This article is written by Shambhavi who is pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.
Table of Contents
Introduction
A Non-Disclosure Agreement (NDA) is a type of legal contract between at least two parties that outline confidential material, knowledge, or information that the parties wish to share with one another for certain purposes, but also wish to restrict access to.
An NDA is also sometimes referred to as a Confidentiality Agreement (CA) or Proprietary Information Agreement (PIA). Nowadays, non -disclosure agreements have become essential elements of business deals as they are required to protect any type of confidential and proprietary information or trade secrets.
An NDA is also a type of contract and like any other contract they cannot be enforced if the contracted activities are illegal. Moreover, NDA’s are not only signed by two companies but can also be signed by individuals, or other entities such as partnerships, societies, etc, if they are considering doing business and need to understand the processes used in each other’s business for the purpose of evaluating the potential business relationship.
In light of the above mentioned facts we can say that NDA’s have become essential for doing business today and so in this article we will briefly discuss where non-disclosure agreements can be used and how we should draft a non-disclosure agreement.
What are NDA’s?
A Non-Disclosure Agreement (NDA) is a type of legal contract that can be used by parties to protect any type of confidential and proprietary information or trade secrets. Generally speaking, there are two primary types of non-disclosure agreements: unilateral and mutual.
NDAs can be in the form of “mutual agreements”, meaning both parties will be restricted in their use of the materials provided. A mutual non-disclosure agreement is typically executed between businesses engaged in a joint venture that involves sharing of proprietary information.NDA’s are also used In legal disputes that are resolved by settlement. In such disputes, the parties are often required to sign a confidentiality agreement relating to the terms of the settlement.
Under a unilateral non-disclosure agreement only one party is restricted from using the confidential information/material. An employee can also be required to sign an NDA or an agreement with a clause restricting employees from using or leaking any company-owned confidential information. The majority of non-disclosure agreements fall under this category. Though many agreements of this sort are intended to protect a business’s trade secrets, they may also be created to protect the copyright for information created through an employee’s research, for instance, contract and corporate researchers in the private sector and professors at research universities are sometimes required to sign NDAs that give the rights of any research they conduct to the businesses or universities that supports them.
Where NDA’s are required?
Some typical situations where one may want to use a Non-Disclosure Agreement are:
1) Presenting an invention or business idea to a potential partner, investor, or distribution.
An inventor or a business will usually present a business idea or model they have worked on to their potential partners, investors or distributors. However, in the course of such events there’s a possibility of their potential partners, investor or distributor stealing the idea or sharing the same with other businesses. This will greatly damage an inventor or a business who has spent time and money on such business ideas or models.To avoid such loss the inventor or a business will enter into a non-disclosure agreement with the other party before presenting their ideas to them.
2) Sharing financial, marketing, and other information with a prospective buyer of your business.
In the process of selling off a business a lot of confidential details about finance and marketing etc. are shared with the prospective business, thus making a lot of confidential details vulnerable to getting compromised. In such a scenario signing an NDA becomes essential.
3) When an individual or company is availing services from other companies or individuals and when an employee is accessing confidential information.
Another instance where an NDA becomes essential is when a company or individual is Receiving services from a company or individual who may have access to some sensitive information in providing those services and when a company allows employees to access confidential and proprietary information related to the business during the course of their job.
How to draft an NDA?
NDAs are also an essential part of negotiations for business mergers and corporate takeover so the particular content of each NDA will be unique, as it will refer to specific information, proprietary data, or other sensitive details determined by the people involved and what is being discussed. Therefore, while drafting a NDA there are some essential elements that need to be kept in mind, they are:
1) Identification of the parties.
Outlining the parties to the agreement is the first step in drafting an NDA. The parties to the agreement are usually a straightforward description set forth at the beginning of the contract. If it’s an agreement where only one side is providing confidential information, then the disclosing party can be referred to as the disclosing party and the recipient of the information can simply be referred to as the recipient.It is also pertinent to cover other third parties, where the recipients are expected to show the confidential information to such party in the course of business.
