Non Disclosure Agreement (NDA)

What Is a Non-Disclosure Agreement (NDA)?

A non-disclosure agreement, or NDA, is a contract signed between two or more parties that agree to keep any confidential information out of the public domain. They are mostly associated with new ideas, sensitive information, or any other kind of business process.

The main aim of a non-disclosure agreement (NDA) is to protect and conserve any kind of confidential information, trade secrets, or proprietary information. This contract creates a confidential relationship between the parties to the contract.

Depending upon the number of parties involved, NDAs can be of three types:

1. Unilateral
2. Bilateral, and
3. Multilateral NDAs

Employees are usually required to sign NDAs as part of their employment contract upon joining a company as they are likely to be privy to important information that the company would not want to be leaked.

An NDA may also be referred to as a Confidentiality Agreement.

Here are WSO member Johnny Cashflow's considerations on what to look out for in these contracts. Read more about these considerations at this WSO forum.

"Ask the team what has been acceptable / non-acceptable in the past.

Are there deal breakers?

Pay attention to:

• Length of term
• Scope of non-solicit
• Venue
• Representations
• Injunctive relief
• Tail provisions and other restrictive covenants"

Understanding Non-Disclosure Agreements (NDAs)

Non-disclosure agreements (NDAs) are legally binding contracts between two or more parties that establish a confidential relationship to protect confidential information from unauthorized disclosure.

The intention behind binding the contract is to protect information related to deals, business information, trade secrets, or any other information that is valuable to parties to the contract.

NDAs are most commonly used in situations such as

• The protection of a company
• Secrets of a company's operations
• Preventing unauthorized disclosure of confidential information
• Preserving secrecy for inventors before applying for patents, and
• Protecting confidential information in the event of mergers or acquisitions.

NDAs can also be used in employee agreements, where the company can require the employees to sign an NDA to protect trade and operational secrets.

NDAs are also used in situations where there are legal disputes. The situations are handled through a settlement between parties after signing a confidential agreement relating to the terms of the settlement.

Contents Of An NDA

While the contents of these contracts may vary from case to case, here are some key elements of an NDA:

1. Parties involved: This section lays out the potential parties involved in the rest of the agreement. In this case, it will typically be the potential buyer and the potential seller.
2. Definition of Confidential Materials: This section lays out and defines all potential confidential material that will be included in the agreement. This includes defining documents, information, and data that will be bound under the confidential clause.
   • It is important to clearly define this section so that in the event of a confidentiality breach from either party, the other can refer to this section.
3. Exclusions from Confidentiality: In contrast to the previous part, it is also important to define what is excluded from confidentiality. Some examples include:
   • Information already in the public domain
   • Previously disclosed information, from the other party, that has been released before the agreement
4. Terms of the Agreement: This part of the agreement typically lays out the length of time over which the confidentiality and overall agreement are binding on the parties involved. The general standard is 1-2 years plus a geographic limitation.
5. Breach of Confidentiality: This section lays out the consequences of a potential breach from either side. Some of these consequences may include:
   • Termination of employment
   • Damage payments
   • Termination of contracts

Types Of Non-Disclosure Agreements (NDAs)

Non-disclosure agreements (NDAs) are generally classified as unilateral, bilateral, and multilateral contracts. This classification depends upon the number of parties involved in the contract.

The description of the mentioned types is as follows:

1. Unilateral NDAs: Unlike mutual NDAs, unilateral NDAs are signed when only one party discloses confidential information to the other party. As only one party obtains access to the revealed secrets, these are binding on one party and hence are called unilateral NDAs.
   • Examples of situations that require the use of unilateral NDAs are employment, seeking funding, and submitting tenders.
2. Mutual (or Bilateral) NDAs: These are signed by all parties that share confidential information amongst themselves. As all parties disclose information, every party has to sign and is then bound by the NDA.
   • They are generally signed as part of joint ventures, partnerships, and other situations where two or more entities decide to work together for mutual benefit.
3. Multilateral NDAs: A multilateral contract includes three or more parties, and at least one of the parties involved expects to reveal information to other parties. The other parties who receive the information are expected to protect the confidential information.

Requirement Of Non-Disclosure Agreements (NDAs)

An NDA requires a lot of information, starting with identifying parties in the contract and ending with their signatures. The specifics we are about to mention may vary depending on the situations and preferences of parties.

1. Identification Of Parties: The first and foremost requirement of an NDA is the identification of all the parties to be involved in the NDA. This can include parties' legal names and contact information.
2. Confidential Information Definition: The agreement should explicitly mention the definitions and inclusions under confidential information. Trade secrets, business plans, financial information, customer lists, data, and other important and confidential information the parties would protect.
3. Purpose Of Disclosure: The purpose of disclosing the confidential information should also be outlined under the NDA. This information could be related to potential business partnerships, collaborations, employment, and other sensitive information.
4. Obligations Of Recipient: The NDA should openly discuss the obligations of the confidential information recipient and a commitment against disclosing any information to third parties or any outsider. This can also include standing firm and not using the information for any other purpose than mentioned in the contract.
5. Duration Of Confidentiality: The agreement should disclose the duration of the agreement for which the confidentiality on the mentioned matters can be kept. This period of confidentiality could range between a few countable years to an indefinite period.
6. Exclusions From Confidentiality: The topics and matters that aren't confidential and are open to public discussion should also be discussed. 
7. Consequences Of Breach: What penalties and compensations will the parties be liable to pay in the event of a breach of the agreement for non-disclosure of sensitive information? All this information should be mentioned in the agreement.
8. Governing Bodies And Laws: The NDA should be transparent about the laws and jurisdictions that can be applied to the parties in contracts. 
9. Signature: An NDA, should be finally signed and dated by authorized representatives of both parties exhibiting agreement to terms.

