What To Look For In A Non Disclosure Agreement?

A Non-Disclosure Agreement (NDA) is a critical contract used by businesses, professionals, and organizations to protect confidential information from being disclosed to third parties. Whether you are sharing proprietary information, trade secrets, business strategies, or any other sensitive data, an NDA serves as a legal safeguard, ensuring that the recipient of the information will not use or disclose it improperly.

However, not all NDAs are created equal. When entering into such an agreement, it’s important to carefully consider various clauses and provisions to ensure that the contract is tailored to your specific needs, enforceable, and fair. This article outlines the key components to look for in an NDA, how to recognize problematic provisions, and how to ensure the contract provides the protection you require.

1. Introduction to Non-Disclosure Agreements (NDAs)

An NDA is a legally binding contract designed to protect sensitive or confidential information from being disclosed or used by unauthorized parties. The agreement creates an obligation for the recipient of the information (often referred to as the “receiving party”) to keep that information confidential and not use it for personal gain or in competition with the disclosing party.

NDAs are commonly used in business relationships where one party shares proprietary information, such as intellectual property, business plans, customer data, or formulas, with another party. These agreements can be unilateral, where only one party is disclosing confidential information, or bilateral, where both parties exchange sensitive information.

While an NDA is a useful tool for protecting intellectual property and maintaining business secrecy, a poorly drafted NDA can fail to provide the necessary protection or even become unenforceable. It’s essential to understand the core elements that make an NDA effective and fair.

2. Key Components of an NDA

An NDA typically includes several important clauses that define the terms and conditions of the confidentiality obligation. Below are the critical components you should look for when drafting or reviewing an NDA:

Definition of Confidential Information

The definition of confidential information is arguably the most important section of any NDA. This clause outlines what constitutes confidential information and, equally important, what does not. The definition should be clear, specific, and comprehensive to avoid ambiguity or confusion about what information is covered by the NDA.

What to look for:

Clear Scope: The definition should include all forms of confidential information, such as documents, oral disclosures, business processes, software, or designs, whether shared in written, electronic, or verbal form.

Exclusions: It is also essential to identify what is not considered confidential. Typical exclusions include:

• • Information that is already publicly known or becomes public through no fault of the receiving party.
  • Information that the receiving party already knew before the agreement was signed.
  • Information disclosed to the receiving party by a third party without a confidentiality obligation.

A vague or overly broad definition of confidential information can make the NDA unenforceable or limit its effectiveness in protecting sensitive data.

Duration of the NDA

An NDA must clearly define how long the confidentiality obligations will last. The duration depends on the type of information being protected and the relationship between the parties.

What to look for

Term of Obligation: The NDA should specify how long the receiving party is obligated to keep the information confidential. This can range from a few years to indefinitely, depending on the nature of the confidential information. For example, trade secrets may require indefinite protection, while general business data may only require protection for a few years.

Expiration Date: It is also essential to establish when the NDA itself expires, as well as any specific provisions regarding the return or destruction of confidential information upon termination of the agreement.

An agreement with an undefined or unclear duration can lead to disputes over the length of time the confidentiality obligations remain in effect.

Permitted Disclosures

Even though the NDA imposes confidentiality obligations, there may be circumstances under which the recipient is permitted or required to disclose the confidential information. These provisions should be carefully considered to ensure that the scope of permissible disclosure is reasonable and protects your interests.

What to look for

Exceptions for Legal Compliance: The NDA should include a provision allowing disclosure of confidential information if required by law, regulation, or a court order. However, the agreement should specify that the disclosing party must be notified in advance, so they have an opportunity to seek protective measures, such as a court order limiting the disclosure.

Disclosure to Employees or Contractors: Often, NDAs allow the recipient to share the information with their employees or contractors who need it to perform their duties. However, the NDA should specify that these third parties are also bound by the same confidentiality obligations.

Non-Disclosure of Existence: A common provision in NDAs prevents the parties from disclosing the existence of the NDA itself. This is particularly important when the confidentiality of the relationship is critical to the business.

