What Is a Non-Disclosure Agreement?
A Non-Disclosure Agreement (or “NDA”) is a legally enforceable contract that you use to keep business information confidential.
It’s one of the most commonly used contract types by businesses today, so let’s look at everything you need to know.
Why Use a Non-Disclosure Agreement?
Businesses use NDAs for a wide range of purposes – after all, there are many different reasons you might want to keep information secret.
Some of the most common uses for an NDA include:
- Sensitive negotiations or discussions. If you are exploring a potential deal or business opportunity with another party, you might want to be able to share information to let them assess the opportunity.
- Inventions or business ideas. You might wish to share some details of a new invention or business idea with an investor, client, or potential employee, without them stealing the idea.
- Dispute settlement. For example, you might have settled a dispute but want to keep the terms private.
What Are the Key Terms in a Non-Disclosure Agreement?
NDAs can range from being a short, and relatively simple arrangement to a much more elaborate and heavily negotiated agreement.
Whatever the type of agreement, there are some key legal terms that you will find in most NDAs.
Definition of “confidential information”
The parties will usually define the subject of the agreement – what it is that they want to protect. You can base this on a general definition, covering all information passed between you and the other parties. To avoid disputes later, you might instead list different types of information that you want to be treated as confidential. On the other hand, sometimes the definition might be limited to only information that you have marked or identified as confidential.
If there is a document or file that is particularly sensitive, it can be a good idea to identify this item specifically by name so there can be no doubt later that you intended it to be treated as confidential.
Obligation to only use for the specified purpose
As well as an obligation to keep the information secret and confidential, the parties will often specify that the information can only be used for a specific purpose.
For example, two businesses may be exchanging confidential documents in advance of a business sale. They may specify in their NDA that the information can only be used for the buyer to evaluate the business. If the sale doesn’t proceed, the buyer cannot then use the information for other purposes (such as targeting the company’s customers).
Implement security measures
You may also wish to specify in your NDA the minimum security measures that the other party should implement. You can define these by reference to an industry standard. Alternatively, you might wish to be more specific about how and where the information can be stored.
What To Exclude From a Non-Disclosure Agreement?
The parties to an NDA will commonly exclude certain types of information from the NDA. These categories are usually standard, although there may be other specific types of information that will need to be excluded. Typical examples include:
- Information that is already in the public domain or that the business has been able to get from other sources that are not confidential.
- Information that needs to be disclosed to satisfy a legal or regulatory obligation, or, in the case of listed companies, stock exchange disclosure rules.
To cover situations where disclosure is required by law, the parties might decide to include more specific provisions. For example, they may specify that the person who is obliged to disclose the information must inform the other party and limit the disclosure to the minimum required.
What Happens If the Parties Breach a Non-Disclosure Agreement?
The other party to your NDA might still breach its terms – for example, by making an authorized disclosure or using the information for any unauthorized purpose.
If you act quickly enough, you might be able to obtain an injunction to prevent a threatened breach of the NDA and to stop the information from being further disclosed. If it is too late, you may be able to recover damages for any loss you suffer.
This does highlight an important point, which is that there is a limit to how useful an NDA can be. Once your information has got out (even if it results from a breach of a confidentiality obligation), the information is now out there in the public domain and can’t be made confidential again.
It’s best to think of an NDA as just one tool you can use to keep the information confidential. You can also implement other practical measures to restrict access to the information. For example, you could:
- Encrypt and add password protection to the file.
- Change the file settings to prevent it from being copied, edited, downloaded, or forwarded onwards (although even this can’t prevent the information from being manually copied).
- Only allowing access to hard copies of the information, which are not permitted to leave the room or be copied.
Logging who has accessed the information by checking the person’s identity and using, for example, watermarks on documents, timestamps, and version control measures.
What Happens When the Non-Disclosure Agreement Expires?
An NDA will usually define how long the confidentiality obligations will last. That can depend on industry practice and the type of information involved, but a fixed period such as one or two years is not uncommon. Sometimes another event might trigger the end of the obligations too, such as where you decide to enter into a deal with the other party and agree that you want to publish a press release together to announce the deal to the market.
An NDA will also usually specify what happens to the confidential information if the original purpose for sharing it comes to an end. Usually, this will be an obligation to return or destroy the information, and sometimes, to certify that this has been done.
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To succeed in business, you always need to be exploring new opportunities and partnerships. This means you will be constantly discussing and sharing ideas with potential partners – but this comes with the risk that those partners could take the information and use it for their benefit.
An NDA is one way that you can keep your competitive advantage. So, it’s worth taking the time to get familiar with how an NDA works, put in place an efficient process – and make sure you always get that NDA signed before sharing your ideas.