Why use an NDA?
Confidentiality Agreements (NDAs – Non-Disclosure Agreements) are used in a wide variety of business situations. Essentially, they are used to protect commercially sensitive information which one party is going to disclose to another party. The disclosure is usually a preliminary step in a proposed business dealing or transaction between the parties.
- information disclosed by a company to a potential investor
- information disclosed by a seller to one or more potential buyers of assets such as commercial property, the business of the seller or a company owned by the seller
- information disclosed by the inventor, creator or originator of a product, service or business idea
- information disclosed by parties who are considering entering into a joint venture
Before they are ready to enter into a long-form agreement which will cover their overall business relationship or transaction, either one or both parties needs to receive the other party’s commercially sensitive information so that they can evaluate that information and use it to decide whether they want to proceed with the underlying business transaction.
If however the parties do not ultimately enter into that transaction, the party which has disclosed its commercially sensitive information will want the confidentiality of that information to be legally protected, both from further disclosure and from its use or exploitation.
If the parties do proceed with the transaction, the long-form legal agreements for the transaction will usually include their own confidentiality provisions and will replace the NDA.
Which NDA to use?
NDAs can be either “one way” or “mutual”. A “one way” NDA covers the situation where only one party discloses confidential information to another party, for example the seller of a property or business. A “mutual NDA” covers the situation where both parties will disclose their own confidential information to the other party, for example in the case of a proposed joint venture.
What does an NDA cover?
NDAs vary in their complexity and length but (as well as usual legal boilerplate clauses) essentially deal with the following principal issues:
- what information will be covered by the NDA (usually defined as “Confidential Information”)
- whether the NDA is “one way” or “mutual”
- the purpose for which the recipient can use the disclosed information
- a restriction on the recipient disclosing or using the disclosed information other than for the specified purpose
- the limited categories of people to whom the recipient may supply the disclosed information (for example, employees and professional advisers who need to know that information for the specified purpose)
- exceptions to the restriction on the recipient from disclosing the disclosed information (for example, if required to do so by law)
- how long the restrictions last
This can be achieved in a relatively “short-form” document (whether in the form of a letter or a legal agreement). Alternatively, an NDA can be in “long-form” and cover the principal issues in more detail and also a number of ancillary matters.
What issues arising in negotiating NDAs?
Whether a short-form NDA or a long-form NDA, the intention of the parties should be to seek to agree the form of NDA relatively quickly, so that they can move to the next stage of the business relationship or transaction.
Often, however, negotiations on the terms of NDAs become protracted due to unreasonable and excessive terms being included by whichever party provides the first draft of the agreement.
Examples of issues which arise in negotiating NDAs include:
- the scope of the Confidential Information to be protected – the disclosing party may draft this too wide or without what are considered to be standard accepted exclusions
- the range of people to whom the Confidential Information can be further disclosed by the recipient and the responsibility which the recipient has for ensuring that those people comply with the NDA – a balance needs to be struck in the wording to allow the recipient to disclose information to the people who need to receive it for the purpose of the transaction. The recipient should accept responsibility for compliance with the NDA by people to whom it has disclosed the Confidential Information (provided the terms of this are not unrealistic)
- if the disclosing party requests the return or destruction of the disclosed Confidential Information, what the recipient must do to comply with this request. Confidential Information is often provided electronically in digital format and the disclosing party should be realistic about what the recipient should be obliged to do to ensure the deletion of information which has been held on the recipient’s network or other data storage platforms
- how long the confidentiality restrictions should last. There is no rule about this and the period will depend on the sensitivity of the information and how long it will remain commercially sensitive. A period of more than 2 or 3 years would be unusual, as would a period of less than 1 year
- the inclusion of an indemnity for breach by the recipient of its obligations under the NDA
- the inclusion of non-solicitation covenants as a matter of course, under which the discloser seeks to restrict the solicitation by the recipient of the discloser’s employees, suppliers and/or clients for a period of time
Our selection of template NDAs are all aimed at providing a solution which, whilst legally robust for the disclosing party, achieves a balanced position between the parties.