This article is written by Pallavi Chandrasekhar who is pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Lawsikho.
One of the first agreements to be signed before parties enter a commercial relationship with each other is a Non-Disclosure Agreement (NDA) to prevent leaking of any sensitive, classified, or confidential information discussed to a third party not part of such discussions. For example: parties to a merger must enter into an NDA before they discuss the term sheet, and other agreements as confidential information would be shared between the entities. There are two parties to an NDA- (a) the party divulging sensitive or confidential information called the Disclosing Party, and (b) the party obtaining the sensitive information called the Receiving Party.
An NDA is different from a Confidentiality Agreement because it requires less degree of secrecy. In an NDA, parties must not disclose personal or private information whereas in a Confidentiality Agreement, parties must take proactive measures to ensure information is not disclosed or leaked. Secondly Confidentiality Agreements are used more often in employment or personal situations whereas NDAs are used third party or start-up situations. Lastly, NDAs are used when the obligation to not disclose is unilateral, whereas Confidentiality Agreements are utilized when there is a bilateral or multilateral disclosure of sensitive information.
NDAs ensures that information that is valuable to the firm does not get leaked and cause losses to the firm or company. For example- if an associate leaks supplier or client list to a competitor (valuable confidential information), the company’s competitor could try lure the clients or suppliers away from the company thereby causing financial loss to the company.
Factors to be considered before drafting
- Obligations under the NDA must be reviewed: It is important to review an NDA if a party is making another party sign one. Several times NDAs also include non-compete and non-solicit clauses which prevents one or both of the parties from competing in the same field as each other and not to take away clients or suppliers from the Disclosing Party. Furthermore, the Disclosing Party can make the Receiving Party sign similar NDAs with all other parties with whom the Receiving Party might potentially share the confidential information.
- Scope of the confidential information must be taken into consideration: In every NDA, what constitutes confidential information is always defined. Usually, the Disclosing Party would want this definition to be as broad as possible to include all of the disclosed information, whereas the Receiving Party would want this clause to be as narrow and specific as possible. Sometimes especially during talks of a merger or an acquisition bid, not just the details of the transaction but the entire transaction itself has to be confidential and would qualify as confidential information. In such an event, parties to the transaction or bid would have to be extra careful to not divulge any information to third parties barring those specifically mentioned in the agreement.
- Remedies available if breach has occurred: When an NDA is breached either financial relief can be claimed, or the Receiving Party can be injuncted from acting on or using the confidential information. The Disclosing Party on successfully seeking an injunction can approach a court and ask that the Receiving Party return all the confidential information with it and stop revelation of such information to other parties.
- Pre-requisites of Confidential Information: Some parties state specifically on their NDA that information that is specifically marked “Confidential” must not be disclosed to parties not related to the agreement or transaction. However, this can be impractical on some occasions. For example: the Disclosing Party would may not be able to mark every document on a shared server with the Receiving Party as “confidential”. The Receiving Party would prefer that only documents or information marked “confidential” would be covered by the NDA but the Disclosing Party would sometimes not be able to mark every new or updated document in the shared server as “confidential” to prevent disclosure. Thus, specifically marking documents as “confidential” favours the Receiving Party and does not favour the Disclosing Party.
- Exceptions and Disclosures: There must always be certain exceptions that would not trigger a penalty for disclosure. These must be inserted in the NDA and include situations such as information already known to the Receiving Party, information that publicly known, disclosure to courts due a court order, modification of the law in the future such that confidential information or its components cannot be kept confidential, etc.
- Information to be Returned on Termination: After termination, most NDAs mandate return of original and copies of confidential information disclosed by the Disclosing Party. This is possible when physical information has been transferred in the form of computers, laptops, hard drives, manuals, USB, tokens, etc. Return of information in electronic format becomes harder. To prevent this loss, Disclosing Party can direct the Receiving Party to delete all the files with it related to the confidential information. Whereas the Receiving Party can ask for retaining certain copies of the confidential information for its own record keeping or accounting purpose only.
Employees hired as consulted would be required under an NDA to return all originals, although it is favourable to them to retain copies of their work. This retention of copies can help the consultant demonstrate her past experience in the field. Nevertheless, it can only be done once the term of the NDA expires.
- Term or Duration: When there is a confidentiality clause in agreements, the term for confidentiality of disclosed information, exceeds the duration of that agreement. However, in an NDA the duration for which the confidential information must not be disclosed must be stated clearly. This term would depend on the nature of the business, the nature of the transaction being entered into and nature of the information. For example- in a fast-paced business, the probability of the information related to technology etc., may become old soon, thus a shorter term for the confidentiality would be preferred. On the other hand, details of suppliers or customer data would not become outdated so soon and a longer confidentiality period can be included.