Advantages And Disadvantages Of NDAs

NDAs play a very significant role in the protection of confidential information and sensitive business details. Below we discuss some of the advantages and disadvantages:

Advantages:

1. Protection Of Intellectual Property: One of the primary advantages of the NDAs is the protection of intellectual property and preventing other companies from accessing or duplicating valuable innovations.
2. Builds Trust: The agreement starts a confidential relationship between the parties in the contract. A bond is formed to protect the organizational interests from outsiders and competitors.
3. Enables Employee Mobility: NDA promotes the acquisition of skilled human capital from competitors without the worry of sensitive information being disclosed in the public space. 
4. Ensuring Legal Compliance: Many industries mandate the safeguarding of sensitive and confidential information, and NDAs help ensure compliance with relevant laws and regulations, like HIPAA.
5. Facilitates Negotiations: Since there is protection of confidential information, it allows parties to share sensitive information and begin negotiations without the fear of disclosing it in any other space. 

Disadvantages:

1. Mistrust: NDAs can start with a pinch of mistrust at the beginning of the agreement process, which may negatively impact the potential dynamics between parties.
2. Challenges In Talent Acquisitions: The companies may feel restricted in acquiring top talent from competitors because of the uncertainty revolving around the potential employees' discussion about the job in the future.
3. Potential Lawsuit: Breach of a non-disclosure agreement can lead to potential lawsuits and legal consequences that involve all parties.

In conclusion, NDAs can present difficulties regarding trust issues, talent acquisition, and potential legal repercussions if infringed, even if they offer considerable benefits in terms of safeguarding personal information, fostering trust, and guaranteeing legal compliance.

Examples Of NDAs

As mentioned in the article there are three types of non-disclosure agreements. The unilateral, bilateral, and multilateral NDAs. These categories are in place depending on the parties involved in the agreement to offer sensitive and confidential information to parties to the contract.

The requirements under NDAs and how they are progressed depends upon the number of parties engaged in the agreement. Let us discuss examples of NDAs under the three types of agreements.

Unilateral NDA Example

Company A and Company B enter into a confidential agreement. Company A is the disclosing party, the party that agrees to share confidential information, and Company B is the receiving party, bound to receive the information from the disclosing party.

The parties' purpose in entering into the agreement is for Company A to disclose proprietary information to the receiving party and for Company B to evaluate opportunities to enter a market.

Key Considerations:

• Company A provides specific confidential information to Company B
• Company B agrees to keep the information secret
• The confidentiality tenure is also decided (the period for which the agreed information is to be kept secret)
• The damages and compensation in the event of a breach of the agreement.

Bilateral NDA Example

Company A and B agree to meet and share confidential information, exploring the opportunity for a potential alliance. In a bilateral agreement, both parties share valuable information.

Key Considerations: 

• Both parties will share information regarding their potential alliance and partnership
• Here, both parties will also agree to keep the information discussed confidential, and not be discussed with any third parties
• The confidentiality tenure for the parties should be discussed. Apart from this confidentiality obligations should also be discussed during the negotiation period to safeguard trade secrets and sensitive information
• Potential consequences of a breach of the agreement may include termination of negotiations and legal consequences for damages.

Multilateral NDA Example

Assuming there are three companies now. Companies A, B, and C. Here, they come together to form a joint venture, a syndicate to carry out business activities. Here all the parties to the contract share valuable information with each other.

Key Considerations:

• Regardless of the number of parties involved. All parties should disclose information valuable to the venture.
• All parties must agree to keep the information shared confidential, and not to be disclosed to any third parties or for public use
• The confidentiality agreement and tenure are only for the period of joint venture with the avenue to extend beyond the tenure
• Breach of agreement can lead to termination of joint venture.

Conclusion

An NDA is a contract signed between two or more parties that agree to keep any confidential information out of the public domain. They are mostly associated with new ideas, sensitive information, or any other kind of business process.

These agreements build trust, confidentiality, and legal compliance, while also introducing the parties to the contract to challenges such as trust issues, and legal consequences in the event of a breach.

The examples discussed above include all of the key elements of an NDA; parties involved, the purpose of the agreement, the confidential information to be protected, the information that can be discussed in the public domain, obligations to both parties, duration of agreement, and confidential obligations.

Organizations must weigh in the merits and demerits of the NDA before moving forward. 

The non-disclosure agreements offer various advantages to the users in protecting the confidentiality and trade secrets of the organizations and prevent any parties from disclosing any of the discussed information.

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