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This article has been written by Saloni Maniyar, a student of pursuing Certificate Course in Advanced Civil Litigation: Practice, Procedure and Drafting from LawSikho.

Introduction

Almost every business whether it be a small start-up company or some tech-giant company, each of them has an idea or unique thought process to begin with. An idea or a unique thought process is the fundamental foundation of any business. In fact, for most businesses, their net worth revolves around the patents, trademarks, designs, processes and trade secrets. These unique ideas or thought processes and their results reels in the money. In order to protect and ensure that no one gets their hands on and uses these unique ideas or information, the ‘confidentiality agreement’, also known as ‘non-disclosure agreement’ or simply as an NDA are brought into the picture.

What is a Confidentiality Agreement?

In simple terms as well as the name suggests, confidentiality agreement means a legal agreement established with a sole purpose to confide or protect ideas or information which are unique and sensitive in nature, from being not disclosed to the public at large or to competitors. A confidentiality agreement is commonly used in a situation wherein an individual or a company has a secret information or process that it does not want to be revealed at any cost and if such information or process is out, it may cause considerable damage to business operations as well as to net-worth of an individual or a company.

A confidentiality agreement is a written document binding one or more parties entering into with an obligation to non-disclosure of any confidential information and discussions concerning the business to any third party. Having confidentiality agreements is a common and cliched method to begin any business relations. The party disclosing the confidential information is known as a ‘Disclosing Party’ and the party with whom such information is shared and which receives such information is known as a ‘Receiving Party’.

Types of Confidentiality Agreement

Confidential agreements can be in the form of unilateral agreements or they can be bilateral agreements. 

Unilateral Agreement:

In unilateral agreements which are one sided agreements, information is disclosed only by one party and the receiving party is bound to maintain the secrecy of such information disclosed. Unilateral agreements are developed wherein for instances a company discloses marketing idea to an ad agency or discloses a new product for its evaluation. 

Bilateral Agreement:

Whereas in bilateral agreements which are mutually agreed, both the parties disclose confidential information and both of them are obligated to protect and maintain such information as secret. Mutual confidentiality agreements are used in situations such as to protect valuable proprietary information or a trade secret which can influence the valuation of business.

Any type of information can be protected under confidentiality agreements which are generally unknown to the public and such information is virtually unlimited. Any information which is passed from one party to another can be said to be as confidential and to treat information as such completely depends upon the type of industry and weightage such information holds – data, technical know-how, drawings of plan, software, tools, processes, systems and the list is exhaustive and never ending. By executing confidentiality agreements, the receiving party is legally prohibited to disclose and is required to protect and maintain the secrecy any act which in violation which defeats the purpose of such agreement results in breach against which the disclosing party has remedies to sought.

Exceptions to the confidential agreements

However, there is some information which cannot be considered as confidential and are excluded from being classified as such in confidentiality agreements, revealing such information does not amount to breach. Such type of information could be the one that is already known to the public and is in public domain, information which is disclosed by the party before creating a confidentiality agreement, information provided by any third party to the receiving party, wherein such third party was under no obligation or had the right to disclose such information or any information by lawful means obtained by the receiving party before entering into such agreement.

Confidentiality Agreements and Patents

Where an individual or a company has come up with an invention and for which a patent application is yet to be made, in such a situation creating a confidential agreement becomes substantially crucial for the inventor. Even when an application has been filed, confidentiality agreement can still prove to be of great assistance, as until the application is approved and patents rights are granted, such agreements maintain the secrecy until the patent is approved. More so, when such inventions are revealed for the purpose of marketing strategy or some other details which may not be outlined in the patent application. Such elements could be considered as trade secret and deserves protection under the agreement.

Uses of a Confidentiality Agreements

A confidentiality agreement can be used in following circumstances:

  • A confidentiality agreement can be helpful in today’s business growing world to any scale of business organization ranging from small start-up businesses to large corporations. These business organization may at any point of time for their business operations, be required to involve an outsider and share their confidential information. In such situations, developing such agreements proves to be of great aid.
  • In the case of a start-up, such agreements are vital and should be kept at handy, as for any start-up to set the first step and flourish, dealing with outsiders becomes necessary for the purpose of pooling in some investments, collaboration, evaluation of any product or any other detail which is essential for them to set up their start-up. And it is always advisable to appoint a lawyer to discuss all the requirements and terms of the agreements before actually signing them.
  • Confidentiality agreements have been proved to be of great help in the film and television industry wherein huge amount of confidential information is shared with multiple outsiders. For instance, actors are required to sign such agreements which prevents them from disclosing any scene, plot, details of their projects or any project undertaken by the producer or director which is not known to public yet. Same applies to fashion industry as well. Similarly, if any scrip writer wants his story to be made into a film, he needs to disclose the story to a producer or a film maker for the same. Therefore, in cases like such, creation of confidentiality agreement protects the originator of an idea.
  • Similarly, such agreements are used at the time of job interviews or at the time of certain level recruiting where the employer of the organization is keen at keeping certain information secret which are confidential and private. Executing such agreements fulfill the purpose of the employer by preventing the candidates from disclosing such information shared at the time of recruiting them for the job.
  • Confidentiality agreements play a substantial role in protecting the information and discussions which are ‘trade secret’ to a company. For instance, the recipe of coca cola is a ‘trade secret’ of the company and if such trade secret is revealed and out in public, company shall lose its value in market and suffer considerable losses as such ‘trade secret’ influences the market.
  • Any other information, idea or process such as product invention, marketing strategy or other details which are material for an individual or a company to be kept as a secret and known only to them and few of the outsiders working in connection with their projects, confidentiality agreements are always at the rescue for them.

