In this blog post, Deepshikha Ranjan, a student from Chanakya National Law University (CNLU), Patna and who is currently working as an intern in iPleaders describes Non-Disclosure Agreements (NDA’s). The author further describes when to sign an NDA.
A Non-Disclosure Agreement (NDA) is an agreement in which one or more parties to an agreement agree not to disclose the confidential information specified in that agreement. These agreements are also known as a Confidential Agreement (CA), a Confidential Disclosure Agreement (CDA), a Secrecy Agreement (SA) and a Proprietary Information Agreement (PIA). It outlines the knowledge or information which are confidential and denies the access of that information to any third party. Although NDAs are commonly signed between the two companies, individuals or other entities but an employer can also enter into a Non-Disclosure agreement with his employee.
In India, a non-disclosure agreement is governed by the Indian Contract Act, 1872. For the validity and enforceability of the NDA, which are to be stamped.
NDAs are often entered upon so that it can help in protecting the intellectual property rights like databases, client lists, proprietary information, sensitive business-related information of a person or business. It helps the parties to understand their duties and privileges better by writing down their Non-Disclosure Agreement.
Types of Non-Disclosure Agreements
NDA are of three types:-
- Unilateral NDA: It involves two parties, out of which only one party discloses certain information to the other and expects that the information is prevented from any further disclosure.
- Bilateral NDA: It involves two parties; both the parties disclose information to each other, and both of them intend to protect the information from disclosing to another. E.g.- Joint Venture.
- Multilateral NDA: It involves three or more parties to the agreement, out of which one of the parties discloses the information to other parties and wishes to have that information protected from any further disclosures. These types of NDAs also eliminate the need for distinct unilateral or bilateral NDA.
When to sign a Non-Disclosure Agreement?
- NDA while entering into a business deal: While entering into a business deal, like hiring a vendor or supplier or consultant, if you want to ensure that the proprietary information you are sharing with those vendors or service providers, does not become public, then entering into an NDA is a great idea. For example, if you are going to work with a logo designer, and have to tell that person the concept of your to be launched business, and you don’t want him or her to go and discuss this with your competitors or other business owners, then entering into an NDA will be very useful. In startups and some information sensitive companies, it is a brilliant idea to make employees sign NDAs. In fact usually, their employment agreement itself carries an NDA clause which serves the same purpose. Also, there are many other applications. For example, if you are looking for a potential buyer for your company, before disclosing proprietary information, you may enter into NDAs. Dominos and other such businesses that depend on franchising often make it mandatory for the franchise to sign an NDA that they won’t disclose details like menu or how proprietary food is to be made or details of profit or loss.
- NDA while starting a new project: On starting a new project and the need to collaborate with a few people, even when commercials are not explicit, or company or partnership isn’t framed, and there is no IP to protect yet, it may pay off to enter into an NDA.
- Should you sign NDA while talking to investors? Many people used to do this in the past. However, it is an unnecessary practice and is becoming obsolete now. Most investors will refuse to sign such an NDA for early discussions. Only if and when the need arises to look inside the papers like revenue numbers or a particular technology or some sensitive data at an advanced stage of considering the company for investment, a request to sign an NDA first may be made. Justification may be made as to why signing an NDA is important. Same goes with Mergers and Acquisitions. However, there getting an NDA signed might be easier.
- NDA clauses in contracts: It is a practice that an NDA clause is inserted into all and sundry contracts as a part of special precaution. Unless a part demands its removal, it generally stays. It helps both parties on the whole, as business details have to be treated with caution and can’t be leaked to media, etc., without a doubt even when conflict arises in the course of doing business.
- NDA to protect trade secrets: We often advocate signing a trade secret non-disclosure agreement when trade secret requires protection. It is not yet a practice in India but a very useful step. Top executives and employees should be made to sign such agreements. It goes a long way in preventing them from jumping into business with the same information and competing with the former employer.
An NDA should always be put down in writing.
How does an NDA protect Intellectual Property Rights?
Nowadays one of the most useful and valuable properties owned by a company is the Intellectual Property Rights. These properties or assets could also meet debts, commitments or legacies. Companies take , aperiodappropriate steps to protect their Intellectual Property Rights and also to make use of that property efficiently. Start up companies protect their Intellectual Properties in many ways. One of the ways is by entering into a “Non-Disclosure Agreement”. This confidential document or agreement lets the company share its intellectual property with those whose input it needs without even putting a risk of loss, harm or failure that the information would be shared with anyone else. If a company has a new product, but it has to consult with an expert for advice on how to protect them, the non-disclosure agreement makes sure that the consultant does not disclose that information to the competitor of the company itself.
