This article is written by Senjyoti Howlader, pursuing a Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho. The article has been edited by Ruchika Mohapatra (Associate, LawSikho) and Arundhati Das (Intern at LawSikho).
This article has been published by Shoronya Banerjee.
Businesses at times gather, receive, interchange, or share a great deal of confidential, invaluable information in the course of their transactions. To protect such confidential information and/or trade secrets from getting leaked, the parties either enter into a confidentiality agreement (CA), which is also known as a Non-Disclosure Agreement (NDA), or a Confidential Disclosure Agreement (CDA), or a Secrecy Agreement (SA), or a Proprietary Information Agreement (PIA), or document the confidentiality obligations in the confidentiality clause within an agreement. In this article, we will discuss Confidentiality Agreements and understand the elements of the agreement that need to be kept in mind while drafting the same.
What is a Confidentiality Agreement?
A Confidentiality Agreement is a legal instrument signed by two parties that prohibits the disclosure of sensitive “confidential” information to other parties. These agreements are commonly used by businesses during interactions with prospective buyers, clientele, or hires, to ensure that sensitive or proprietary information is not shared or misused to the owner’s detriment.
The document formalises the parties’ relationships and directs their behaviour and usage of the information. It also serves as evidence in court on the disclosure of confidential information.
A Confidentiality Agreement is also known as the following:
- Non-disclosure agreement (NDA).
- Confidential Disclosure Agreement (CDA).
- Proprietary Information Agreement (PIA).
- Secrecy Agreement (SA).
Who are the parties to a Confidentiality Agreement?
A Confidentiality Agreement is signed between two parties:
- The party that delivers sensitive information for the stated purpose.
- The party that receives the information.
The parties enter into a Confidentiality Agreement to guarantee to the party providing information that the recipient will not divulge or misuse the information and will only use it for the stated purpose.
When is a Confidentiality Agreement required?
A Confidentiality Agreement is required when it is essential to preserve and protect confidential information, innovations, ideas, or creative creations during deliberations, proposals, and negotiations. The following are the common scenarios:
- When an employer wants to keep corporate information private while negotiating a position with a potential new hire or delegating new duties to an existing employee.
- When considering an independent contractor or consultant, a client wishes to keep their corporate or personal information confidential.
- When the seller seeks to keep the proposed terms of the agreement and corporate information confidential during a prospective company acquisition.
- When two or more businesses or individuals would like to start working together but want to keep specific details mentioned during discussions confidential.
- To protect intellectual property of the person or organization.
Why confidentiality agreements are necessary to be made in writing?
There are various reasons to enter into written confidentiality agreements, for example:
- Preventing misunderstandings about what the parties perceive to be confidential. .
- Outlining the parties’ expectations about the treatment of sensitive information, whether disclosing or receiving confidential information.
- It is easier to enforce written contracts than oral ones.
- Upstream arrangements with third parties frequently necessitate the memorialization of secrecy agreements.
- Covering issues that are indirectly related to confidentiality, such as non-solicitation.
Can a Confidentiality Agreement last forever in India?
The Indian Contract Act, 1872 governs confidentiality in India. Confidentiality Agreements in India normally impose duties that continue between two and five years, however, some obligations might be permanent. If trade secrets were shared, it is customary for Confidentiality Agreements to extend beyond the term of a commercial partnership. Methods, recipes, procedures, and so forth are examples of trade secrets.
General clauses in a Confidentiality Agreement
- Details of the parties: The details of the provider of the information and the recipient of the information, between whom the agreement is being signed.
- Term: This clause discusses the period of time for which the agreement continues to sustain.
- Confidential information: This segment of the agreement indicates and describes in detail as to what information is confidential.
- Obligation of the parties: This part clearly states the duties and obligations of the parties.
- Use of the information: Sometimes the provider of the confidential information limits the use of the information received by the recipient. This clause covers how such information is to be used.
- Exceptions to confidentiality obligations: This segment contains certain exceptions to the confidentiality obligations. These exclusions primarily include material released during a legal process or an inquiry.
- Return of information: When the duration of the agreement expires, the receiving party is obligated to return the information, along with any derivative material, and remove it from their operating systems.
- Consequences of breach: This part of the agreement imparts the consequences that the recipient of the confidential information would face if it breaches any part of the agreement.
