This article is written by Shiva Atul Goradia, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.

What is Confidential Information?

The data must be of limited public availability and a specific character. It must not necessarily be original, novel or complex or indeed commercially valuable (consider other methods of protection of such information). Still, in most circumstances, commercial parties will be wishing to protect the data of a commercial and valuable nature. There have been several cases in understanding what may or may not consist of confidential information. Confidential information must be specific. It must not consist of other non-confidential information as to lose its identity, therefore rendering it outside the restrictions of confidentiality.

What is a confidentiality clause?

Confidentiality Clauses, these important and seemingly simple agreements are so prevalent in today’s business environment that many business people regularly sign them without much, if any, actual analysis or consideration.

A confidentiality clause or non-disclosure clause in a contract constrained two or more parties or all the involved parties to safeguard and agree that specific type of information that is provided by one or all the parties will remain confidential. Such a clause in a contract where a secret idea/process/product/concept, etc., is equipped by a company or an individual.

What are the Advantages/Disadvantages of a Confidentiality Clause in Contract?

Advantages of a confidentiality clause: By use of an explicit term in a contract parties can conceivably extend the cover of the equitable principles of confidentiality, make them to the particular case and renounce the need to refer to a court to define the accountability of the parties.

Disadvantages of a confidentiality clause: However, there is a probability that the contract in a similar way can bring less cover. For example, where a deal provides for confidentiality for five years, after that period, there will possibly be no bar on a party using that data whereas in equity a court may consider that privacy should be maintained inconstancy.

What are the types of Confidentiality clauses?

In Non-Disclosure Clauses, there are two types of secrecy bond that can be imposed:

1. Unilateral Confidentiality: In this kind of a clause, all the information and documents which may come into the possession of the other party is treated confidentially. But the confidentiality provisions do not administer the other way around. Through bountiful agreements of this sort are predetermined to protect a business’s trade secrets, they may also be constructed to protect the copyright for information created through an employee’s research. The duties expected by one party to the other are not depicted towards the other party. Most of the non-disclosure agreements fall under this type. Contract and corporate analysts in the private sector and professors at research universities are sometimes required to sign Non- Disclosure clauses that give the rights to any research they conduct with the Business or university that safeguards them.
2. Mutual Confidentiality: Each party is obligatory to the other the same or similar duties to keep each other’s confidential information confidential.  If a chip manufacturer knows about the confidential tech going into a new phone, they may be obligatory to keep the design confidential. At the same time, the phone manufacturer may be required to support the latest tech in the chip confidential as well.
   

Why is a confidentiality clause necessary?

There is both legal and commercial vindication for including time limits in confidentiality agreements. Confidentiality clause plays an important role when an individual or a company agrees with another party or parties. It is an intrinsic element especially in a license, between start-ups and companies who wish to test the probable possibility of a favourable commercial partnership, reseller agreements, technology, employment contracts etc. The key objective behind including this clause is to ascertain that both the parties involved in the Agreement will maintain secrecy and high levels of confidentiality.

For example, a start-up company wanting to raise money from venture capitalists or other investors may panic that their excellent idea will be filched in lieu of receiving an investment. Having a signed Non-Disclosure clause legally hinders such idea theft. It can be difficult to justify that an idea has been filched without a confidentiality clause.

A company recruiting outside consultants may also need those individuals, who will be treating sensitive data, to sign a confidentiality clause so that they do not unveil those details at any point. Employers who are working full-time are required to sign a Confidentiality clause when engaging on latest projects that have not been made public, as the effects of unveiling confidential information could harm the value of the project and the company as a whole.

What should be the term of a Confidentiality Clause?

The term of Confidentiality clause indicates for how long the clause should be active. Typically, the everyday use of the clause ranges from one to five years. However, it all depends on the essence of the transaction or market conditions. As an employer or businessman, it is in your interests to enforce a confidentiality clause for as long as possible. Signatories to your clause generally prefer for the document to lapse at some point. For this reason, it is rare but yet possible to see the clause operating indefinitely as it unfairly prejudices the contracting party. Ideally, the confidentiality clause will cover an appropriate amount of time to protect the disclosing party’s interests. Having a reasonable time frame for you’re, the clause is especially important if a dispute arises. This is because the courts look to the period, reasonableness, and impact on the receiving party in making their decision.

What are the restrictions of a Confidentiality Clause?

