In this article, Neha Susan Rajan who is currently pursuing Diploma in Entrepreneurship Administration and Business Law from NUJS, Kolkata, discusses Six key issues that you should look for in a Non-Disclosure Agreement.
What is Non-Disclosure Agreement?
Non-disclosure agreement, often referred as confidentiality agreement, entered between disclosing party and recipient during course of the business, enables the owner of confidential information to share information to recipient and obligates latter not to disclose the said information. There are primarily two parties to the contract. The one who discloses the information is called disclosing party. The party who receives the information is called confidential information recipient party.
Non-Disclosure Agreements (“NDA”) are of two types: a mutual agreement or a one-sided agreement. Mutual agreement is entered when both the parties to contract have confidential information to share while in one-sided agreement only one of the parties makes the disclosure.[1]
NDA can be entered in many circumstances. These include presenting an invention or new technology or intellectual property (specifically trade secret) to a potential partner, investor or licensee, sharing financial, marketing, and other information with a prospective buyer of your business, allowing access to some sensitive information by virtue of receiving services from a company or individual and mandating employee to keep confidential information (propriety interest and client information) of a business enterprise as a secret during course of job.[2]
Dual purposes
NDA executed between two parties serves two purposes. First, it secures the business interest of the Company. This helps the company to be in a very stable position. Second, any breach of NDA can be remedied by exemplary liquidated damages or injunctive order, thereby placing the disclosing party in a better position.
Essentials of a Non-Disclosure Agreement
Breach of contract of confidentiality largely results from the poor drafting of Non -disclosure agreements. Every NDA generally entails six essentials. They are:
- Obligations within an NDA
- Scope of Confidential information
- Remedies on breach of agreement
- Marking certain documents as confidential
- Provision for exceptions
- Mechanism for return of the document
Obligations within a Non-Disclosure Agreement
Non -Disclosure Agreement is one of the vital documents generally entered in many contracts to protect the interests of the disclosing party. It should give the names of disclosing party and confidential information recipient party. It gives an elaborate account of the confidential information to be handled by the recipient and entails the rights and obligations of the confidential information recipient. Any default from the part of the recipient will result in breach of contract.
Confidential information recipient is duty bound to not to disclose the scope, nature, object and future benefits of the confidential information to any party, which includes any person or entity or third party, other than the contracting parties. The recipient can be held liable for breach of confidentiality agreement by the employees or agent of the recipient who have access to the information.[3]
It is to note that while drafting a confidentiality agreement for any party, time frame of the agreement must be mentioned; it need not be necessary that there should be certainty to the date of expiration of agreement at the time of entering into the agreement. Generally, NDA exclude subject matter of third party in the contract. In order to hold the third party accountable, NDA must discuss their obligations as well as liabilities. The NDA can be perfected by including clauses like Non-Solicitation clause[4] (to prevent recipient from soliciting with disclosing party’s employees or clients), jurisdiction clause (to decide the place of suit in case of breach), injunction clause (right of injunction for disclosing party to prevent the recipient from sharing information to others), warranty clause (parties do not make warranty to the authenticity of the information shared) and no obligation clause (to terminate from contract at any point).
Scope of Confidential Information
The most important part of drafting an NDA is to determine the scope of confidential information. It should be described in detail with precision without leaving any confusion in minds of the recipient or leave a room for negotiation in future. Every NDA includes a list of confidential information and certain exclusions from the purview of confidentiality agreement.
It is the duty of the disclosing party to ensure that the confidential information recipient is aware of the fact that disclosure of the information does not entitle them any right, title or license on the confidential information but they have access to the information for the purpose of advancement of the contract. Hence the disclosing party must keep in mind that while drafting NDA, the scope of the confidential information must be kept wide enough to ensure more protection to current or future trade secrets by enabling the disclosing party to sue for any kind of breach of contract.
Mark Certain Documents as Confidential
While determining the scope of confidential information, the disclosing party must ensure to mark certain documents as confidential in order to add clarity to the protection of confidentiality. This would make the confidential information user to be aware of the intended use of the shared, confidential information.
