Anatomy of an NDA

What is an NDA?

An NDA (non-disclosure agreement) is a form of agreement that is often used where two parties enter into negotiations that will involve at least one of the parties sharing commercially sensitive information with the other party. Also known as a confidentiality agreement, it puts in place obligations to keep information confidential, and to use the information only for a limited, agreed purpose.

Do I need one?

Even in the absence of an NDA, confidential information may still be protected at law. If you receive information in confidence you cannot take unfair advantage of it, and must not make use of it to the detriment of the person who disclosed the information to you (at least not without obtaining consent).

It can be difficult to rely on that law, however, so parties tend to opt for a formal NDA. That allows them to specify very clear rights and obligations.

What happens if a party breaches its obligations?

If a party to an NDA uses or discloses the information in an unauthorised way, the other party can bring a claim for damages. Depending on the circumstances, it may also be able to apply for what’s called an “injunction”, which is a court order stopping the other party from any more use of the information. An injunction is often the most useful remedy but obtaining one can be very costly - and of course, once the information is out there, you can’t make it secret again.

What are the key considerations?

When entering into an NDA, there are a number of things you should keep in mind, whether you are going to be disclosing information, or receiving it. Some of these issues are discussed below:

1. What do you know about the recipient?

This may be a potential partner, investor, client or supplier. It’s important to satisfy yourself (as far as possible) that the proposed recipient of your information is reliable and trustworthy. What’s their track record? A little due diligence can go a long way, so before you even consider an NDA, consider who you’re dealing with.

2. What do you need to disclose?

Of course, all the due diligence in the world can only go so far, so (with or without an NDA!) it is always best to limit the amount of information being disclosed to what is required to enable the negotiations to take place.

3. How should you disclose information?

If you do need to disclose information, consider passing the information in hard copy rather than electronically, and in the NDA stating that copying or scanning the information provided is not allowed. Or, if appropriate in the circumstances, consider giving a presentation rather than handing over information.

4. Who needs to know the information?

Your NDA should make it clear who within the recipient’s organisation is entitled to receive and use the information. It should also require the recipient to impose the same confidentiality obligations on those individuals and make the recipient organisation responsible for their actions. If you’re the recipient you’re going to be responsible for the acts of those to whom you disclose the information, so ensure you share the information only with those who do really need to know it and make sure they are not only contractually bound to comply with them, but also actually made aware of these obligations.

5. What can the recipient do with the information?

Ensure the NDA limits the use of the information to a specific purpose. This ensures the recipient knows exactly where the boundaries lie and makes it easier to assess whether they have stepped over the line. If you’re the recipient, you need to make sure the permitted purpose allows you to use the information in the way required.

6. How long should the obligations last?

Often the obligations in an NDA will be stated to continue indefinitely. Great, if you’re the discloser, but if you’re the recipient you may wish to limit the duration of your obligations to a specific period of time so that they are not hanging over you forever. A duration of three or five years is not uncommon.

7. When should you disclose information?

It seems obvious, but if you’re going to put an NDA in place don’t disclose any confidential information before both parties have signed the NDA. Parties can often spend a lot of time negotiating the document only to fail to sign it at all! And an NDA signed after the disclosure of confidential information may not protect the disclosed information.

8. Should the agreement be mutual?

If you are presented with an NDA to sign, check to see if it is mutual (i.e. protects the confidential information of both parties) or only one way (i.e. only protects the other party’s confidential information). If it is one way only, and you will be disclosing any of your own confidential information, ask for the agreement to be mutual.

9. What else should I look out for?

If you’re presented with an NDA to sign, it’s tempting just to skim read it and sign it to get the ball rolling. But you may miss something important. Sometimes, an NDA will contain:

an assignment of intellectual property, which might have the result of assigning what you thought was your own IP to the other party;

a non-compete restriction that would prevent you from talking to anyone else about the same type of project/transaction;

an indemnity that would make you responsible for compensating the other party in full for any loss they suffer or costs they incur as a result of your breach, which is rarely (if ever) a reasonable request.

It is important to remember that an NDA is not a silver bullet. It can’t actually prevent the other party (or their employees) from disclosing or using your confidential information in breach of the agreement, rather it acts more as a deterrent. If you suspect a breach, it may be difficult - and costly - to prove. So before disclosing anything at all, consider if you really need to disclose that secret recipe?

On the flipside, if you’re the recipient it’s important to enter into an NDA with your eyes open - does it cover what you need it to and does it contain anything that it shouldn’t?

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