The NDA: Protecting Your Confidential Information Without Stifling Potential Commercial Opportunities
For many businesses one, if not the key, asset is some degree of knowledge or confidential information. Whether that is the mechanics of a unique selling point or a list of customer information, it may still represent a significant proportion of a business’s goodwill – and therefore it is a valuable commodity that should be protected.
Perhaps, in an ideal world, such information would remain exclusive to the company.Such a notion may evoke images of a cast iron safe within the deepest bowels of the Coca-Cola head office in which the original hand-etched manuscript of the recipe for their caffeine and sugar-laced beverage is securely held until it is passed on to the next custodian to guard with his (or her) life…
In reality, it is simply not feasible for many businesses to grow and develop without interacting with other commercial entities. A commercial decision then needs to be made as to whether or not their confidential information should be disclosed to another party and, if so, upon what terms?
This is where a non-disclosure agreement (NDA) can be a useful tool. NDAs, often referred to as confidentiality agreements, create a contractual right for the party disclosing information of a confidential nature to seek a judicial remedy from the party receiving the information in the event that they breach the disclosing party’s confidence and unlawfully disclose or exploit their information for their own material gain.
A well drafted NDA should provide the disclosing party with the choice of seeking financial compensation or an injunction imposed by the court, which effectively prevents the receiving party from disclosing the information – assuming they have not already done so.
At this point it is worth noting that an NDA alone cannot be regarded as a guaranteed prevention mechanism. However, they undoubtedly offer some commercial advantages as well as a degree of legal certainty.
It goes without saying that if you are ever in the situation where you are considering disclosing any aspects of your business’s confidential information, you should first undertake a thorough due diligence review of the receiving party. If you decide to proceed and opt for an NDA as a means of further protection, listed below are some of the key factors you should consider:
Ensure you are as clear as possible in respect of exactly what information you want to protect under the NDA by including a thorough and succinct definition of “Confidential Information”. It is crucial to get this right as including any information which is obviously not to be construed as confidential (for example any information already disclosed or currently within the public sphere), will result in all the information disclosed being treated as non-confidential – thus rendering your NDA effectively useless.
Also, make sure all parties to the agreement are clearly set out and full details are provided – normally you would expect to see just two parties to an NDA (the receiving and disclosing parties) although this is not necessarily always the case.
The purpose (or ‘permitted purpose’) sets out exactly what the receiving party is permitted to do with the information and in what context. Purposes obviously vary significantly, but can be anything from an investor receiving copies of your business’s financial records as part of a due diligence exercise prior to investing in your business, to another company using your confidential information as part of a feasibility study prior to a proposed joint venture. Whatever the purpose, it should be clearly set out at the front of the document.
It is usual for an NDA to have an agreed timeframe or term, under which all parties to the agreement are bound by their respective obligations. Tthis will also vary depending upon the actual purpose of the disclosure or exchange of information.
If you are the disclosing party then it will be in your interests to impose as long a timeframe as possible. However, you should try to approach this clause with a degree of pragmatism. The idea is to encourage the receiving party to enter into the NDA, so you need to strike a balance between the value you place upon the information and the overall reasonableness of the agreement, so do not impose a term which is longer than necessary. Anything from one to five years is common for the majority of NDAs but, again, this will be a subjective issue.
This part of the agreement effectively tells the receiving party what they can and cannot do with the confidential information, who may access it and how it must be stored during the term and subsequently, whether it should be returned or disposed of upon the expiry of the term. The more specific this clause is, the easier it will be for the disclosing party to manage and review the receiving party’s conduct in order to ensure compliance and, if necessary, prove a breach.
Although it is never possible to completely prevent any party unlawfully disclosing or using another party’s confidential information contrary to their wishes, there are commercial advantages to a well drafted and thorough NDA. It can provide an added degree of certainty to all parties to the disclosure process, whilst giving additional comfort to the disclosing party and also acting as a deterrent to the receiving party. This is because it demonstrates that the disclosing party places a high commercial value upon the confidential information and provides that any breach or unauthorised disclosure by the receiving party could result in court proceedings and subsequent financial penalties.
Please get in touch if you'd like to speak with one of the team about drafting an NDA specific to your business or confidential information.