Documents such as business plan, documents on share value for the purpose of trading and documents on Intellectual Property owned by company such as patents, software patents, designs of modern equipments, automobiles, weapons, and trade secret are marked confidential normally.[5]
Remedies for Breach of Disclosure
One of biggest advantages of entering into Non-Disclosure Agreement is that it remedies the aggrieved party (i.e. the disclosing party) by providing appropriate remedies. These remedies include equitable remedies and liquidated damages. Equitable remedies include injunction wherein the disclosing party can prevent further breach of damage. Further, the Court can impose penalty on recipient that will be commensurate with the damage caused to the disclosing party from the breach.[6]
The disclosing party has the right to terminate the contract on breach of the agreement. It should contain a clause of arbitration in case of breach to prevent lengthy litigation, and jurisdiction clause to determine the place of suit in case of any breach of contract.[7]
Provision of Standardised Exceptions
When the confidentiality agreement is drafted, the drafters must ensure to include certain standardised exceptions to the agreement. The common exceptions include information that is
- Already known to the recipient at the date of disclosure
- Already publicly known (as long as the recipient didn’t wrongfully release it to the public)
- Independently developed by the recipient without reference to or use of the confidential information of the disclosing party
- Disclosed to the recipient by some other party who has no duty of confidentiality to the disclosing party
- Disclosed due to legal process (i.e, through court order)
When the confidential information recipient is compelled to disclose information by a court order, the party must inform the disclosing party about it.
Mechanism for Return of Document
Every Non-Disclosure Agreement must contain clause for return of the document. It should entail a detailed mechanism for return of the documents. Return of documents marks the termination of the confidentiality agreement. When the contract expires, confidential information recipient must transfer all documents of confidential information or extinguish it. The agreement should determine when and how this should occur. The recipient and disclosing party must delete their hard drives, drop boxes, thumb drives, email storage, etc. If it is impossible to delete the information, the agreement must stipulate a clause restraining the recipient party from using this information in all future transactions.
Conclusion
Perhaps one of the biggest uses for nondisclosure agreements is in the protection of trade secrets. Unlike patents, which must be part of the public domain, trade secrets are, by definition, secret. In addition, trade secrets are only afforded protection if the owner takes measures to keep the secret and the secret gives the owner an advantage in the marketplace. Because of the tenuous nature of trade secrets, nondisclosure agreements are often used to protect them from becoming part of the public domain.
Perhaps the real purpose of nondisclosure agreements is to create confidential relationships between the party that holds the trade secret and the party to whom the trade secret is disclosed. Parties that contract into such relationships have a legal duty to keep the confidential information in confidence.
Non-Disclosure agreements constitute an exception to Section 27 of the Indian Contract Act, 1872 which denotes agreement in restraint of trade as void. Any kind of restriction during the course of employment is considered valid, however it is those which are applicable after the employment that has become the bone of contention over the years. But luckily the courts have upheld the validity of such Non-Disclosure agreements post-employment especially with regard to trade secrets through various cases in recent years.[8]
Although legal concepts like Garden Leave Clauses exist to control the damage that could arise because of the breach of NDA by the recipient party or any other pitfalls from the side of the Disclosing party, the only solid and sustainable solution to avoid vagueness and confusion in such agreements is to draft it with meticulous precision and a prophetic foresight.
References
[1] ‘Non-Disclosure agreements, Are they enforceable in India?’, (Indian National Bar Association) INBA View Point, http://inba.tv/non-disclosure-agreements-enforceable-india/
[2] American Express Bank Limited v. Ms. Priya Puri 2006 (110) FLR 1061
[3] Rohit Shrivastava, Non-Disclosure Agreement,http://businesslawinindia.blogspot.in/2009/09/non-disclosure-agreement-nda.html
[4] Desiccant Rotors International Pvt Ltd v Bappaditya Sarkar & Anr., Delhi HC, CS (OS) No. 337/2008 (decided on July 14, 2009)
[5] Mr. Durani Murugan P.v.k, Negative Covenants And Agreement In Restraint Of Trade-an Insight Into Indian Laws, http://www.manupatrafast.com/articles/PopOpenArticle.aspx?ID=264fdfb0-bb02-416b-9eed-4ca76ca1ee46&txtsearch=Subject:%20Contract
[6]https://www.extension.iastate.edu/agdm/wholefarm/html/c5-80.html Overview of Confidentiality Agreements
[7] Employment Contracts in India : Enforceability of Restrictive Covenants, Nishith Desai Associates August 2014. http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/Employment_Contracts_in_India.pdf
[8] Gujarat Bottling Company Limited (GBC) V. Coca Cola Company AIR 1995 SC 2372 ;
Diljeet Titus, Advocate v. Mr. Alfred A. Adebare and Ors. (2006) DLT 330