- Right to seek an injunction: This clause lets a party who is suspecting a breach can immediately go to a court and get a stay.
- Jurisdiction and governing laws: This clause states the laws that will govern in case of a dispute between the parties and which court/courts will have the jurisdiction to resolve/decide the dispute.
- Dispute resolution: This clause states the method or medium of dispute resolution.
Points that must be kept in mind while drafting a Confidentiality Agreement
What is the scope of obligation?
The recipient of confidential information is obligated not to divulge the scope, nature, object, or future benefits of the confidential information to any party, including any person, company, or a third party other than the contractual parties. The recipient may be held accountable for breaches of confidentiality agreements committed by the recipient’s employees or agents who have access to the information. To hold the third party accountable, the Agreement must discuss both their obligations and liabilities.
How well is the scope of confidential information defined?
Confidential information should be defined specifically for both parties. It is not advisable to utilize generic definitions to incorporate a broad area of information. Always be precise in defining the extent of secret information, which may be the same or different for both parties. In the case of a discussion including the mutual exchange of sensitive information by both parties, the type of information to be shared by each party may differ. As a result, in such instances, establishing an exact definition of confidential information for each party makes sense.
What is excluded from confidentiality treatment?
Every Confidentiality Agreement contains various exceptions from the receiving party’s responsibilities. These exemptions are intended to address instances in which keep the information confidential would be unfair or unduly inconvenient for the other party. Some common exclusions are:
- The recipient already being aware of the information;
- That the information is already known to public;
- That the recipient independently produced the information without using the disclosing party’s proprietary information;
- That the information has previously been provided to the receiver by a third party who owes the disclosing party no duty of confidentiality.
What are the remedies in case of a breach?
One of the significant benefits of entering into a Confidential Agreement is that it provides adequate remedies to the aggrieved party, i.e. the provider of the information. Equitable remedies and liquidated damages are among the available remedies. Equitable remedies include injunctions, which allow the disclosing party to avoid additional damage. Furthermore, the Court may impose a penalty on the recipient that is proportionate to the damage caused by the breach to the disclosing party.
In the event of a breach of the contract, the aggrieved party has the right to terminate the contract. It should include an arbitration clause in the event of a breach to avoid protracted litigation, as well as a jurisdiction clause to decide the location of the suit in the event of a breach of contract.
What is the method for return of confidential information?
Every Confidential Agreement must include a clause requiring the return of the document which will entail the process for returning the confidential information after the termination of the contract.
Does the party hold the right to injunction?
Ensure that you have a clause that allows you to seek injunctive relief if the other party violates the terms of the agreement. This clause merely states that you can obtain a court injunction preventing the other party from engaging in the breaching act.
What is the jurisdiction in case of a dispute?
Ensure that if there is a dispute, then the dispute will be resolved solely in your city. You don’t want to go a long distance and incur additional expenses to enforce the Confidential Agreement.
How do you want to resolve the dispute?
In case of a dispute, how are you going to resolve it? The method of resolution of the dispute should always be mentioned clearly to avoid any further dispute over it.
The primary goal of signing a confidentiality agreement is to protect confidential information and restrict its usage of it by the receiver of such information. Hence while drafting such an agreement there are some points (mentioned before in the article) that one should always keep in mind
It should be ensured that negotiations and discussions do not stall due to unacceptable clauses in the Agreement. While drafting and negotiating the agreement, the end goal should always be prioritised, and unnecessary clauses should be avoided. Standard clauses in the Confidentiality Agreement should be given a high priority while drafting it.
- Six key issues that you should look for in a Non-Disclosure Agreement by Anubhav Pandey – https://blog.ipleaders.in/six-key-issues-look-non-disclosure-agreement/
- 7 Considerations While Drafting a Non-Disclosure Agreement (NDA) – https://www.techlaw.attorney/7-considerations-while-drafting-a-non-disclosure-agreement-nda/
- NDAs and confidentiality agreements: What you need to know – https://legal.thomsonreuters.com/en/insights/articles/confidentiality-agreements
- The Key Elements Of Non-Disclosure Agreements by Richard D. Harroch – https://www.forbes.com/sites/allbusiness/2016/03/10/the-key-elements-of-non-disclosure-agreements/?sh=71cf6252627d
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