What is a Non Disclosure Agreement?
A non disclosure agreement in the course of business expressly prohibits the disclosure or use of proprietary information without your permission. It is a legal contract by which one or more parties agree not to disclose confidential information as a necessary part of doing business together.
Non disclosure agreements are also commonly referred to as confidentiality agreements or confidentiality undertakings.
A well-drafted non disclosure agreement is legally binding on all parties. It creates a contractual right for the information provider to seek a judicial remedy from the recipient in the event of a breach. The remedies available include injunctive relief to prevent the confidential information from being shared, as well as damages to financially compensate for any losses sustained.
By asking a third party to sign a non disclosure agreement, it is intended to act as a powerful deterrent against unauthorised disclosure.
When are non disclosure agreements used?
Non disclosure agreements are most commonly used in the following circumstances:
- When customers, suppliers and manufacturers are receiving confidential information during the course of normal trading arrangements.
- When a business is seeking an outsourced service, such as professional outsourcing of account and legal services, where the sharing of confidential information with the service provider is necessary so as to enable the provision of that service.
- When taking on a lease, where the sharing of confidential information with the landlord relating to the anticipated use of the property is a necessary part of the lease being granted.
- When settling employment disputes, in this way prohibiting existing or ex-employees from discussing matters that took place during the course of their employment and/or disclosing confidential information that they have been made privy to.
- When sharing ideas and knowledge with prospective investors, or anyone else interested in an invention, especially prior to the grant of a patent.
What makes an effective non disclosure agreement?
The most effective non disclosure agreements are bespoke and specific to the needs of the parties and the wider circumstances at hand.
At the core of any non disclosure agreement should be identifying the particular information to be provided to the other party and to establish how that information can and cannot be used by the recipient party.
Effective non disclosure agreements typically include terms dealing with the following:
Specify the permitted purpose for which the ideas and information are being provided, setting out exactly what the recipient is permitted to do with the information, for example, to enable a decision to be made on a joint venture. This is to prevent the confidential information from being used for any other purpose, for example, launching a competing product or service.
Define what is meant by ‘confidential information’. The definition must not be too wide in scope, but similarly, it must not be too narrowly defined as this might mean key information is not caught by the obligations under the agreement.
Ensure that any disclosures already made during the course of preliminary discussions, or otherwise, are included in the definition of ‘confidential information’. Ideally, you should never disclose any ideas or information until the recipient has signed a non disclosure agreement.
Set out exactly what the recipient is permitted, as well as refrained, from doing. This can include how information is to be kept confidential, who may access it and with whom this information may be shared, for example, with the recipient’s lawyers or accountants.
Decide on the duration of the obligation. This should be limited to a period that reasonably reflects the shelf life of the information being provided. For technical information this could be between 3-5 years, whereas for financial information likely to be filed in due course with Companies House, this could be just a few months.
Specify all parties involved, including any third parties, so as to hold all those involved to the same confidential standards. The agreement should also include a declaration that any signatories are authorised to sign on behalf of all parties involved.
A non disclosure agreement can be one way or mutual, depending on whether the disclosure of information is from one or both parties.
The other party may provide you with their standard document to sign. Where a non disclosure agreement has been presented by the other party, take legal advice to ensure your rights are protected and enforceable and the obligations placed on you are as unsdertood before you agree to the contract.
What are the challenges of using non disclosure agreements?
In practice, a well-drafted non disclosure agreement can be extremely effective in maintaining the confidentiality of ideas and information shared during the course of doing business.
That said, there are a number of legal and practical challenges involved, not only in ensuring that the agreement is fit for purpose, but ensuring that it is in fact enforceable. In particular, if confidential information is already within the public domain, a non disclosure agreement cannot be enforced.
A non disclosure agreement also offers no guarantee that judicial remedies will protect the confidential nature of your information or adequately compensate you for any breach.
In particular, you are unlikely to have advance notice of a threatened or actual breach, such that obtaining a court order to prevent unauthorised disclosure may be of little use. Further, if claiming damages, it can be hard to prove the extent of any financial loss.
It is therefore always best to ensure compliance, rather than seeking injunctive relief or compensation in court – needless to say, suing will not make the information confidential again.
What if I don’t have a non disclosure agreement and have been subject to a confidentiality breach?
The equitable law of confidence will offer some limited legal protection in so far as the recipient may not take unfair advantage based on ideas and information received in confidence.
Under this doctrine, a duty of confidence arises when confidential information comes to the knowledge of a person, and there has been an unauthorised use of the information to the detriment of the owner.
However, the information must have been imparted in the first place in a manner that imposed an obligation of confidence, for example, it was marked as important and confidential.
It is therefore not advisable to rely on good will, but rather to legally protect any confidential or sensitive information by way of a non disclosure agreement.
Seeking legal advice for non disclosure agreements?
Ensuring the confidentiality of your business ideas, trade secrets or other sensitive information can be key to commercial success.
But the evidential and costs burden of suing for breach of a non disclosure agreement can be significant. It is therefore always better to focus the parties’ minds from the outset as to what is at stake.
An experienced legal adviser can not only draft a suitable non disclosure agreement, bespoke to your requirements to protect your confidential information, they can advise on the practical steps to be taken to prevent or remedy any breach.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.