Every Receiving Party should acknowledge the confidential nature of the Confidential Information of the Party who is disclosing the secret information and agrees that such Confidential  Information:

1. will be kept a secret by the Receiving Party; 
2. will not be used for any other reason other than to calculate and terminate the Contemplated Transactions; and 
3. without limiting the preceding, will not be divulged by the Party who is receiving it or any Person;

except in each case as otherwise expressly allowed by the terms and conditions of this Agreement or with the p written consent of an lawful representative of Seller concerning the Confidential Data of the Seller (each, a “Seller Contact”) or an lawful representative of  the Buyer concerning the confidential data of  Buyer (each, a “Buyer Contact”). Both  Buyer and Seller will unveil the confidential data of the other  Parties only to its representatives who require such material for evaluating the  Contemplated Transactions and are informed by  Buyer, Seller or  Selling Principal, as the case may be, of the obligations concerning such  Confidential Data. 

Both Buyer and Seller will:

(a) enforce the terms to its representatives;

(b) take such action to the extent necessary to cause its  representatives to comply with the terms and conditions; 

(c) be responsible and liable for any breach of the provisions.

Unless and until this Agreement is terminated, Seller will maintain the confidentiality of any Confidential Data of the Seller relating to any of the Assets or the Assumed Liabilities. Nonetheless the previous sentence, Seller may use any Confidential Data of the Seller before the Closing only in the Ordinary Course of Business.

From and after the Closing, the provisions will not apply to or restrict in any manner Buyer’s use or disclosure of any Confidential Information of Seller or Selling Principal relating to the Business or any of the Assets or the Assumed Liabilities.

What happens after the contract expires?

The clauses will provide for what happens after the term of the contract lapses. Usually, it will provide that even if the period has ended, the disclosing party retains its obligations under intellectual property rights. The fundamental rights will always extend to the employer or the one aiming to protect the secret information. It is still necessary to find out howB327 long your non-disclosure agreement will last and see how it may affect you subsequently.

What is not included in a confidentiality clause?

Not all of a business trades and dealings are meant to be kept a secret. Public records such as data filed with the SEBI or the address of the company headquarters are not covered by a confidentiality clause.

Courts have an extent to understand the scope of a confidentiality clause, depending on the language of the Agreement. For instance, if one party to the contract can prove they had knowledge covered in the confidentiality clause before its signing, or if they can prove they acquired the learning outside the Agreement, they may be able to escape an adverse judgment.

Moreover, not all knowledge is protected in a confidentiality clause. If the information is exposed due to a court order, the aggrieved party may not have a legal remedy.

What are the Benefits of duration in a confidentiality clause?

It is essential to extricate between confidentiality clauses relating to employees and clauses between companies. Clauses affecting individuals are more likely to be in the constraint of trade, and the issues of duration limits in these cases seem very much more susceptible. The limited case law there is on a specific period for which the commitment of confidentiality between commercial entities may run has not laid down any easily detectable rules. It seems to depend on the circumstances of acknowledgement, the retail value and nature of the information. The Agreement often limits obligations of confidentiality between parties to a contract to a specific period.

The time may be decided by the period for which the confidential information is likely to remain susceptible as in many cases within a few years, and commercial data will have lost this quality. Valuable data can be safeguarded as a trade secret as long as the owner continues to make reasonable efforts to maintain the information’s privacy. If a company admits knowledge to another company using a confidentiality agreement that has a firm duration of the confidentiality obligations – like one year – then after that time, the data will likely not be defended as a trade secret.

Since the beneficiary of such information has no obligation to keep the information confidential after the agreed period, courts will likely not allow a company to claim that the data is a trade secret, even if the company is accusing an unrelated party of exploitation of the information. The clear answer to this situation would appear to be using confidentiality clauses without a firm time duration if there’s a chance that private trade information will be revealed. Some places view confidentiality clauses without a firm period as unreasonable constraints on trade if they apply to report that, while confidential, does not rise to the level of being a trade undisclosed under the relevant law.

Conclusion

Non-disclosure agreements are an essential legal framework used to protect sensitive and confidential data from being made available by the beneficiary of that information. Companies and start-ups use these documents to ensure that their good ideas won’t be stolen by people they are negotiating with. Anybody in breach of a confidentiality clause will be subject to lawsuits and penalties commensurate with the value of lost profits. Criminal charges may even be filed. Confidentiality clauses may be one-sided whereby only the beneficiary of the data is required to keep it confidential, or mutual where both parties agree not to share each other’s sensitive data.

References 

1. https://news.bloomberglaw.com/
2. thomsonreuters.com
3. https://lawshelf.com/

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