Non-disclosure agreements, confidentiality agreements, or NDAs, are legally binding documents which establish and outline a confidential relationship.
NDAs should be used whenever sensitive information needs to be shared among parties for the purpose of ensuring no party discloses the sensitive information to a third party. In essence, NDAs are legal promises that information discussed will be kept secret.
An NDA may be used to protect a business from having anything they wish to be kept private, made public. This can be anything from a formula or recipe for their product, to details about the business operations.
As NDAs are private agreements between the parties, they do not need to be registered in the same way that patents do.
There are two main types of NDA that tend to cover most areas – one-way (or unilateral) NDAs, or mutual NDAs.
A one-way or unilateral NDA is the most common type of NDA. These documents are used when a business is disclosing sensitive information to another party and that party agrees to not disclose that information externally to that relationship.
One-way NDAs are largely used to protect the interests of the business (the Disclosing party).
A business may use a one-way or unilateral NDA with their employees, vendors and suppliers, clients or even investors to protect trade secrets.
A mutual NDA is used when both parties are required to share sensitive information with each other that neither party wants disclosed. This type of NDA is typically used when companies are exploring options for partnership, investment, collaborations, mergers, or purchases.
Companies or individuals will typically use an NDA when they want to protect confidential information or trade secrets. For example, you might want to use an NDA when you are employing a marketing or PR firm, when partnering with a new manufacturer or supplier, or when speaking with a potential investor.
Most often NDAs are required to be signed before any conversations begin or before you bring in a new employee or contractor. This ensures that the business is covered with an assurance of confidentiality from the very beginning of the conversation. At times NDAs can be created at the end of a relationship – such as when a partner decides to leave – however it is more difficult to negotiate at that point.
There are 9 elements and clauses which should be included in an NDA, including:
Definition of the confidential information
The parties involved
The terms and duration of the agreement
Information Disclosure Clause
Legal Obligation to Disclose Clause
Return of Information Clause
No-binding, No Obligations or Termination Clause
To learn more about the elements in an NDA, visit our article on the NDA template.
Ensuring you have included every necessary element in a business NDA can be time consuming, drag on both business activities and takes Legal’s focus from key strategic work. This is an issue when these documents are relatively standard yet require much of Legal’s time to recreate them every time.
To combat this lag many businesses are utilising open sourced standardised NDA templates like that from the organisation OneNDA. Some businesses are taking their NDA templates one step further and incorporating technology like Plexus into their business strategy to automate their NDA templates. This strategy allows anyone in the business to create complete, legally compliant, and binding documents themselves. This allows business conversations to get started sooner and keeps Legal teams focused on the high-value strategic work.
Every NDA should include a Non-binding, No Obligations or Termination clause which outlines the process which a party must follow should they wish to terminate their involvement in the relationship.
The termination clause should contain:
- How the terminating party must communicate intent to terminate the agreement with the other party
- Any notice period required before termination will come into effect after notice of intent to terminate is presented.
While breaking an NDA is not a criminal offence, an NDA is a legally binding document and so a breach in agreement will likely result in some penalties.
These penalties are typically stated in the agreement and all parties agree to these upon signing. The penalties for breaking an NDA may include, but are not limited to:
- A lawsuit for breach of contract
- A monetary penalty for remedies
- Termination of employment (if the NDA is signed as a condition of employment)
No party should ever sign an NDA they intend to break. At the same time, NDAs should also never be designed to cancel or prevent a party from reporting criminal activity.
As NDAs can carry serious penalties if broken, it may be best to discuss with a lawyer to consider what options are available to you if you feel you may need to break an NDA to report a crime.
If you are ever in doubt of the contents or restrictions of an NDA, it is always best to consult an independent lawyer.
NDAs are a critical component to many business relationships as they protect the business and their counterparty from the consequences of the release of confidential information.
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