Confidentiality Agreement (NDA) - Simple
A confidentiality agreement is also known as a non-disclosure agreement or an NDA. It is a legal contract between two parties to establish the terms of using any confidential information that has been disclosed from one party to another. It is a commonly used commercial agreement which is intended to protect confidential information such as business strategies, trade secrets, technical and commercial information.
When should you use an NDA?
An NDA is often used where it is anticipated that confidential information will be disclosed from one party to another for commercial purposes. For example, prior to the due diligence process relating to the sale of a company or as part of a joint venture project. The non-disclosure agreement includes the definition of confidential information, confidentiality obligations, permitted disclosure, mandatory disclosure, return or destruction of confidential information and inadequacy of damages.
It is important to note that there are exceptions to the obligations of confidentiality including information required by a court or by law as well as any information that is publicly known or available before the information was provided by the disclosing party.
This is a simplified version of the NDA that is quick to create and can be used where both parties are sharing confidential information (for example as part of a collaboration opportunity). This simple form of agreement is drafted to be “standard”, non-controversial and on the basis that no further negotiations will be required. However, it does not include a non-solicitation clause, an indemnity clause, an ownership clause nor a non-reliance clause. If you would like a more extensive contract with all of the aforementioned clauses (and more), please create the confidentiality agreement (NDA) - mutual on our platform. Alternatively, if only one party is providing confidential information, you should use the confidentiality agreement (NDA) - discloser friendly available on PocketLaw.
Either party can end discussions by serving a written notice on the other party. However, in practice, parties rarely end discussions by giving such formal notice as it is far more common for the discussions to gradually decrease or stop completely because a party is no longer interested in pursuing the purpose together. The key step thereafter is for all confidential information to be returned or destroyed.
Why is an NDA important and why should you use an NDA?
A non-disclosure agreement should be entered into before any confidential information has been provided to the other party.
An NDA aims to ensure that:
- The parties are aware of their obligations to keep confidential information confidential;
- The parties ensure any confidential information disclosed to employees or advisors on a need-to-know basis must be kept confidential on the same terms as set out in the agreement; and
- The parties will only use any confidential information obtained for a specific defined purpose - for example, to evaluate the value and/or viability of the company.
What are the common pitfalls of an NDA?
The duration of the confidentiality obligations under the agreement is between one and three years from the date that the agreement is terminated. You will also have an option to set your own preferred duration (e.g six months or five years). If the relationship proceeds and progresses, both parties would have a mutual interest in protecting the confidential information. However, if the discussions end and the relationship terminates, then the confidentiality of the information would become vital. Whilst an indefinite period of confidentiality would seem tempting or logical, courts are reluctant to allow such “heavy” obligations and are inclined to weigh such obligations up against the proportionality of the restraint of trade. It is commonly accepted that, whilst some technical or specific information can maintain its commercial value indefinitely, most business information would only remain valuable for a short period of time (e.g. five years is likely to be the absolute maximum but between one and three years tends to be market practice). Hence, when deciding on the duration of the confidentiality obligations, you should be realistic and consider the type of information that is being disclosed.
Confidentiality agreements are difficult to enforce as it is often difficult to prove the breach of confidentiality. Even if the breach can be proved, the full extent of the losses resulting from the breach, especially in relation to the continuing impact and what rippling effect it would have, is not easily quantifiable. Additionally, damages (compensation) for a breach of the NDA may not be sufficient by virtue of the fact that, once confidential information (trade secrets like KFC’s secret recipe) has been exposed, it would be almost impossible to make it confidential again. It is therefore advisable that practical measures be put in place in addition to the non-disclosure agreement. For example, a restricted data room that tracks and restricts access, staggered disclosure so that the most valuable confidential information will only be provided until advanced stages of discussions or disclosing hard copy documents in a physical data room (which is therefore harder to duplicate compared to soft copies).
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