This article has been written by Kamal Kishore Krall, pursuing a Diploma in US Contract Drafting and Paralegal Studies course from LawSikho and edited by Shashwat Kaushik.

This article has been published by Shashwat Kaushik.

Introduction 

In this digital age, due to growing cyber-attacks and data breaches, confidential information is at risk at all times 24*7, especially startup businesses, are on target and it’s a challenge to protect their confidential information. To overcome this wrenching issue, the NDA comes to the rescue to ensure the protection and safeguarding of sensitive data. In this article, we will learn about how NDA can be used to safeguard business interests, along with its legal implications.

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Definition of Non-Disclosure Agreement (NDAs)

A non-disclosure agreement (hereinafter referred to as an NDA) is a confidentiality agreement between the obligatory parties protecting and safeguarding the individual’s or organization’s interest in restricting the use of information other than as exclusively listed in the NDA. NDAs are meant to protect the sensitive nature of information, business plans and strategies, trade secrets, or intellectual property. 

Who are obligatory parties in Non-Disclosure Agreement (NDAs)

The obligatory parties of the NDA revolve around two spheres: (i) the disclosing party and (ii) the receiving party. In either of these, the representatives may or may not be limited to individuals or business entities, governing board members or members holding key posts within the organisation, employees, third parties engaged by the organisation, and likewise.

1. Disclosing party:

  • The disclosing party is the individual or entity that possesses confidential and proprietary information and intends to share it with another party. This information could include business secrets, trade secrets, financial data, inventions, or any other information that provides a competitive advantage or holds significant value.
  • The disclosing party has a responsibility to identify and protect their confidential information. This includes implementing adequate security measures, restricting access to authorised individuals only, and clearly marking or labelling sensitive documents.

2. Receiving party:

  • The receiving party is the individual or entity that is on the receiving end of the confidential information shared by the disclosing party. They may be potential business partners, collaborators, investors, contractors, or any other party with a legitimate need to access the information.
  • The receiving party is obligated to maintain the confidentiality of the information they receive. This typically involves signing the NDA and agreeing to specific terms, such as non-use, non-disclosure to third parties, and destruction or return of the information upon termination of the agreement.

Representatives of obligatory parties:

  • While the NDA primarily revolves around the disclosing and receiving parties, their representatives may also be subject to the agreement’s terms. Representatives can include:
    • Individuals: Employees, officers, directors, or any other person acting on behalf of the organisation.
    • Business entities: Subsidiaries, affiliates, or other related entities that are privy to the confidential information.
    • Governing board members: Members of the board of directors or other governing bodies who have access to sensitive information.
    • Key post holders: Employees or individuals holding critical positions within the organisation, such as senior managers, executives, or department heads.
    • Third parties: Consultants, contractors, or service providers engaged by the organisation who may need access to confidential information to fulfil their duties.

It’s important to note that the specific obligations and restrictions imposed on the parties and their representatives may vary depending on the jurisdiction and the specific terms of the NDA. It is advisable to consult with legal counsel to ensure compliance with all relevant laws and regulations.

How NDA plays an important role in an organisation

During the establishment of any business, irrespective of geographical location, some aspects of the business need complete protection in respect of the leaking of confidential information that may lead to business fallout besides monetary loss and profiting competitors. Some of these aspects may be:

Business negotiations

During establishing or establishing businesses, there are deliberative exercises to protect sensitive information, viz., trade secrets, business strategies, financial inclusion plans, intellectual property, HR strategies, marketing and operations plans. 

Execution of contracts with employees

NDA may be enforced with employees binding legal action in case found involved in any illegal activities disclosing business plans or any misconduct, including revealing any confidential information of the respective organisation. This condition also prevails in the event that an employee leaves or resigns from the organisation.

Engagement of contractors and third parties

NDA enforces the non-disclosure of any sensitive information by its third party “contractors” engaged in carrying out specialised tasks for any unauthorised use by any means or practice during collaboration. 

Geographical existence of parties

The geographical location of the parties also plays a crucial role in the framing of the NDA and relevant laws about their respective territories need to be accentuated to avoid any potential jurisdictional disputes. 

Structure of Non-Disclosure Agreement (NDAs)

Type of NDA to be executed:

  • One-way- one party shares confidential information to the other party;
  • Two-way- Both parties share confidential information;
  • Mutual NDA- this is similar to the two-way NDA, which covers additional clauses on duration and types of confidential obligations to be adhered to; and
  • Industry-specific NDA- This type of NDA is designed for a specific industry with unique confidentiality needs in national defence matters. 

Clauses to be defined in Non-Disclosure Agreement (NDAs)

A well-drafted NDA before coming into effect may include:

Confidentiality obligations

As such, what is to be considered should be accurately defined in terms of confidentiality, its exceptions and its exclusions in NDA agreements. This involves specifying the types of information that are considered confidential, as well as any exceptions or exclusions to the confidentiality obligations. By doing so, both parties can have a clear understanding of what information is protected and under what circumstances it can be disclosed.

