidential information is required to be disclosed by any applicable laws, rules or regulations, the receiving party may make such disclosures to the extent required by law, provided that the receiving party gives prompt notice to the disclosing party of such required disclosure and takes reasonable steps to limit the scope of such disclosure.
- Permitted disclosures: The receiving party may make disclosures of the confidential information to its directors, officers, employees, affiliates, and professional advisors to the extent necessary for the proper performance of their duties and responsibilities in connection with the transactions contemplated by this agreement, provided that such persons are bound by obligations of confidentiality no less restrictive than those set forth in this agreement.
- Public domain: If any confidential information becomes generally available to the public through no fault of the receiving party, then the receiving party shall not be bound by the confidentiality obligations with respect to such information.
- Prior knowledge: If the receiving party had prior knowledge of any confidential information, it would not be bound by the confidentiality obligations with respect to such information.
The receiving party shall bear the burden of proof to demonstrate that any of the foregoing exceptions apply to its disclosure of any confidential information.
Are NDAs legally binding
A NDA is legally binding, and thus the party infringing the agreement would be legally liable to compensate the aggrieved party (mostly the disclosing party). To ensure the further validity and enforceability of the NDA, It is suggested that it be notarized.
Breach of a non-disclosure agreement
The NDA must specify the remedy for a breach, which could be monetary damages or injunctive relief (including an order from the court directing the disclosing party who has breached the agreement to return the information and stop disclosing it further).
Sometimes, monetary damages can’t compensate for the harm that may be caused by disclosure, so most NDAs specify that, in the event of a breach, injunctive remedies be invoked by parties.
Challenges in enforcing NDAs
Challenges in enforcing NDAs are:
- One of the primary challenges in enforcing NDAs is potential leakage of confidential information. Through signing of an NDA, parties share sensitive data either through human error, malicious intent or inadequate security measures.
- Proving breach of NDA is more challenging because it requires solid proof. It becomes necessary to take legal action and hold the disclosing party accountable.
- Mobility of employees is one more challenge before NDA. Employees change jobs from one company to another company or organisation. Having with them knowledge and insight from the previous company. They can use confidential information from previous organisations in a new organisation while playing their role.
- Nowadays, when information is stored or shared through digital tools, the rise of data breaches and unauthorised access to information increases. It is a huge challenge to protect and safeguard this digital information. There should be a special mechanism for ensuring security, like cybersecurity.
Conclusion
A NDA is a legal agreement between two parties where the company gives access to certain restricted information to the employee, preventing its disclosure by the employee to third parties. The secrecy of the restricted information is protected through an NDA. This restricted information, also known as confidential information, which is the essence of every business, consists of ideas, strategies, designs, formulas and programmes. Disclosure of this information may potentially damage the company and that’s why NDAs protect parties from such incidents. This NDA also has some restrictions that set the disclosing party free from the binding legal force of its disclosure. A NDA is legally binding on parties and if it is not followed, then the parties have to pay damages or compensation. To ensure its enforceability, an NDA can be Stamped and Notarized. Mugging up all the discussion, we can say that An NDA is a kind of mutual promise by both parties not to misappropriate the disclosed information.
References
- https://www.legalwiz.in/non-disclosure-agreement-drafting-service
- https://legalserviceindia.com/legal/article-10903-critical-analysis-non-disclosure-agreements.html
- https://www.investopedia.com/terms/n/nda.asp
- https://blog.ipleaders.in/need-know-non-disclosure-agreements/
- https://legal.thomsonreuters.com/en/insights/articles/4-things-to-know-about-non-disclosure-agreements
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