In this Article, Pallav Gupta pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses the important clauses in a Confidentiality Agreement.
Introduction
Behind every new startup company, there is an idea. But before that idea is presented to the world, it is very necessary to protect that idea from potential competitors in the market. Even the big companies have to protect their trade secrets and certain other information which could exploit their intellectual property. For specifically protecting that aspect, a Confidentiality Agreement comes into the picture.
Confidentiality Agreement
A Confidentiality Agreement which is also known as a Non-Disclosure Agreement, in simple words, is an agreement between two parties where one of the parties is bound to not to disclose any kind of information being provided or shared by the other party to the first party. Non-Disclosure Agreements (NDAs) are agreements signed between two entities in writing that confidential information is being passed from one entity/person/company to another, the nature of the information, the purpose and most importantly an undertaking from the person receiving the information not to reveal it to anyone for a specified period of time. In India, there is no such statutory enactment for its applicability and its enforceability but it is governed under the Indian Contract Act, 1872.
For example:
- A start-up company is seeking for funds through investors and capital ventures and the founders may fear that their idea will be stolen in lieu of receiving an investment. By entering into a Confidentiality agreement, one can prevent such idea theft.
- In the absence of such an agreement, it would become difficult to establish in the future that whether the idea was stolen or not. Similarly, a company recruiting new employees may also require those individuals, who will have to get their hands on the sensitive information, to sign an NDA so that they do not disclose those details at any point.
- Full-time employees may also be required to sign an NDA when working on new projects that haven’t yet been made public, as the effects of information leakage could damage the value of the project and the company as a whole[1].
- When the NDAs with regard to employer-employee are concerned, there is no need for a separate confidentiality agreement as it can be included as a Clause in the employment agreement as well.
This agreement in its inception can be of two folds where it can be unilateral and bilateral. A bilateral confidentiality agreement will be when both the parties entering into the agreement have certain information to share or disclose to each other and in the unilateral confidentiality agreement, it will be the only party who discloses or shares the information.
Kinds of information which can be protected under the Confidentiality Agreement
Not every kind of information can be protected under a confidentiality agreement. If a certain piece of information has already been made public or that information amounts to the public knowledge then that information cannot be asked for to be protected. Just like a new intellectual property that information is necessary to be original, novel or inventive. For example, there is a dispute between the parties regarding the disclosure of the information, and the accused party is able to show to the court that they had the same information prior to the signing of the same agreement, the court can make them not accountable for disclosure of the information in the same case.
Types of Confidentiality Agreements
Unilateral Confidentiality Agreement
Under this kind of agreement, there is only one party out of the two parties to the agreement whose information is required to be protected. The kinds of agreements which fall under this category are employer and employee or client and vendor. Almost every employment agreement these days has a clause of the confidentiality clause, rather than having a separate agreement.
Bilateral Confidentiality Agreement
Under this kind of agreement, both the parties to the agreement disclose the information to each other and both the parties are required not to disclose the information. For instance in the case of a joint venture, If a chip manufacturer knows about the top-secret tech going into a new phone, they may be required to keep the design a secret. In the same agreement, the phone manufacturer may be required to the keep the new tech in the chip secret as well[2]. Bilateral or two-way confidentiality agreements are less likely to contain such provisions which can come out to be one-sided.
Uses of a Confidentiality Agreement
- A confidentiality agreement in today’s era is a useful agreement not only to multinational corporations but also to small companies or startup companies or partnerships or any other entity since at any point of time during their course of business, the involvement of an outsider can put their confidential information in danger.
- In the case of a start-up, these agreements have to be handy. For the growth of that start-up, it is very necessary for them to deal with outsiders for the purpose of collaboration or compliance or anything which is required by them to establish the setup. For example, for the purpose of getting a product to be patented, an expert/ legal opinion would be required by them or even for the purpose of registration of the company or drafting of the agreements they need to discuss every kind of confidential information with a lawyer.
- So in that case as well these companies in order to protect their idea and the confidential information behind it, a confidentiality agreement become necessary. In times of competition in today’s market missing out on these small precautions can jeopardize the confidential information.
- A confidential agreement would be a lot of help in the film and television industry where a lot of intellectual ideas are shared with the outsiders. For example, if a scriptwriter wants his story to be made into a film and he approaches a film production company, he has to share his story to that company and his ideas are being shared with an outsider. So, in cases like this confidentiality agreement would be very helpful for the primary owner of that idea. Another prominent industry where a confidentiality agreement can be useful is the fashion industry wherein the designs are not meant to be shown in public before their shows or exhibitions.
- A nondisclosure agreement is also used in other circumstances where an employer is interested in keeping company confidential and proprietary information private. But, as a binding, legal document, the employer would have some recourse if company confidential or proprietary information was shared. For example at the time senior level recruiting, the recruiters have to share a certain amount of confidential information with the candidate in order to understand their real-time crisis solving antics so that they are able to figure out whether the candidate is fit for the job or not.
- Employers entering into confidentiality agreements with the employees of the company can really benefit from the same. As they are the only people, who are working with that information day in and day out. These days, the employers have started including the confidentiality clause in the employment agreement instead of entering into a separate agreement.
- A nondisclosure agreement should offer a clause that allows an employer to sign off on or give permission to the signer to use company proprietary information. This allows employees some latitude to participate in activities such as starting a business or becoming a supplier to their former employer[3].
