What is a non-disclosure agreement?
A non-disclosure agreement, an NDA, a confidentiality undertaking, a confidentiality letter or a confidentiality agreement are all names for essentially the same document. There are few formal requirements as to what can constitute a non-disclosure agreement and it is perfectly feasible for a non-disclosure agreement to be wrapped up in some other type of document or agreement, for example, some Heads of Terms or an Exclusivity Agreement, both being documents commonly used to begin formalising a transaction between two or more parties.
Non-disclosure agreements therefore come in all shapes and sizes, but have at their core one clear purpose: to identify certain information to be provided to another and to establish how that information can and cannot be used.
Non-disclosure agreements regulate and record the flow of information. This flow can be one way. For example, where a IT company is going to produce some software for your business based on certain confidential information you will provide. Or they can be mutual, i.e. the party receiving the information (the information recipient) is also providing their information to you. Both one-way and mutual arrangements are common, but it is important to identify from the outset which of the two arrangements is to be used.
Where would you expect to come across a non-disclosure agreement?
The short answer is that you’d expect to encounter a non-disclosure agreements in any situation where confidential information is being provided and the party providing the information wishes to record and regulate the treatment of it.
Typical examples therefore include:
- On an investment; the company seeking the investment would ask the investor to sign a non-disclosure agreement relating to the confidential due diligence information about the company the investor will receive.
- On the outsourcing of a service; the outsourcer would expect the service provider to sign a non-disclosure agreement relating to both the confidential information he will receive to allow him to commence providing the service, but it would also cover the information received in the course of such service provision.
- On taking a lease; the tenant would expect the landlord to sign a non-disclosure agreement if the tenant needs to pass on confidential information about his business to the landlord relating to the anticipated use of the property.
Non-disclosure agreements are also commonplace in normal trading arrangements where customers and/or suppliers are providing or receiving confidential information.
Should you expend time, cost and effort in putting one in place?
Legally, subject to certain formal considerations that apply to any contract, non-disclosure agreements do work. They create a contractual right for the information provider to seek a judicial remedy from the information recipient should he breach the terms of the agreement. The remedies available should, assuming the non-disclosure agreement is drafted properly, allow the information provider to choose between financial compensation and a court order preventing disclosure of the confidential information concerned.
Legally, to enforce a non-disclosure agreement, the information provider will need to go to court and to show that there was a contract, to establish its terms, to establish that on the face of the facts there was a breach by the information recipient and then to establish the financial damage.
A well-drafted non-disclosure agreement and a properly managed and controlled information disclosure process can make it relatively simple to provide strong evidence under most of these heads. Proving damage could be harder, but the facts normally speak for themselves. If, for example, you have provided your secret recipe to a manufacturer and the manufacturer, in turn, provides it to a competitor who then uses it to produce a competing but cheaper product, it is a good bet that your sales will fall, while your overheads will remain the same, or, put more simply, that you have suffered provable loss.
However, here the legal points necessarily give way to the commercial reality. It is often said that you would never wish to, or can afford to, sue a more established business or wealthy individual to whom information has been provided. It is true that the evidential and costs burden will be on you and it may also be true that your financial loss might be deemed small in the court’s view. Furthermore, you are not likely to have advance notice of any breach, so obtaining a court order to prevent unauthorised disclosure is not likely to be relevant.
Having a non-disclosure agreement can’t be regarded as a panacea. That said though, I still believe they have their place as part of your wider approach to dealing with confidential information.
Having a non-disclosure agreement does have a number of irrefutable commercial advantages. The mere act of putting one together focuses the minds of the parties on what information is confidential and how it can be treated. This is beneficial and this process typically only takes place in the context of agreeing a non-disclosure agreement.
Non-disclosure agreements have a deterrent effect. Much like the role of criminal law, they establishe in the recipient’s mind that unauthorised disclosure might land him in court and could cost him financially.
Finally, you should not forget that having a non-disclosure agreement, or choosing not to, is not just a decision for your business in the here and now. For example, if you are considering looking for investment in due course, you will find that your IP and confidential information is seen as a key asset and you will also find that you have to disclose it to a number of potential investors before you find the investor or investors who actually inject cash into your business. Your successful investors will want to see that it is protected and, of course, what starts off as your information will become their information too on investment. Just because you might not want to sue on a non-disclosure agreement, your investor may well want to in order to protect his investment. Having a non-disclosure agreement will be especially useful in preventing disclosure by the unsuccessful investors who performed due diligence.
William Robins is a partner of Keystone Law and specialises in helping early-stage companies commercialise their products and raise investment. Email him at email@example.com
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