By Kim Whitaker
Are you hoping to get someone to invest in your business? Or perhaps you’re thinking about working with a business partner in a collaboration arrangement or joint venture?
If you are, you are probably worried about how you will protect the confidential information about your business.
You’ve probably heard the terms “NDA” (short for Non-Disclosure Agreement) and Confidentiality Agreement. But how are these agreements relevant and what do you need to think about?
The first thing to say is that an NDA and a Confidentiality Agreement are just different names for what is the same type of agreement – that is, one that says information disclosed by one party to another must be kept secret and not disclosed to third parties.
You may be thinking that as an NDA/Confidentiality Agreement is a legal document, it will be expensive to put in place. And anyway, hasn’t someone told you that there is no point in having one because you won’t be able to afford to enforce it?
These are common misunderstandings. I want to make it clear that this is not the case and give you an idea of what are the key things that you need to know.
1. Is it worth putting an NDA in place?
Yes, in my view, it is. You should always enter into one of these types of Agreement, preferably before sharing any information (although they can be made retrospective to cover information already disclosed).
The mere fact that a document of this kind has been signed will remind the other party of their obligations and act as a disincentive to any breach.
Admittedly, if you did have to go through the full process of enforcement in the courts it would be expensive – but it is unlikely to get to this in most cases: usually the matter can be resolved between the parties.
2. Where do I get an NDA and will it be expensive?
NDAs come in two basic flavours:
- one-way (where only one party is disclosing confidential information and the other party is receiving it, for example, so it can review it and decide whether investment or purchase is worthwhile); or
- mutual (where both parties are disclosing confidential information to each other: this is likely to be the case for collaboration/joint venture type arrangements).
In some circumstances where an NDA is to be used, one party may have a standard form document they always use but don’t worry if not. There are lots of free and inexpensive templates for both one-way and mutual NDAs on the internet – do a search and you should find plenty of examples.
You will probably need to tailor them a bit – include names and addresses and perhaps a “Purpose” (ie stating the reason that you are sharing the information). It then clear that information disclosed is to be used only for the stated purpose – and not for anything else.
3. Who needs to be a party the Agreement?
This is something you need to think about. The most straight forward situation is where two companies are entering into an NDA: they then accept responsibility for their employees keeping information confidential.
But sometimes one of the parties will be an individual and should, therefore, be a party to the NDA personally. This may be OK if the individual is a “disclosing party”. However if he or she is a “receiving party” and breaches the agreement, he or she could be sued personally for everything they own.
4. Lots of NDAs look very different: are they really the same?
Well, they may seem different but the truth of this is that most of it is window dressing. There are common elements which are always the same (although there may be extras – see point 5 below).
The core elements are as follows:
- Definition of Confidential Information
There will be something along these lines but it may be called something different – eg “the Information”, “the Disclosed Information”.
Often the definition of confidential information is very general – “all information about the business, customers, suppliers, know- how etc”.
Others definitions go the other way and say everything is confidential – so by implication even trivial and obvious things are covered.
A compromise would be for the definition to say it covers information that is confidential in nature.
- Exceptions (that is, what is not Confidential Information)
Typically, one or more of the following will be “carved out” from the general definition of the “Confidential Information”.
- Information in the public domain or which is publicly available (other than as a result of breach of the Non-Disclosure Agreement by the recipient of confidential information)
- Information required to be disclosed by law or order of a court etc.
- Information already known to the recipient or independently developed by it (for example, as a result of its own research).
- Use of the Confidential Information
This part of the Agreement will say how information can be used and that it mustn’t be used for anything else. There may be more detail about this, for example, the recipient won’t make copies, will take reasonable measures to keep information secure and so on.
There will also probably be something about the return/destruction or deletion of information at the end of discussions or if the relevant project doesn’t go ahead. In any event usually there is something that says, whatever happens, the confidentiality obligation is on-going. This might be indefinite or for a specified period (such as 2, 5, 10 years).
There may also be a provision allowing sharing of information with professional advisers, consultants, employees, if they need to know about it in connection with the project under discussion. If this is the case, the party sharing the information is usually made responsible for ensuring that that people they share comply with the terms of the NDA, even if they don’t actually sign it.
5. Extras: Bells, Whistles
You know how lawyers like to cover every possibility under the sun? Well, you may find “bells and whistles” included in NDAs in the form of clauses along the following lines:
- The fact we are disclosing information to you (especially intellectual property) doesn’t give you a right (licence) to use it.
- We are providing this confidential information but we are not giving any representations or warranties that it is correct and we won’t update it. (This may or may not be reasonable – you need consider the wider context of the arrangements in each case).
- If there is a breach of the NDA, it is agreed that damages will not be an adequate remedy. (The point of this is to make it clear that if there is a breach, the party who is disadvantaged should have the right to get an injunction to prevent the disclosure – actually, this would cost thousands – even tens of thousands – so probably a last resort).
This is how I think of those clauses you need to beware of. Particularly, if you are receiving information you want to avoid clauses that say something like:
“you agree to indemnify the disclosing party for all costs, claims, demands and liabilities arising directly or indirectly out of a breach.”
The problem is that, if you agree to this then potentially you are going to have to compensate the disclosing party for everything that your breach of the NDA costs them (including the cost of any injunction (see above!)). Not good news.
Ideally, you would try to get the disclosing party to agree that your liability won’t exceed a specified amount – but this isn’t always possible. If it isn’t, try to ensure that the party who claims to have lost out has to prove it and take reasonable steps to minimise any loss suffered.
Remember if the party signing the NDA is a company or corporation, if the worst comes to worst, its liability will be limited. That won’t be the case for an individual ..(see point 3 above).
In addition to the provisions discussed above, there will probably be some of the “standard” clauses you typically find in legal agreements (usually known as “boilerplate”). Examples are, clauses about how notices should be given, what law will govern the agreement and so on
Pretty much all NDAs will have the elements described above – although the Bells, Whistles and Dragons are optional. So don’t worry they aren’t as bad as they seem.
Please don’t be put off by the fact that NDAs can seem daunting at first. In fact, when you have looked at a few you will get quite used to them and the general principles. So my suggestion is that you get familiar with them since they are definitely worth having in place to protect your business information, if you are sharing it with others as part of potential arrangement between the two of you.
What are your thoughts on this? Please do share them below.
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