Now let’s look at few samples clauses to understand how are these drafted –
- One of the first clauses in the NDA after the usual recital clauses is the definition clause. Amongst other things it must define most importantly what confidential information is, receiving party and disclosing party.
- “Confidential Information” shall mean any information provided by the Disclosing Party(defined herein below) to the Receiving Party (defined below) under or related to this Agreement or any other agreement(s) the Parties may sign with each other in writing, orally, and related to business affairs, technical data, or know-how.
- “Disclosing Party” shall mean ABC Pvt. Ltd., who disclosing the Confidential Information to the Receiving Party.
- “Receiving Party” shall mean XYZ Pvt. Ltd., who is obtaining Confidential Information from the Disclosing Party.
The definition of Confidential Information can be more detailed depending on the nature of the agreement between the parties.
- The second would usually talk about the obligation of the Receiving Party. This would also include the scope of the confidentiality required by the Receiving Party.
- OBLIGATIONS OF THE RECEIVING PARTY:
- The Receiving Party undertakes:
- That it shall not disclose without the written permission of the Disclosing Party any Confidential Information directly or indirectly to any third party;
- That it shall take all necessary steps to protect the Confidential Information and prevent its unauthorized use;
- That it shall inform the Disclosing Party of any accidental disclosure of Confidential Information and shall take necessary steps with the help of the Disclosing Party to to retrieve and protect such Confidential Information;
- That it shall use such Confidential Information only for the purpose for which it has been disclosed to the Receiving Party and shall not profit from the same in an unauthorized manner.
- The Receiving Party undertakes:
This clause could also include more obligations depending on the nature of the agreement and information being disclosed.
- Sometimes especially when NDAs are signed with employment agreements, employers make the employee sign a non-solicit and non-compete clause in the NDA.
For example: “The Employee shall for a period of 2 year after the termination of her employment, not work for rival firms, or solicit clients of the Employer with whom she interacted or worked during the course of her employment.”
- For breach of NDA, the Disclosing can add an injunctive relief clause apart from seeking liquidated damages to the extent of disclosure.
For example: “INJUNCTIVE RELIEF: The Parties acknowledge that to the extent of disclosure, monetary damages sometimes may not remedy the loss borne by the Disclosing Party, and in such cases the Disclosing Party may approach a court of law to obtain an injunction against the Receiving Party or other such third parties to enforce the terms of this NDA.”
- There are certain exceptions to disclosing Confidential Information by the Receiving Party. This could be drafted as follows:
The Receiving Party shall follow its obligations mentioned above except in the following circumstances:
- When the Confidential Information is already there in the public domain;
- When such Confidential Information is required to be disclosed under an applicable law or to any regulatory body under whose jurisdiction the Receiving Party is subject to.
- In so far as it is disclosed to the employees, directors, partners, etc. of the Receiving Party and such persons shall treat such Confidential Information as confidential.
- To the extent such Confidential Information was previously known to the Receiving Party.
- Confidential Information must be returned to the Disclosing Party on termination of the agreement or in the event of breach, injunction ordered by court, etc.
“The Receiving Party shall on termination of this NDA, return to the Disclosing Party all laptops, hard drives, manuals, USB, token, etc. in hard copy format and delete all files related to and including the Confidential Information in softcopy format.”
- Term for which information should be kept confidential may exceed the term of the original agreement.
“Even after the termination of this Agreement, the Receiving Party shall not disclose any Confidential Information received by it for a period of two years after the termination of this Agreement. After the end of the two years, it shall return on documents related to the Confidential Information to the Disclosing Party and delete all copies of the same.”
- Other boilerplate clauses of governing law, jurisdiction, dispute resolution, notice, indemnification, and signature sections.
Sometimes instead of NDA, the important terms of an NDA can just be added to agreements in the form of a confidentiality clause. This confidentiality clause becomes part of the boilerplate or standard clauses that are included in all contracts. NDAs also have a wide variety of industrial application. They are not just used when companies are transacting with each other, but can also be part of employee contracts, settlement agreements between adversaries in a case, intellectual property contracts, etc. Therefore, NDAs are especially important to any transaction.
- Lawsikho notes on Non-Disclosure Agreements, https://login.lawsikho.com/learn/home/LS–Dip–in-Ad–Contract-Drafting—September-2019-Batch/LS–Advanced-Contract-Drafting–Negotiation—Dispute-Resolu/section/26110/lesson/280389
- Lawsikho sample on NDA
LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join: