This article is written by Arushi Agarwal, pursuing Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho. The article has been edited by Prashant Baviskar (Associate, LawSikho) and Ruchika Mohapatra (Associate, LawSikho).
Table of Contents
Introduction
A non-disclosure agreement (NDA) ensures that any information pertaining to a business is kept secret by the receiving party. Since the information pertaining to the business is valuable, disclosure of such information is often likely to cause a loss to the business. NDA is the first legal document that should be executed before beginning discussions on commercial relationships in which you are required to disclose confidential or sensitive information relating to your business to another entity. For example- it should be executed before the parties present their business model to a venture capitalist, it should be executed when the party hires a consultant with whom the party needs to share inside information. NDAs are even part of the employment agreements. Through this article, the author seeks to simplify the concept of non-disclosure agreements along with providing a sample template for better understanding.
Who needs to sign an NDA?
The entity which receives the information after signing an NDA is under an obligation to maintain confidentiality and must ensure that the information is not disclosed to third parties. An NDA is usually applicable to top management, employees, officers, consultants, and anyone else who receives the information from the receiving party.
The kind of business relationship with respect to which an NDA is contemplated is important. Usually, in an investment transaction, the obligation to maintain confidentiality is only with respect to the investee since the investee will be providing confidential information to the potential investor. However, if you are contemplating a joint venture, the information disclosed by you is also protected under the NDA. So, if the other side sends you an NDA, it is advisable to go through it and see whether information disclosed by you is also protected under the NDA. If not, then there is a requirement to insert a clause imposing the obligation on the other party.
The key issues that should be looked out for in an NDA
Examine the obligations under an NDA carefully
If you have received an NDA from another party, you should examine your obligations and restrictions carefully. The document may have various other kinds of provisions like non-compete and non-solicitation obligations. Hence, it is very important not to presume that the only obligation under the documentation is confidentiality.
Furthermore, the NDA may require you to enter further NDAs with other people as well, particularly people external to the organisation with whom the information is shared. In those cases, the receiver of the information must keep on record the further NDAs that are signed by them with the persons with whom the information is shared.
The scope of confidential information
Every NDA will contain some definition of what information is to be considered confidential. The party disclosing the information will want the definition to be broad and cover all information disclosed, while the receiving party will negotiate to have a specific and narrow definition.
Often, the receiving party will ask the disclosing party to specify which information is disclosed is confidential and only such information is then treated confidentially. The disclosing party, on the other hand, usually demands that all information disclosed without exception or with few specific exceptions, be treated as confidential information.
It is also possible that the party disclosing the confidential information specifies that not only the terms and details of the transaction being entered into are confidential, but the very fact that the transaction being entered into is itself also confidential. For example, where an acquisition is about to take place, not only the terms at which it is to take place and the information that is exchanged during the transaction is confidential, but the very fact that the acquisition is about to take place is also confidential. In such cases, the parties to the transaction will be required to be extra careful not to allow the existence of the potential transaction to be disclosed beyond the available exceptions.
Remedies available for disclosure
An NDA must specify the remedy for a breach which could be monetary damages or injunctive relief. Injunctive relief usually involves an order from a court directing the disclosing party who has breached the agreement to return the information and stop disclosing it further. Sometimes, monetary damages cannot compensate for the harm that may be caused by disclosure, so most NDAs specify that in case of a breach injunctive remedies can be invoked by parties.
Requirements to mark documents as ‘Confidential’
Some NDAs state that only information that is clearly identified and marked as “CONFIDENTIAL” will be protected. But it may not be practical to implement it in all situations. For example, the receiver may have access to the entire server on the site of work, and the disclosing party may not be able to specifically mark every new document that is already in the server. Therefore, this requirement should be customised depending on the situation. If confidential information pertaining to your business is being provided to another entity, you may want to exclude the marking requirement. If you are likely to be the receiver of information, it is good that the confidential information is specifically marked.
Include some standardised exceptions and allow certain disclosures
Should you be liable for wrongful disclosure if you disclose information that was already known to you, or if an entity that is unrelated to you, discloses confidential information to the public? In every NDA, there are certain exceptions to confidential information which should be carefully considered.
Similarly, there may be situations where it may be necessary to disclose confidential information. For e.g. What if the other party is required to disclose information pursuant to a court order? What if the law is modified in future and certain components of the information that you have disclosed cannot be kept confidential? It would be commercially impractical if you hold him liable for breach simply for complying with the law or an order of the court. Therefore, the purpose and the extent of disclosure under certain compulsions and legitimate reasons must be specified as exclusions from the duty of confidentiality.
Return of information
Most NDAs require original and copies of confidential information to be returned upon request. Requesting electronic information may not be practical. However, some NDAs require the receiving party to delete such information from all their electronic records. Receiving parties, in such circumstances, may ask for a right to retain certain copies for the purpose of record-keeping or proper accounting only.
Duration for which the information is to be kept confidential
Often confidentiality obligations, if included within other obligations, are made to last even beyond the expiry of the main content, However, where there is a separate non-disclosure agreement entered, the duration for which the information is required to be kept confidential must be provided for in this agreement. This duration will depend upon the nature of the business and the nature of the information.
In dynamic, fast-paced businesses, chances are that information related to product technology may become obsolete quickly and therefore, the duration would be shorter. However, details such as customer or supplier data, business model etc. may not be a longer duration of confidentiality imposed.