Specifying exceptions and exclusions:

While certain information may be deemed confidential, there may be instances where exceptions or exclusions to the confidentiality obligations are necessary. These can include:

  • Public information: Information that is already publicly available or accessible through legitimate means is generally not considered confidential.
  • Information independently developed: If a party independently develops the same or similar information without using or referencing the confidential information, it is not considered a breach of confidentiality.
  • Information required by law: In some cases, parties may be required by law to disclose confidential information, such as in response to a valid legal order or subpoena.
  • Information disclosed with consent: If the disclosing party provides explicit consent to the receiving party to use or disclose the confidential information, it is not considered a breach of confidentiality.

Identification of the parties involved

To mitigate risks, the financial status of the parties involved may be evaluated before executing the NDA. Besides, dependency, insolvency, and bankruptcy checks may also be verified and should be explicitly mentioned in a clause in the NDA. If required, a risk assessment may be carried out, outlining the expected risks that may be evoked due to providing highly sensitive confidential information.

Registration status of company

The registration status of the disclosing company with whom the NDA is to be executed should be verified by their respective local government office to ensure the company’s status and if there are any legal proceedings active in their respective state/territory.

To conduct this verification, the following steps should be taken:

  1. Identify the local government office responsible for business registrations in the company’s jurisdiction. This may vary depending on the country or region.
  2. Obtain the necessary information about the disclosing company, such as their legal name, registration number, and address.
  3. Contact the local government office and inquire about the company’s registration status. Provide the necessary information to facilitate the search.
  4. Review the information provided by the local government office, including details on the company’s registration status and any active legal proceedings.
  5. Document the verification process and maintain records of the information obtained.

By verifying the registration status of the disclosing company, you can mitigate risks and protect your organization’s interests. This process helps ensure that you are entering into an agreement with a legitimate entity and that there are no legal impediments that could impact the validity or enforceability of the NDA.

Commencement and validity period of Non-Disclosure Agreement (NDAs)

The term of the NDA between the obligatory parties, with the date of commencement and limitation of use of the NDA w.r.t. confidentiality obligations, should be specified.

This term should include the commencement date, which marks the beginning of the confidentiality obligations, and the limitation of use period, which specifies the timeframe during which the confidential information shared under the NDA can be used or accessed by the recipient.

It is crucial to define the term of the NDA to ensure that all parties involved are aware of the specific timeframe during which the confidentiality obligations are in effect. This helps prevent any misunderstandings or disputes regarding the duration of the agreement and the associated responsibilities.

The commencement date of the NDA is significant as it establishes the starting point from which the confidentiality obligations come into force. This date should be clearly stated in the agreement to avoid any confusion or ambiguity.

Similarly, the limitation of use period clearly outlines the timeframe within which the recipient of the confidential information is permitted to use or access the information disclosed under the NDA. This limitation helps protect the confidentiality and integrity of the information by restricting its use beyond the specified period.

Obligations of the receiving party

The receiving party is obliged to keep confidentiality information disclosed by the disclosing party to maintain utmost confidentiality, limiting the information to be bare-minimum circulated with their team designing NDAs, securing information in proper lockable storages, prohibiting use of the disclosing party’s information for personal or unauthorised purposes, and if required, the same may be returned and/or destroyed as deemed by the disclosing party.

Non-compete clause

The receiving party should be limited to engaging in certain activities that may harm the disclosing party’s business interests. This also applies to employees who leave the organization and are bound by their signed NDAs.

Indemnification clause

Both parties should be indemnified from any financial or monetary loss due to a breach of NDA terms. Under this clause, any indirect or consequential losses may be deferred/excluded. However, legal fees and damages resulting in monetary loss may be defined with the utmost clarity. 

Breach of Non-Disclosure Agreement (NDAs)

The consequences for the breach of the NDA may be outlined with potential relief to the other party in the form of injunctive relief, which needs to be explicitly mentioned in the NDA. This course may lead to the termination of the NDA, the destruction of all records/evidence of the NDA, and may cover all the monetary damages, including fees involved. Revealing or disclosing information in any form post execution of the NDA also forms part of a breach of the NDA; a conflict of interest during the NDA’s validity is also a type of breach of the NDA.  

Issuing of notices

On confirmation of the breach of trust where the party knowingly hid the facts and provided misleading and inaccurate information, a legal notice may be issued to sue the party for covering consequential damages.

Severability clause

Adding a severability clause to the NDA to address recovering the extent of financial/monetary damages incurred due to a breach of the NDA is a good idea. Here, it may be noted that the severability clause may not be confused with the one that an employee receives after leaving the organisation or upon resigning from the organisation. 