2) The scope of the confidentiality obligations.
Obligations of both the parties must be included in this section. One can state for what purposes the confidential information has to be used, to whom the information can be further made available to by the parties and the appropriate steps that are required to be taken by the parties to ensure confidentiality of such information.
3) Definition of what is deemed to be confidential.
This section deals with the task of defining what information will be deemed as confidential according to the agreement. Oral information in particular can be tricky to deal with. Oral information can also be considered as confidential at the instance of a party, however, the disclosing party must confirm to the other side in writing sometime shortly after it has disclosed the information so that the receiving party is now on notice as to what oral statements are deemed confidential. Other information such as the disclosure period and exclusions from what must be kept confidential should also be covered in this section.
4) Exclusions from Confidentiality Treatment.
It is also pertinent to note that the restrictions on the disclosure or use of the confidential data becomes invalid if the recipient had prior knowledge of the information,the materials are already generally available to the public or if the recipient gains subsequent knowledge of the information from another source. The NDA should also cover situations in which the recipient is forced to disclose confidential information through a legal process. The recipient should be allowed to disclose such information in legal; proceedings without breaching the NDA as long as the recipient informs the disclosing party in advance of such proceedings.
5) Terms of the Agreement.
Other terms of the agreement must be negotiated carefully and included in the agreement. Other terms generally included in the agreement are:
- Time period of the confidentiality agreement and what is required to be done with the confidential materials once such Agreement ends.
- Employee solicitation clause- If the recipient had significant access to the other party’s employees, one may want to insert an employee solicitation clause that prohibits the recipient from hiring those employees for a certain period of time.
- Jurisdiction in case of a dispute- One might want to make sure that in case of a dispute as to whether the other side has lived up to the obligations or not, the dispute is resolved in a certain location that is convenient for the aggrieved party.
- Injunction- Including a clause that gives a party, the right to seek injunctive relief to stop the other party from breaching the Agreement is necessary.
- Limitations on the rights of the receiving party- One can insert a clause stating that the party receiving the information has no rights to those ideas and sharing of confidential information with the receiving party does not mean that the disclosing party has to enter into a deal with them.
NDA agreements used in India
NDA Agreements have become a commonplace in India as they form an essential part of negotiations for business mergers and corporate takeovers. In India such Agreements are governed by the Indian Contract Act. The use of NDA’s are especially on the rise in India because of its burgeoning outsourcing industry. To ensure the validity and enforceability of an NDA in India, it must be duly stamped and registered under the Registration Act 1908.
Conclusion
Nowadays, the use of NDAs has become a common requirement to guarantee the security of the confidential materials and information that is shared. To ensure that the NDA drafted for a client is without any loopholes one must draft it properly. One must ensure that all the information which is confidential in nature and shared or will be shared with the other party is clearly and unambiguously mentioned in the Non-Disclosure Agreement and ensure that the parties clearly understand what they are signing into otherwise the Agreement will lose its sole purpose.
One must not include any unfair clauses in the Agreement and ensure that the clauses are not in conflict with each other. The quality of the Agreement will heavily depend on the negotiations that take place between the parties. The disclosing party must take some precaution before finalising the Non- disclosure Agreement draft and ensure that there is no chance of confidential information getting compromised.
References
- Phil M Raju (Restriction or Redemption, https://www.ediplis.com/nda-restriction-redemption/) accessed on March 15th, 2021
- Non-disclosure Agreement, https://legaldocs.co.in/non-disclosure-agreement, accessed on March 16th, 2021
- Richard Harroch (The Key Elements of Non-Disclosure Agreements,https://www.forbes.com/sites/allbusiness/2016/03/10/the-key-elements-of-non-disclosure-agreements/?sh=2f5a78db627d), accessed on 17th March,20121
- Umakanth Varottil (Non-compete and Non-disclosure Agreements- are in they restraint of trade, https://indiacorplaw.in/2008/09/non-compete-and-non-disclosure.html), accessed on 21st March, 2021
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