Important clauses of NDA
- Timeframe of the NDA: Tha period for which NDAs are made to be maintained. The duration of time for which the recipient of the information is expected to hold the secrecy of that information. This period includes the day when NDA comes into effect till the time it expires due to completion of the contract. It is not a good idea to create NDA that prevents one from holding information infinitely especially when such restriction is causing a restriction on starting a business or carrying out some business or employment directly or indirectly. There should be a reasonable limit to Restrictions in NDA.
- What is the Confidential Information ought to be protected under the NDA? This part of NDA specifies that which part of the information has to be kept secret or confidential. Usually, such information is detailed in a schedule and attached to notices sent by email. This mechanism may be specified in the agreement..
- Duties and obligation of the parties to NDA: The contract usually clearly states the responsibilities and obligations of the parties. For example, the party may be required to use a particular kind of encrypted mechanism for communication or may be urged to mark any information meant to be covered by the agreement as “confidential”, etc.
- Consequences of breach of an NDA: What would be the consequence of breach of confidentiality? This must be specified in the contract. Heavy financial penalties may not work in an Indian scenario, though it is often added for psychological impact. However, getting an indemnity for all losses suffered due to a breach is usually sufficient.
- Right to seek an injunction in an NDA: It is often specified in such contracts that monetary compensation alone cannot compensate losses arising out of the breach and that the parties are agreeing to this in the contract itself. This is done so that a party apprehending a breach can reach out to a court and get a stay easily. It is a common practice though the efficacy is doubtful.
- Dispute Resolution clause in an NDA: It is important to resolve all disputes arising out of the agreement quickly and cheaply so that cost of enforcing the contract remains low. In India, this is very difficult. We strongly recommend that institutional arbitration is mandated in the agreement for this reason. You can refer your dispute to Access to Justice Institute, where you can get things resolved for few thousand rupees through online arbitration provided you include this clause in the agreement: “Any dispute,, controversy or claim arising out of or relating to this contract, or the breach, termination or invalidity thereof shall be settled by arbitration in accordance with the Rules of Arbitration of the Access or Justice Institute (justiceinstitute.in), and the and the award made in pursuance thereof shall be binding on the parties. The parties agree that the arbitration proceedings shall be conducted by way of submission of written pleadings, documents and submissions made by the parties without any oral hearing. The parties agree that the written pleadings will besubmitted to the arbitrator appointed by the said Institute who will resolve the dispute and differences hereunder by fast track procedure. The arbitrator shall take a decision in a time bound manner after considering only such written arguments. The decision or award so given by the Arbitrator shall be binding on the parties hereto. In case, one of the parties does not take part in the arbitration proceedings and/or obstruct the arbitration proceedings, the Arbitrator shall pass ex parte order which would be enforceable on both the parties.”
Jurisdiction Clause in an NDA
It is important to specify courts of which city will have jurisdiction in the case of a dispute. Failing this, you may have to fight expensive court battles in other countries or far off cities.
Benefits of entering into an NDA
As discussed above NDA is an agreement between two or more parties whereby they agree to disclose confidential information among themselves but excludes all other from the right of accessing that information, except in some circumstances.
Five Advantages of signing an NDA
- NDA helps the parties to accommodate or to adapt their obligations well. It helps them to understand when the obligations do not apply and when they would terminate.
- It helps to describe exactly what, the confidential matter is and helps in maintaining their secrecy.
- Non-Disclosure Agreement deals with the provisions which deal with penalties imposed on the contracting party who discloses the information which was supposed to be kept confidential. The one who breaches with the NDA are prescribed punishments in the form of compensation. They have to bear the damages caused. This issue can also be brought to the court where they can receive an injunctive relief. This would prohibit the recipient from disclosing such information any further so as to prevent breach of non-disclosure
- Non-Disclosure Agreement helps in achieving the purpose of their commitments by performing due diligence in safeguarding the confidential information.
- A court cannot give relief for the breach of confidential trade secret or information if the owner of that information has not entered upon Non-Disclosing Agreement. NDA is like a protection given to the owners. A court grants relief to the owner if he has taken attempt for safeguarding the confidential information.
Problems of NDA
- Bad drafting can lead to confusions: The main problem of NDA is the difficulty to ascertain what has been covered in the contract and what has not been covered. This often happens due to lack of good drafting in the contract. This is why you need a lawyer to look at your NDA and copying from the internet is not a good idea.
- It can lead to lengthy litigations: It is a big issue in India as entering into a contract is easy for enforcing is difficult. This is why, entering into a contract with a good arbitration clause that ensures low cost of contract enforcement is critical.
- Wrongly drafted NDA can cause you problems later: If there are clauses the meaning of which is not clear to you and you didn’t consult a lawyer, you can get into trouble. We had a client who had signed an NDA which prevented him from competing with the counter-party in a business that he was planning to enter. However, the language wasn’t clear to him and later he got sued for this and court gave an ex-parte injunction against him as well. This led to much legal confusion and legal bills. NDAs are powerful tools, but must be wielded carefully.
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