Inclusions and exclusions of Non-Disclosure Agreement (NDAs)

Specifically mention the inclusions and exclusions of the NDA after thorough research to protect both parties from any monetary losses. Also, there may be instances where confidential information may be required to be disclosed, which may be covered under an intimation to the disclosing party with prior consent in writing to avoid any future legal complications. For example, inclusions are those clauses where there is total clarity of the role of either party in the NDA. However, in cases of exclusion, for example, oral confidential information doesn’t come under the scope of the NDA and is explicitly highlighted/written/covered in a separate clause. Information that has been made public before execution of the NDA or disclosed to a third party is also an exclusion of the NDA and will attract a breach of the NDA. 

Dispute resolution and jurisdiction

If the breach is not settled by the obligatory parties themselves, an arbitrator may be invited/involved to resolve the dispute. However, the governing laws and jurisdiction need to be seen as mentioned in the NDA. The involvement of an arbitrator provides a structured and impartial approach to resolving disputes arising from the breach of an NDA. The arbitrator, typically a neutral third party with expertise in the relevant field, will assess the claims and defences presented by both parties and render a decision based on the applicable laws and principles.

The governing laws and jurisdiction outlined in the NDA will play a pivotal role in guiding the arbitration process. These provisions will determine the legal framework that the arbitrator must adhere to, including the relevant substantive and procedural laws that will be applied in resolving the dispute.

Furthermore, the governing laws and jurisdiction will establish the legal venue for the arbitration proceedings. This includes specifying the location where the arbitration will take place, as well as the rules and procedures that will govern the conduct of the arbitration, such as the exchange of pleadings, the presentation of evidence, and the issuance of the arbitral award.

Covering up consequential damages

A threshold limit may be defined for consequential losses to a limit as mutually agreed by the obligatory parties to cover up the loss due to breach. By establishing a threshold limit, the parties involved can manage and mitigate the financial risks associated with consequential losses. When a breach occurs, the threshold limit acts as a benchmark to determine the extent of compensation or damages that the non-breaching party is entitled to receive. Any consequential losses that exceed the threshold limit are generally not recoverable, thus providing a level of predictability and certainty in the event of a dispute.

The threshold limit can be customised and tailored to suit the specific circumstances and needs of the parties involved. Factors such as the nature of the contract, the industry norms, and the potential severity of consequential losses may be considered when determining an appropriate threshold limit.

Delivery of Non-Disclosure Agreement (NDAs)

After all the formalities of the NDA are completed, including the governing laws and procedures of the respective territory, the delivery of the NDA within a set time frame should be initiated by proper means with acceptability and a confirmation receipt from the disclosing party to bind the obligatory parties to the terms of the NDA.

Authority to Non-Disclosure Agreement (NDAs)

The authorised signatory(ies) of the NDA refers to the list of members as listed in the NDA appointed after thorough deliberations and authorised to executive the NDA. Prior and proper verification of the identified members’ involvement in any legal matters or involvement in unlawful activities prohibited under respective government law needs to be verified beforehand and before the signing of the NDA. 

Destruction of Non-Disclosure Agreement (NDAs)

Upon expiry of the validity period of NDA, all the documented resources of NDA in physical/electronic means are to be destroyed and properly documented to keep both parties safe in any future litigation. However, as a goodwill gesture, confidentiality needs to be maintained by both parties for future collaborations. 

Disclaimer clause

A clause may be added stating that NDA is not providing legal advice and that professional legal consultants may be hired for specific legal matters. This clarification is important to emphasise that the NDA’s purpose is to protect confidential information, and it should not be misconstrued as legal counsel. By including this clause, both parties acknowledge that the NDA does not provide legal advice and that seeking professional legal consultation for specific legal matters is advisable.

A brief example of Non-Disclosure Agreement (NDAs)

A business entity already in the education business is planning to expand its business into reality. For this, the owner appoints Strategic Partnership Professionals (SPP) and shares some confidential information. At one point, the business owner feels risky about sharing all the confidential information and hires a legal professional to execute the NDA on their behalf.

Conclusion

Every startup,  new business, or established business has its own confidential plans, strategies, and secret and confidential information that needs to be safeguarded and protected to remain ahead of its competitors. Non-disclosure agreements serve as the master key to safeguarding the privacy of data, protecting sensitive and confidential information, and fostering trust.

NDAs serve multiple purposes in safeguarding confidential information. Firstly, they create a legal obligation for individuals or entities to maintain the secrecy of disclosed information. By signing an NDA, parties agree not to divulge, use, or share confidential data without prior authorization. This legal framework adds an extra layer of protection, ensuring that sensitive information remains within the intended circle and is not misused or leaked.

Moreover, NDAs establish clear boundaries and expectations regarding the handling of confidential information. They outline the specific terms and conditions under which information can be shared, accessed, or utilised. This clarity helps prevent misunderstandings, disputes, and potential legal complications arising from the unauthorised use or disclosure of confidential data.

Furthermore, NDAs promote a culture of trust and confidentiality within an organisation and its business relationships. By entering into an NDA, parties demonstrate their commitment to protecting sensitive information and respecting each other’s intellectual property rights. This fosters an environment of mutual trust, encouraging collaboration, innovation, and the sharing of ideas without the fear of unauthorised disclosure.

References

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