Before you start a new business relationship, it’s often sensible to sign a non-disclosure or confidentiality agreement (NDA) so that you can explore the proposed relationship freely – in the comfort that your commercially sensitive information is protected.
NDAs are usually fairly standard, but there’s a handful of points that it’s a good idea to double check before you sign on the dotted line.
who are you contracting with?
A NDA may be a simple document, but its terms cover your most valuable information. So it should state the other party’s full legal name as a contracting party, or you may have problems enforcing the NDA.
what information is covered?
Make sure the description of confidential information covers all of the types of information that you will be sharing, e.g. the NDA should cover oral information as well as written information, so that things discussed at meetings are protected. It’s also a good idea to cover any information shared before the date of the NDA (in case you’ve given the other side an early taster of what you want to discuss).
what can your information be used for?
The NDA should include a clear purpose for which the information may be solely used, based on why you are sharing the information, e.g. for the parties to discuss a possible joint venture related to [X]. By limiting use of information to a purpose, it means the recipient can’t use your information for another reason.
It also pays to check to whom the recipient can disclose your information – usually this is limited to named classes of persons (e.g. professional advisors and employees) but make sure you’re happy for each class of person to receive the information. Of course, the more your information is passed on, the less control you have. Given this, it’s a good idea to:
- limit disclosure to a need to know basis for the purpose
- require these additional persons to be subject to similar confidentiality obligations too.
NDAs usually have stated exceptions to the restriction on disclosure. Keep these as narrow as possible, e.g. limited to where the recipient is compelled to disclose the information by law, a stock exchange that governs the recipient, or court order.
when should confidentiality end?
Often confidentiality obligations continue indefinitely, regardless of whether the NDA or purpose has ended, i.e. if the other party still has your information, it should still keep it confidential. Increasingly though, NDAs limit confidentiality obligations for a set period only (e.g. 3 years), meaning once that time period expires, the other party can use your information for any purpose. A time limit may not be an issue depending on what type of information you are sharing, e.g. financial information usually has a short shelf-life but IP (and technical descriptions of IP) may need longer protection. So, before agreeing to limited duration confidentiality, make sure you’re OK with unrestricted use of your information after that time or you place a positive obligation on the recipient to return or destroy your information before the end of the period. Another way to address this risk is to restrict access to the information that you are concerned about (e.g. read-only access onsite at your premises).
liability and remedies
Liability under a NDA is normally unlimited – reflecting the significant loss that the discloser could suffer if their information was misused. If there is a cap, make sure it’s meaningful (i.e. large) and takes account of the damage your business could suffer if your confidentiality was breached.
The NDA should also allow you to obtain court orders to protect your confidentiality (e.g. an order requiring the other party to specifically perform the NDA) because, if you have to sue for damages, the horse has bolted and your information is in the hands of someone who shouldn’t have it. A court order can be obtained quickly to prevent a current disclosure or breach. However, this remedy needs to be expressly stated because a court will be reluctant to grant an order of this type if it thinks damages provide you an adequate remedy.
use our free template
If you would like a standard NDA to use or to act as a comparison if the other side supplies their NDA, check out our free template NDA.