Important Clauses in a Confidentiality Agreement
Definition of “Confidential Information”
The first clause becomes the essence of the agreement as to what exactly comes under the confidential information. As explained above as well, that information which would be in the knowledge of the party receiving the information or that information which amounts to public knowledge cannot be covered under this category. Every kind of information has to come under this heading so that the dispute in future can be avoided under any circumstance. This clause can also contain the manner in which the information will be shared with the receiving party.
Description of the Parties
It is not necessary to include this as the clause but it is the requirement of every agreement that there should be the proper description of every party to the agreement along with their respective full initial and registered address.
Duration/ Term of the agreement
- It is an obvious fact the longer the period of protection of information is mentioned in the agreement, the safer the information gets for a longer time.
- Depending on the nature of the disclosing party’s business, the ‘trade secret’ may be just as critical in 25 years as it is today. As such, they will seek to protect and secure the confidentiality of that information for as long as possible[4].
- The term of the agreement should be mentioned specifically in the agreement so that there is no ambiguity left open.
- For example, the agreement term can be till one year, two years, even five years but in the cases where the time frame is mentioned in the form such as not less than 18 months and not above the period of 2 years. This kind of term can create a dispute and can lead to ambiguity.
Use of Information
Some owners of the information feel that the receiving party should be able to access to every piece of information they are able to perceive while working with the first party. Whereas, the other owners might think of limiting the criteria for usage of the confidential information. It depends upon the requirement of the company to company. For example, at the time of Merger and Acquisition, if there is a confidentiality agreement between the parties before entering into the said transaction, the company can only be entitled to use the information required for the purpose of evaluation.
Obligation to disclose
This clause is mentioned in almost every confidentiality agreement because there are certain circumstances wherein the party can be bound to disclose the information. This can happen in the case when there is any administrative or legal authority can ask the party to disclose the information. For example, if there is an investigation going on by Customs Department, then the party is bound to disclose that information to those officials.
Return of the Information
Generally, after the time frame mentioned in the agreement has lapsed, the receiving party has to hand over the confidential information along with all the material with it. It is not necessary that the party has to return the information, it can be asked to destroy the same as well, as according to the agreement between the parties, and whether the same information has to be destroyed/returned can be mentioned under this clause. The effective return of all confidential materials has become increasingly difficult with technology. In today’s age of technological advancement, it is very difficult to fully destroy such information such as cloud storage, USB drives, hard drives etc. As a result, more and more NDAs are allowing the recipients to retain some of the information for ‘document retention’ – but not accessible in the course of daily business.
Remedies
Every confidentiality agreement must have this clause that in the case of breach of this agreement the primary party will have the right to proceed legally in a certain prescribed manner. The costs of a breach can be hard to calculate or prove, so a mutual agreement up front as to what constitutes a fair remedy will help you avoid a lengthy legal battle later on. This clause should include the possible consequences of a breach and explicitly preserve your right as the Disclosing Party to seek equitable remedies[5]. It is necessary that the disputes arising out of the said agreement should be resolved cost effectively and the most cost-effective option in Arbitration. His powers and appointment should be clearly defined in the said clause so that so that there is no dispute regarding the remedy and dispute resolution.
Jurisdiction
It is also very necessary to mention that which area/city will be having the jurisdiction according to this agreement to entertain the dispute arising between the parties[6].
No Binding
- The signing of the said agreement does not always imply that there will be the permanent relationship between the parties. Therefore, the said clause implies that any party can terminate the collaboration at any point in time. This clause reserves the right of both the parties to withdraw from the said relationship as according to the procedure mentioned in the said clause and by abiding the relevant laws.
- Another important thing while entering into a confidentiality agreement is its registration. The parties can get the same registered through notarization as well as it will be the cost-effective and time-saving process.
- An unregistered confidentiality agreement can be as good as nothing since no party would be able to move to the court if the same is not registered.
Conclusion
Non-disclosure agreements are an important legal framework used to protect sensitive and confidential information from being made available by the recipient of that information[6]. The main problem with the confidentiality agreement is the difficulty that whether all the aspects have been covered or not. This problem can arise if the said agreement has not been drafted properly in a manner which can reduce the ambiguities. This is why if the companies require a good confidentiality agreement they must consult a lawyer for that instead of copying from the internet. Bad drafting can cause the companies to enter into long litigation battles which can incur them a lot of legal costs as well. Therefore, the companies should always go for properly drafted confidentiality agreement from the professionals as it does not cost a fortune.
References
[1] Adam Hayes, How NDAs Work and Why They’re Important https://www.investopedia.com/articles/investing/041315/how-ndas-work-and-why-theyre-important.asp.
[2] Susan M. Heathfield, What is a Non Disclosure agreement? https://www.thebalance.com/non-disclosure-agreement-1918197.
[3] 9 clauses to include in every Non-disclosure agreement https://www.axial.net/wp-content/uploads/2014/03/Axial_9-Clauses-to-Include-in-Every-NDA.
[4] Erica Gardener 10 key clauses in every non-disclosure agreement https://everynda.com/blog/10-clauses-have-non-disclosure/.
[5] Deepshikha Ranjan, What you need to know about non-disclosure agreements https://blog.ipleaders.in/non-disclosure-agreements/.
[6] How NDAs Work and Why They’re Important | Investopedia https://www.investopedia.com/articles/investing/041315/how-ndas-work-and-why-theyre-important.asp#ixzz55ksvza1v.
