This article has been written by Ayush Sahay, Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.
Say, you and your friend are working on a research paper, you tell your friend about the topic and every other outlined and factual detail of the same research paper, but to your surprise you come to find that your friend has used all the information you provided them with, and has already submitted a research paper on the very same topic, as a sole author or even as a co-author. Now, imagine the same situation but a little bit more in detail and with extremely higher stakes.
When parties enter into an agreement, they share tons of information that might act as crucial factors for the way one specific party works, i.e., such information is crucial for their operations to function. In cases if either party to the Agreement decides to terminate the contract, or maybe after the term of the Agreement, one party uses or sells sensitive information (for instance a very peculiar trade secret) of the other party. The party whose sensitive information is now out in the public, will suffer huge losses in multiple ways in such instances.
This article aims to provide you a gist of what a confidentiality clause is and as to how one can ensure that confidentiality is maintained between parties entering into a contract.
What is a confidentiality clause?
This clause in an agreement acts as an insurer that neither party that is involved in the agreement, will disclose any information that has been defined as confidential information or any information that has been marked as confidential information. The basic principle of this clause is to make sure that the mentioned confidential information remains secret, i.e. confidential. In order to make this clause have stronger foundations, the parties agree upon a hefty fine for the breach of this clause.
What information does a confidentiality clause contain?
The confidentiality clause usually consists the below mentioned information:
- The definition or reference to the information that is sensitive or that which should be kept confidential.
- The duration of until when does this clause stand.
- The duration can be until the term of the agreement, or even after the expiry or termination of the agreement, depending upon the parties involved and as per their discretion.
- Discussion regarding what will be the process and procedure in cases when such confidential information will have to be disclosed as a compulsory aspect.
- It will also include the remedies for cases where a breach to this confidentiality clause occurs.
A sample confidentiality clause is given below for your reference:
To the degree permitted by the Agreement, events may need to reveal sensitive information to each other (‘Confidential Info’) every so often and in relation to the work contemplated under this Agreement. Each Party shall make every effort to avoid the disclosure of any of the confidential information of the other Party to any other Party for a period of three years after termination of this Agreement and, in addition, the following clauses shall apply:
- Will not be disclosed in writing or reduced to writing and thus labelled within thirty (30) days of disclosure with relevant confidentiality information.
- It is already in the possession of the receiving party at the time of its disclosure.
- Is or later becomes, by no fault of the recipient party, part of the general public area.
- Is purchased from a third party with no confidentiality commitments to the reporting party.
- Is developed independently by the recipient party.
- Needed to be disclosed by legislation or regulation.
Publication and confidentiality
Each party shall retain any confidential data recognized as confidential and collected from the other party in the course of such a relationship for a period of three years after the termination of this Agreement. Nothing in this should prohibit the establishment or any other aspect of the system from using any information created below for exceptional analysis and typical business functions.”
Can a confidentiality clause be waived off?
Usually, the parties are not given the option to waive off the confidentiality clause, but when a 3rd party gets involved in the relationship of the 2 parties, they may have to share the sensitive information to the 3rd party, which in a way is waiving off the confidential clause. But one must also note, that this doesn’t mean such information is and can be paid available in the public domain.
What can be the possible steps that can be taken to make sure that the confidentiality is maintained?
Now, it is not an unknown fact that many times the information that was labelled confidential did not remain confidential anymore. It might have been because the other party by an act of negligence brought such information into public domain or might have even used such information for their own benefit of business, etc. making such information lose its label of confidentiality and making the contract between the parties get terminated. Below are a few ways through which the parties can try ensuring that confidentiality is maintained between the parties:
Proper Due Diligence
The party sharing confidential information must make sure that they do proper and extensive due diligence with regards to the party they will be sharing their confidential information with. Now one will also point out that the process of such an extensive due diligence with regards to the history and the present working of the party will be costly, but one must understand that this due diligence will only cost them tangibly, i.e. money, but in cases where with a failed due diligence the parties enter into a contract and in the duration of which the confidential information is leaked, then that party would suffer from heavy intangible costs.
This is the reason why a proper due diligence is required.
Precise labelling of information that is confidential
The parties sharing confidential information must make sure that they have labelled every bit of information however small it may be to be confidential. The party sharing such information must make sure that they don’t share non-confidential and confidential information together, which might cause confusion and might later on lead on to some damage, that may include as already mentioned above, such information coming into public domain and such information losing its confidential nature.
Giving advice to the other party initially
We do understand that the agreement does have a confidentiality clause and it can be assumed that the parties have all information regarding the same, but in any cases this one additional step can be taken to ensure that the parties understand their responsibility and take the steps to make sure that the confidentiality is maintained.
Limiting the access
The parties must try to make sure that they limit the number of people who shall have access to such information. Now this is really important so that the number of people who will and can get their hands on such confidential information.
This helps the parties in making sure that no person who has no use of such information according to their working specification would be able to bring this information into the public domain and or, use it for their own benefit.
Creating a Data Room/Server
Living in 2021 and having survived a pandemic, we have realized how important and easily one can find their way through technology, now this particular step is an advancement of a storage room in the virtual world.
By creating a Data Room/Server what the parties can do is make sure that all the confidential information that has to be shared is stored on a server that is encrypted and can only be accessed by individual credentials. These credentials will update every time either of people who have to use such information and this login will be recorded for security purposes. Having such a system that shows who accessed the information when will make sure that such information remains confidential and because it remains encrypted, trying to bring it in the public domain will remain as a tedious task.
People work even in extreme conditions to make sure that the product or service they are providing people with, is the best out there. These become best because of such confidential information. Making sure that they remain confidential is a frantic task. One has to keep all their eyes and ears open to make sure that such information does not reach the hands of either their competitor or if such information is shared with someone it is not being used unjustly by them for their own benefit.
In today’s day and age, people have and will come-up with many such procedures to keep their confidential information, confidential until then all we can do and say is to make sure that the trust factor amongst humans exists till eternity. Even then, make sure that you as a lawyer make sealed the confidentiality clause in such a way that finding a loophole to it is next to impossible.
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