Obligations of the Receiving Party

This section defines what the receiving party is required to do to protect the confidential information. It is essential that the NDA places reasonable obligations on the receiving party to prevent unauthorized use or disclosure.

What to look for

Duty of Care: The NDA should require the receiving party to exercise reasonable care in safeguarding the confidential information. This is often the same standard of care the receiving party uses to protect their own confidential information.

Prohibition of Unauthorized Use: The receiving party should be prohibited from using the confidential information for any purpose other than the one specified in the agreement. For example, if the information is shared for evaluation of a potential business transaction, it should not be used for personal gain or to engage in competition.

Return or Destruction of Information: Upon termination of the NDA or the completion of the project or transaction, the receiving party should be required to return or destroy any confidential information they have received.

Consequences of Breach

In the event of a breach of the NDA, there must be clear provisions outlining the consequences and remedies available to the disclosing party.

What to look for

Remedies for Breach: The NDA should specify the remedies available in the event of a breach, including the ability to seek damages, injunctive relief (a court order to stop the breach), and attorney’s fees. Some agreements also specify that the breach may result in the termination of the business relationship.

Liquidated Damages: In some cases, the NDA may include a clause specifying liquidated damages, which set a predetermined amount of damages that the breaching party must pay in the event of a violation. This can help avoid lengthy litigation.

Equitable Relief: Given the nature of confidential information, monetary damages may not always be sufficient to remedy a breach. The NDA should permit the disclosing party to seek equitable relief, such as an injunction, to prevent further unauthorized disclosures or use of the confidential information.

Governing Law and Dispute Resolution

Every NDA should specify the legal framework under which the agreement is governed and how disputes will be resolved.

What to look for

Choice of Law: The NDA should specify which state or country’s laws will govern the agreement. This is especially important for businesses operating in multiple jurisdictions, as the legal standards for enforcing NDAs can vary by location.

Dispute Resolution Mechanisms: The agreement should outline the procedures for resolving disputes, whether through mediation, arbitration, or litigation. Many NDAs prefer alternative dispute resolution methods, such as arbitration, to avoid lengthy and expensive court trials.

No License or Ownership Rights

One of the key aspects of an NDA is to protect the ownership and intellectual property rights of the disclosing party. The NDA should clarify that sharing confidential information does not grant the receiving party any ownership or licensing rights to the information.

What to look for

No License Granted: The NDA should clearly state that the disclosure of confidential information does not grant the receiving party any rights to use, exploit, or license the information beyond the specific purpose for which it was disclosed.

Preservation of Ownership: The disclosing party should retain full ownership of the confidential information, including any intellectual property, and the NDA should prohibit the receiving party from making any claim of ownership over the disclosed materials.

Signatures and Execution

Finally, the NDA must be signed by all parties involved to ensure that it is legally binding.

What to look for

Authorized Signatories: The individuals signing the agreement should have the authority to bind the parties they represent (whether they are individuals, companies, or organizations).

Witness or Notary: Depending on the jurisdiction and the nature of the agreement, the NDA may require the signatures of a witness or a notary public to ensure the validity of the contract.

Red Flags to Watch Out For

While NDAs are generally straightforward, some provisions may cause concern or create risks for the disclosing party. Here are a few red flags to watch out for:

Vague or Ambiguous Definitions: If the agreement’s definition of “confidential information” is too vague, it may not effectively protect your interests.

Unreasonable Duration: NDAs that have overly long durations may be deemed unenforceable, particularly if they extend beyond what is necessary to protect the confidentiality of the information.

Unbalanced Obligations: If the NDA places unfair or overly burdensome obligations on one party, it may be challenged in court.

Conclusion

A well-drafted Non-Disclosure Agreement (NDA) is essential for protecting sensitive information and ensuring that both parties understand their rights and obligations. By carefully reviewing key provisions such as the definition of confidential information, the duration of the agreement.