In this blog post, Nabarun Roy, Superintendent of Central Excise and Customs, Export Refund Section, Central Excise, Kolkata – I Commissionerate, Kolkata under the Dept. of Revenue, Ministry of Finance, Government of India, who is currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses the important clauses in a confidentiality agreement or a non-disclosure agreement.
Broadly, there are two parties in a confidentiality agreement or non-disclosure agreement. One party has some information to disclose in order to further his business cause and another party who needs that information in order to take some decision because he has a certain interest in the business of the other party. Therefore, the perspective of the draft agreement depends on whether someone is receiving information or disclosing it. Thus a certain amount of bargain may often come up regarding whether a certain clause should be kept in an agreement or not. The discussion may also be regarding whether the amplitude of a certain clause should be diluted.
Clauses of A Standard Non-Disclosure Agreement
While the draft of a non-disclosure agreement will depend on many parameters, a standard agreement should contain the following points:
- Confidential Information should be properly defined: Since the purpose of an NDA revolves around the disclosure of confidential information of some kind, it is very critical that the same should be clearly defined as to what is confidential and what is not. Also that, how should it be handled. In general, it is seen that the disclosing party will prefer a broad definition and will likely resist the need to mark or otherwise identify information as being confidential. While for the same reason, the receiver of the information will insist on a narrower definition and may also ask to mark each confidential information. It is equally important to define which information is not confidential. It is a fact that given certain circumstances, some information can not reasonably be expected to remain confidential and this must be clearly outlined in the agreement. Examples can be publicly available information, information lawfully known prior to receiving it from the disclosing party, etc.
- How confidential information will be used? This is one of the trickiest clauses. It is always intended that the confidential information is used only for evaluation and negotiation of the transaction at hand. The problem arises due to the fact that despite the best of intentions certain confidential information may be disclosed, even unintentionally, by an executive who may be termed as inevitable disclosure. The recipient of the information will always like to have no limitations on the use of the confidential information while many a business owners will hardly feel comfortable at that much openness built into the contract. This issue can be amicably solved by preferring to use a shorter term for the NDA.
- The term of confidentiality is another important clause in an NDA: For most parties who disclose, the longer the term is, the better especially if trade secrets are involved. However, very few financiers or receivers of information will like to sign an indefinite or long-term NDA to avoid legal vulnerability. Most potential buyers would thus prefer a time period of 12-18 months and not more than 2 years.
- Whether the confidentiality agreement is mutual or one-way: This means whether the confidential information will be shared by only one party or by both. Generally speaking, mutual agreements are less likely to have provisions which are one-sided.
- With whom confidential information is to be shared: This is also known as the representative clause in an NDA. It has been seen that financial sponsors have a variety of employees, attorneys, accountants, consultants, etc., to whom access to confidential information is critical for comfortable due diligence and analysis. On the other hand, being vague in this clause can leave significant areas of interpretation and can create tension with the disclosure, who will certainly prefer to have a smaller group of representatives. Regardless of the parties mentioned in the clause, most NDAs will typically require all representatives to know that certain information is confidential and the clauses to which they are bound. This may be achieved with the wordings that “the representatives agree to be bound by the terms of the NDA prior to receiving any confidential information”.
- Compelled disclosure or legal obligation to disclose: While the primary motto of the NDA is to prevent the disclosure of confidential information to third parties, but at times necessary exceptions to the NDA must apply to pave the way for the disclosures mandated by administrative or legal proceedings. If the Govt. steps in to demand disclosure, there is not much a recipient can do. Or for that matter, such directive may also come from a private party compelling response to a Subpoena or discovery request. Although such disclosures are very infrequent, the clause, if stated properly, helps to protect both the discloser and the recipient in difficult times.
- Non-solicit and non-hire clause and interaction with employees: This clause at times become the most heavily negotiated clause. In the early stages of a deal, there is always a chance that the news of the transaction spills to employees and third parties. Hence an NDA may attempt to limit interaction with employees, especially in regards to solicitation or hiring. Disclosing parties generally ask for expensive non-solicit and non-hire language in the NDA, which encompasses all employees in the business.
- No legal obligation to continue negotiations: This clause simply states that neither party is under any legal obligation to continue negotiations. It may clearly state that the NDA does not indicate any formal relationship and hence either party can terminate the discussions at any point of time.
- Return or destruction of confidential information: It is very natural to include a clause that defines how confidential information should be handled. Traditionally, the return or destruction of the confidential material should occur either at the end of the negotiations or within a certain time frame. This is the trickiest of all clauses in the NDA as with the advancements in technology; it is becoming increasingly difficult to fully destroy or return all confidential information. As a result, the NDAs may allow the recipients to retain some of the information for ‘document retention’ which remain inaccessible in the course of daily business.
- Remedies in case of breach of NDA: This is an important topic that should be adequately covered in an NDA in order to avoid unnecessary hassles in case of a breach. In general, the monetary damage is considered as a primary relief against a breach. In fact, the presence of a remedial clause represents a mutual agreement between both parties that the cost of a breach is difficult to prove or the monetary damage is viewed insufficient, and the discloser is allowed to pursue an injunction as an alternative remedy for the breach. A well drafted remedial clause should include –
- the consequences of a breach of confidentiality depending upon whether the said breach was intentional, negligent or without fault of the party in breach
- ways to preserve the right of the disclosing party to seek equitable remedies by acknowledging that a breach may cause irreparable harm and
- indemnification for any loss or damage arising from the breach.
The above-mentioned points, if properly covered as per the need of the parties going for an NDA, will certainly make a good confidentiality agreement.