Important Clauses in a Confidentiality Agreement

Drafting is an essential stage of developing any relation in a strict legal sense, wherein all the discussions and negotiations between the parties are reduced down in clear and precise legal manner along with remedies made available to them in case of violation. There are certain clauses requiring thorough attention leaving no place for ambiguity:

  1. Definition Clause is the critical aspect of such agreements as it sets out clearly which information are to be treated as confidential and which not. This is the whole point beneath the execution of such agreements and the disclosing party/parties should carefully evaluate the clause and leave no room for ambiguities. Such clause also provides for exclusion of certain types of information from the definition (which are discussed in the exception point above).
  2. Parties should be clearly specified in the agreements as who shall be the disclosing and receiving party along with clear mention of any representative or third party who shall have the access of such confidential information and extent of right to disclose the same.
  3. Terms of confidentiality is a crucial factor and must be drafted with utmost care and caution as party/parties would not want their private and confidential information to be disclosed due to ambiguity in term clause. So, to avoid such situation to emerge the party/parties are required to clearly state a starting point during which the confidential information will be made and the time period during which confidentiality of information to be maintained. Both of these time period should be clearly mentioned in the agreements. Term can be of definite or indefinite period of time depending upon the industry and the information.
  4. Uses of confidential information should be clearly stated out as to for what purpose shall such information be used and when as well as name of any third party who shall use such information. Party/parties may also limit the use of such information as per their requirement.
  5. Legal disclosure clause states that in the event where the receiving is compelled to disclose the confidential information due to some government enquiry or an order from a court, such disclosure shall not amount to violation of the agreement. Party/parties may include an verbiage that in case of such disclosure, only necessary and sought information shall be disclosed and not beyond that.
  6. The agreement shall include a clause for return of the confidential information shared between the parties during the term of the agreement. The clause shall state the manner and when this is to be done. Due to information virtual storage of information such as cloud storage, drop boxes, thumb drives, etc., making it impossible to delete or erase such information, the receiving party shall be prevented from using such information during their course of business or at any time in future.
  7. The agreement shall also include a remedy clause which shall be acceptable to both the parties in case of breach from the receiving party’s end. To estimate a cost of breach in such a situation is not always feasible, so drawing up a mutual agreement of what shall constitute as a fair remedy shall help the parties to avoid any lengthy legal future battles.
  8. At some point or the other there shall arise a conflict between the parties due to breach or violation of any terms of the agreement, including jurisdiction clause specifying the court that shall have a jurisdiction to adjudicate the conflict saves the time of the parties from deciding the jurisdiction at the time when conflict actually arises.
  9. No confidentiality agreement is complete without a non-binding clause. Signing of such an agreement does not establish a permanent relationship and parties shall reserve a right to withdraw from the contractual relationship at any point in accordance with the terms of such agreement.

Recommendations

There are few vital factors every party to a confidentiality agreement should bear and remember before signing such agreement. Being an information of confidential nature, party wants to protect the information at all costs and sometimes in the process, the clauses craved out in the agreement are overly restrictive such as preventing an individual from obtaining a job, rendering the agreement void at times. 

Confidentiality agreements should always be reduced down in writing which thereon creates a confidential relationship between the parties and should preferred to be kept as short and precise as possible making them simple and straightforward to understand. One should never reply on oral agreements simply because they are extremely difficult to prove the existence and most of such cases are decided on the basis of who is believed and one should always stay out of such situation and have a written agreement. 

Confidentiality agreements are crucial for any business especially small start-ups; therefore, they should always consult an attorney before agreeing to such agreements and avoid the risk of passing on the confidential information unintentionally.

Conclusion

The whole and sole purpose beneath the execution of a confidentiality agreement is that the information, ideas, processes or any discussions which are valuable to an individual or a company and desires to keep them as a secret and prevent them from disclosing to public or any unwanted third party. As seen above, drafting of such agreements is a crucial factor as it lays out the entire manner in which what, why, how and when such confidential information is to be disclosed. Therefore, the parties should draft such agreements with utmost care and caution and avoid any unintentional disclosure of private information while dealing with an outsider.

References

  • The Importance of Confidentiality Agreements

https://www.mondaq.com/turkey/trade-secrets/791504/the-importance-of-confidentiality-agreements 

  • Confidentiality Agreement

https://www.thebalancecareers.com/confidentiality-agreement-1918086 

  • Confidentiality Agreement by Adam Hayes

https://www.investopedia.com/terms/c/confidentiality_agreement.asp 

  • Understanding Confidentiality Agreements

https://www.tms.org/pubs/journals/jom/matters/matters-9405.html 

  • 10 Key Clauses to Have in Non-Disclosure Agreements by Erica Gardner

https://www.everynda.com/blog/10-clauses-have-non-disclosure/ 

  • What is a Confidentiality Agreement and Why are they So Important? by Gene Quinn

https://www.ipwatchdog.com/2017/12/16/confidentiality-agreement-important/id=91206/ 


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