In business, whether you are a start-up or well on your way and established, there are numerous instances in which you may want to share confidential information with another party! Preferably, safely and without the other party using the information your provide them to your detriment.
One common way to protect the secrecy of confidential information given to another party is using a Non-Disclosure Agreement, which is sometimes also referred to as a “Confidentiality Agreement” or “NDA.” When reviewing or entering into an NDA, you may wish to keep following 7 key elements* in mind.
Key element 1
MUTUALITY – you’d like your NDA’s to be mutual as chances are likely that you will not only receive Confidential Information from a Counterparty but will disclose your own information as well. Considering your IP (Intellectual Property) is one of the things that makes you unique, you’d prefer this information not to be out in the open without the receiving party being bound to confidentiality.
That being said: sometimes providing information is a one-way street. If you are certain that you will not provide any information to the disclosing party yourself, i.e. you will only receive information from the other end of the table, a non-mutual NDA may work for you.
Key element 2
IDENTIFICATION OF PARTIES – usually the parties to an NDA are pretty straightforward and you will read the parties details at the beginning of the NDA (including the reference each party will have throughout the document, such as “Disclosing Party” or “Receiving Party”). It becomes a bit more tricky when any other people of companies may also be part of the agreement. Does the recipient expect to show the confidential information to a third party (possibly a subcontractor, an affiliated company, partner or agent)? Then make sure that a reference to these parties is included!
Key element 3
DEFINITION OF WHAT IS DEEMED TO BE CONFIDENTIAL – This is a pretty important part of any NDA as it defines what exactly is considered confidential information. Each party will have a different interest here: on one hand, the disclosing party wants this definition of confidential information to be as broad as possible to make sure the other side doesn’t find a loophole and start using its valuable secrets. On the other hand, if you are the recipient of the information, you have a legitimate desire to make sure that the information that you are supposed to keep secret is clearly identified so that you know what you can and can’t use.
As such, make sure you read the definition well and understand what your role is under the NDA. Are you providing or receiving information? Also: always make sure that ANY information provided is deemed confidential. Not only written information but verbally provided information as well.
Key element 4
SCOPE OF THE CONFIDENTIALITY OBLIGATIONS (by the receiving party) – The core of the NDA is a two-part obligation on the receiving party:
– To keep the confidential information in fact confidential and;
– not to use this confidential information for it’s own purpose
The first part is easy: it means the receiving party needs to keep the information secret. This usually means one needs to take reasonable steps to ensure that others cannot access this information. For example, only a limited number of people within the company have access to the information, and they are all informed of the confidential nature of the information they are provided with. In many NDA’s you see a reference to the person or department that is allowed to review the information. If this is the case, make sure that the people working with the information (for example when providing a quote) are all aware of the NDA.
The second part, particularly when providing information to another party, is also crucial: the receiving party should not be allowed to use the confidentially provided information themselves. After all: you do not want them to use your ideas (IP), twisting it slightly and then making good money from it! Or rendering your services redundant.
Key element 5
EXCLUSIONS FROM CONFIDENTIAL TREATMENT – Every well drafted NDA contains a provision with exclusions from the obligations of the receiving parties. In these cases, it may simply be unfair or too burdensome to require the receiving party to keep the information confidential. Common exclusions are:
– Information already known to the receiving party;
– Information that is already publicly known (as long as the recipient did not wrongfully disclose the information to the public of course!);
– Information that is disclosed to the receiving party by another party that is not bound to (the same) level of confidentiality.
In addition, you will (almost) always see a clause indicating that you are allowed to disclose the information in case you are forced to do so in legal proceedings. Make sure this is included, as otherwise you may open yourself up to claims for damages if and when you would indeed be forced to disclose information by law/in court proceedings.
Key element 6
THE TERM OF THE AGREEMENT – Every NDA should contain a duration reference! One could argue that confidentiality and the obligation thereto should last forever, however it is doubtful this would be practical and/or reasonable. A time limit of 2-5 years is common. But, make sure that the NDA states that even when this term ends, the disclosing party isn’t giving up any other rights that it may have under copyright, patent or other Intellectual Property laws.
Key element 7
LAW AND JURISDICTION – It may look like an open door, but like in any other contract make sure that the applicable law and jurisdiction are clear as this may have a direct influence on the agreed terms. You may also wish to include a Dispute Resolution clause. If you receive an NDA with another jurisdiction than you are familiar with make sure to ask for a legal opinion.
More provisions that make sense
The above are the most important elements you would wish to see in any NDA you sign. There may also be some other bells and whistles to add, depending on the exact project or scope of works. For example:
– If a recipient has access to (valuable) personnel, you may wish to insert a non-sollicitation clause preventing the recipient from hiring your employees for a certain period (12-24 months is reasonable);
– Non-agreement clause: as the NDA solely deals with confidential information, you may see a clause that indicates that the NDA does not constitute an Agreement beyond the scope of the NDA. Don’t make the mistake of thinking that by entering into the NDA, you have the rights to a project!
– Penalty clause: many times, an NDA will contain a penalty clause. It is usually very complex to ascertain what the damages are in case of a breach of confidentiality. Agreeing on a penalty upfront helps. It is important to consider that the estimate of this penalty needs to be reasonable in relation to the damages assumed to derive from the breach of confidentiality. Having a 1 million Euro damage clause makes sense, but only if a breach of confidentiality imposes a huge thread ánd the party receiving the fine is able to pay.
– Return of documents: you may also see clauses dealing with the destruction or return of documents or other confidential information. If so, make sure that the storage of documents and other confidential information is done in such a way that you can adhere to this requirement.