Sample non-disclosure agreement
NON-DISCLOSURE AGREEMENT
This Non-Disclosure Agreement (“Agreement”) is made on this____ (“Effective Date”) by and between:
- _____, a company established under the laws of _____ and having its principal place of business at ____ (hereinafter referred to as “Disclosing Party”, which expression shall, unless repugnant to the context or meaning thereof, be deemed to mean and include its successors and permitted assigns) of the First Part.
AND
- ______, a company incorporated under the laws of _ and having its principal place of business at ____ (hereinafter referred to as “Receiving Party”, which expression shall, unless repugnant to the context or meaning thereof, be deemed to mean and include its successors and permitted assigns) of the Second Part.
WHEREAS:
A. The Disclosing Party is engaged in the business of providing _____ (“Business”).
B. The Disclosing Party and the Receiving Party are interested in discussing a possible ____. The Parties acknowledge that with respect to the proposed transaction, both the Parties may exchange certain information, material and documents relating to each other’s business (hereinafter referred to as “Confidential Information”)
C. In consideration of the mutual promises and agreements between the Parties hereto, the Parties have agreed to review such Confidential Information to govern the use and disclosure of the Confidential Information.
NOW THEREFORE IT IS HEREBY AGREED BY AND AMONGST THE PARTIES AS UNDER:
- CONFIDENTIAL INFORMATION
- For this Agreement, the term “Confidential Information” shall mean such information disclosed by the Disclosing Party to the Receiving Party including all information communicated in writing or orally relating to business affairs, any technical data, or know-how, including but not limited to, that which is or relates to:
- Inventions, ideas, processes, research, formats, formulas, object code, data, programs, specifications, other works of authorship.
- Product plans, products, services, customers, markets, software, developments, hardware configuration information.
- Non-public market information, product plans.
- Marketing or finances of the company in any form, customer information, business plans and strategies, price lists and market studies and such other proprietary information relating to the business of the Disclosing Party which is not in the public domain.
- NON-DISCLOSURE AND CONFIDENTIALITY
- The Receiving Party acknowledges that the Disclosing Party shall be privy to Confidential Information relating to the Disclosing Party. Accordingly, the Receiving Party agrees and acknowledges:
- That the Receiving Party shall not, without the prior written consent of the Disclosing Party, directly or indirectly disclose or cause to be disclosed any Confidential Information to any third party.
- That the Receiving Party shall take all steps as may be reasonably necessary to protect the integrity of the Confidential Information and to ensure against any unauthorized disclosure thereof.
- The Receiving Party shall strictly adhere to the provisions mentioned above except.
- To the extent that such Confidential Information is already in the public domain, other than by breach of this Agreement
- The receiving Party shall not, except as and to the extent required, make any copies or reproduce the Confidential Information.
- INJUNCTIVE RELIEF
- The Parties acknowledge that due to the extent of the disclosure of the Confidential Information to the Receiving Party, the Receiving Party understands that the Disclosing Party shall suffer irreparable damage if the Receiving Party breaches any of its obligations under this Agreement and that monetary damages shall be inadequate to compensate the Disclosing Party. Consequently, the Receiving Party must acknowledge that, in addition to any other remedies of rights, the Disclosing Party shall have the right to obtain injunctive relief to enforce the terms of this Agreement.
- DISPUTE RESOLUTION AND GOVERNING LAW
- Any disputes arising in connection with this Agreement shall be referred to arbitration of a sole arbitrator to be appointed by the Parties. The place of arbitration shall be ____. The arbitration proceedings shall be governed by the Arbitration and Conciliation Act, 1996 and shall be in the English language. The arbitrator/ arbitral panel shall also decide on the costs of the arbitration proceedings.
- This Agreement shall be governed in accordance with the laws of India and shall be subject to the jurisdiction of the courts at Mumbai, India.
- INDEMNIFICATION
- The Disclosing Party hereby provides complete indemnity to the Disclosing Party for any loss or damage caused to the Disclosing Party or any of its affiliates and assignees due to the breach of obligations of the Receiving Party under this Agreement.
IN WITNESS WHEREOF THE PARTIES HERETO HAVE SET AND SUBSCRIBED THEIR RESPECTIVE HANDS TO THESE PRESENTS ON THE DAY, MONTH AND YEAR HEREINABOVE MENTIONED:
Signed and Delivered
By the Disclosing Party _____, through Mr. _____
_____
Signed and Delivered
By the Receiving Party _____, through _____
_______
Conclusion
If you have confidential information, beware of a confidentiality statement that might look like an NDA but has just the opposite effect. This sort of clause will typically say that the agreement does not create a confidential relationship or does not create any obligation of secrecy or confidentiality. That means that the other party has no obligation to keep any of your confidential information secret.
Whether you draft one from scratch or use a non-disclosure agreement form, an NDA is a great way to protect sensitive business information from being disclosed to the public before you’re ready. If you routinely receive confidential information from others, you would probably also be asked to sign their NDAs. Just be sure you read them first and understand your obligations.
References
- https://razorpay.com/learn/non-disclosure-agreement-nda-types-procedure/
- https://www.forbes.com/sites/allbusiness/2016/03/10/the-key-elements-of-non-disclosure-agreements/?sh=6d1b71e9627d
- https://corporatefinanceinstitute.com/resources/knowledge/other/non-disclosure-agreement-nda/
- https://www.contractscounsel.com/t/us/nondisclosure-agreement
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