Confidentiality Agreement (NDA)

What is an NDA?

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. 

The definition of confidential information in this version is deliberately wide enough to cover a wide variety of disclosures. 

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.

Whilst not the focus under the NDA, the agreement maintains the rights of ownership of the disclosing party (to avoid any doubt of ownership of the confidential information) and prevents the receiving party from establishing any reliance on the confidential information. Any reliance should be specifically spelt out in further documentation between the parties (such as the share purchase agreement or shareholders’ agreement if the relationship progresses beyond the NDA). The wording in the agreement also ensures that the disclosing party is not obliged to agree to further collaboration beyond the exchange of confidential information set out in this non-disclosure agreement. 

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:

1. The parties are aware of their obligations to keep confidential information confidential; 

2. 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

3. 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. 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. 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 and to whom it is disclosed. It is especially important to consider these points if you are contemplating having an NDA with an employee. 

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).