NON-DISCLOSURE AGREEMENTS: WHAT, WHEN, & HOW

  NON-DISCLOSURE AGREEMENTS: WHAT, WHEN, & HOW Non-Disclosure Agreements or NDAs are a common legal tool used by various stakeholders ...

 

NON-DISCLOSURE AGREEMENTS: WHAT, WHEN, & HOW

Non-Disclosure Agreements or NDAs are a common legal tool used by various stakeholders in a commercial or business relationship. While some business relationships are considered confidential by default, i.e. in law, many others don’t come with any such obligation or rule of confidentiality. As the nature of business transactions is evolving in nature and commercial profits are increasingly driven by innovation and creative thinking, Non-Disclosure Agreements have become more important than ever. The growing dependence on computer algorithms, out-sourcing of software development, increasing distribution of supply-chain, and product-assembly across the globe have also contributed to the growing importance of NDAs lately. Be it a small warehouse, or a multi-national software solutions company, an NDA is a potent legal tool for every stakeholder.

Therefore, it is very crucial to be aware of the structure and nuances of Non-Disclosure Agreements. This article will help you understand the same.

What is an NDA?

An NDA or a Non-Disclosure Agreement refers to a legally binding Agreement between two or more parties under which they are restricted to share sensitive information with any third-party. This sensitive information is exchanged between the contracting parties confidentially to aid their business relationship and cannot be passed on to any third party (any party outside the contract). The nature and scope of this information is laid-out broadly in the NDA itself. In event of a breach of such NDA, the defaulting party is liable to pay heavy penalties to the other party or parties.

A Non-Disclosure Agreement can be signed to safeguard sensitive (or possibly sensitive information) of various kinds. For instance, NDAs can be signed between:

1.      Between Employers and incoming/out-going employees.

2.      Between Management-level staff or employees usually receiving confidential information to aid their work

3.      NDAs are very commonly signed between work-for-hire employees, independent consultants and contractors

4.      NDAs are also signed between software-developers and Companies recruiting them

5.      NDAs are very commonly signed to reinforce the confidential relationship of business between accountants, research-project managers, etc.

6.      NDAs are signed by scientists and researchers developing new drugs that the funding company aims to patent in the future. The same is true for any Business house that expects to make a profit based on innovation or research and development.

7.      NDAs may even be signed between parties sharing trade secrets, unique data-sets, or sensitive information (any information or facts which may be used to the detriment of any party).

Types of NDAs:

NDAs can be categorized based on the number of parties that are involved, the time period for which the designated sensitive information stays confidential, and various other parameters such as indemnification against disclosure etc.

For convenience, NDAs are divided into the following three types:

1.      Unilateral NDAs: A unilateral NDA is a traditional NDA signed between two parties. The offer or demand to sign an NDA is made by the party disclosing sensitive or confidential information (hence, called the disclosing party). For this reason, they are also termed as 'one-way NDA'.

 

2.      Bilateral NDAs: A bilateral NDA is also called as a mutual NDA or a two-way NDA. When both the parties expect to share information that will be sensitive in nature, they sign a bilateral NDA. Both parties set their terms and define what will be regarded as sensitive/confidential information. Such bilateral NDAs are very commonly seen during transactions in the nature of Mergers and Acquisition. Increasingly, parties have become more inclined to sign Bilateral NDAs so that a level-playing field can be created in the business relationship.

 

3.      Multi-lateral NDAs: Multi-lateral NDAs are signed between three or more parties, binding all signatory parties against disclosure of any information received via each other. Multi-party NDAs are an efficient tool to create a safe passage for sharing information when supply-chain and product-development are scattered across the globe. Multi-party NDAs reduce the unnecessary legal costs of bilateral agreements.

Standard Content of NDAs:

A good and effective Non Disclosure Agreement should contain the following clauses:

1.      Complete identification details of contracting parties.

2.      Clear and unambiguous designation of contracting parties: Disclosing Party and Receiving Party.

3.      Nature of information sought to be protected, i.e. proper designation of information that qualifies as confidential and information that doesn’t qualify as confidential.

4.      The purpose or end towards which the contracting parties have agreed to share information.

5.      No-Disclosure clause, that is, how much of the confidential information can be shared with a third party in order to complete essential targets, how the receiving party can disclose information (such clauses usually start with 'need-to-know basis', 'best-efforts' etc.)

6.      No-Use clause that lays out the limited ways in which the confidential information can be used by the Receiving Party.

7.      Severability clause, that is, saving essential parts of the agreement from being rendered invalid in case the court finds certain parts of the agreement legally invalid.

8.      Time-period of NDA relationship and if the NDA will remain in operation after the conclusion of the business relationship between the parties.

9.      Procedure of obtaining consent in event of the agreement requiring amendments or upgrades.

10.   Immunity Clause, that is possible events when NDA will not be binding. These include circumstances such as court-notice to disclose information, force majeure events such as changes in the law that make certain information public information etc.

11.   Penalties and indemnities payable in event of a breach of NDA.

12.   Date, Place, and signature of Parties as well as witnesses.

Enforceability of NDAs:

Non Disclosure Agreements are legally binding and enforceable in a court-of-law. In India, NDAs must be properly executed, signed, dated, stamped and registered in order to turn them into legally binding and enforceable contracts. The parties may also agree to subject the NDAs to arbitration based dispute-resolution.

There is a misconception that NDAs are not enforceable under the Indian Contracts Act, 1872. While the Indian Contract Act doesn’t invalidate NDAs per se, but including some conditions in the NDA can render then legally invalid. These conditions usually relate to matters connected with public policy. They maybe summarized as follows:

1.      NDAs cannot restrict the passing of information in such a way that interferes with a person’s right to work or ‘restraint of trade’. Thus, out-going employees can be bound to not disclose only certain types of information, usually for a stipulated period of time.

2.      NDAs cannot restrict the passing of information that will harm public policy and morality. This usually includes common knowledge or information that was already public.

3.      NDAs cannot be applied ex-post facto. Thus, any information already known cannot be protected retrospectively.

4.      Any information that can be obtained using alternative sources cannot be protected or indemnified against disclosure using an NDA.

5.      Information protected under NDAs may be solicited through a court-notice or summons.