Dan Dowen, Commercial Contracts Senior Associate at Berry Smith, considers the importance, key terms and drawbacks of non disclosure agreements for businesses looking to disclose confidential information for commercial purposes.
To disclose or not to disclose, that is the question. Not quite Shakespeare but a useful soliloquy for businesses considering exchanging confidential information. The answer to that rhetorical question will largely be determined by the existence or otherwise of an enforceable non disclosure agreement, or NDA. So what is an NDA?
What’s an NDA?
NDA’s have been used in a variety of circumstances but have traditionally protected trade secrets and commercially sensitive information in commercial transactions. It is a legal contract governing the release of confidential information between parties. An NDA will identify and define the confidential information being protected by its terms and place the recipient under a contractual obligation of confidence, subject to certain caveats and with sanctions imposed for any breach. A commercial NDA also seeks to ensure the recipient’s use of the confidential information is limited to a defined and/or permitted purpose.
When is an NDA necessary?
NDA’s can be suitable whenever a business is considering disclosing confidential, sensitive information, which is often necessary for its growth and development. You may be a speaking to a prospective business partner or supplier and need to share confidential information with them, such as client lists, data or intellectual property. You may be looking to sell your business and as part of the due diligence process, will be disclosing key business information including details of key customer and supplier contracts. You may be looking to develop or manufacture a product through collaborating with another business, necessitating the exchange of technical data or know how. There are a whole host of situations in which an NDA can be beneficial.
Key terms to be aware of:
- Definition of confidential information
The definition of confidential information needs to be sufficiently broad to cover all the information intended to be protected by the disclosing party. However, simply describing the information as confidential will not furnish it with the necessary quality of confidence required for protection under the laws of England & Wales. Therefore, care needs to be taken to ensure the definition is not drawn so widely as to be unenforceable in the English and Welsh courts.
- Permitted Purpose
The disclosing party must carefully stipulate the permitted purpose for which the confidential information can be used, particularly when disclosing to potential competitors. The purpose must be drafted carefully to guard against the risk of unintended or undesirable use of the confidential information by the recipient.
To be an enforceable contract in England & Wales, an NDA requires consideration. That is, something of value given to the party in exchange for contractual promises. In most NDA’s, the consideration is obvious. For example in a mutual NDA, the consideration will be both parties exchanging their confidential information. However, if there is any doubt as to the consideration in any particular scenario, it is sensible to execute the NDA as a deed, rather than a contract, which is generally enforceable without any consideration.
An indemnity is an advantageous clause in an NDA for the discloser of confidential information. It is a promise by the disclosing party to reimburse the discloser for losses arising from the misuse or unauthorised disclosure of confidential information. However, it is often hotly contested by the recipient on the basis the disclosing party already has remedies available via a breach of contract claim in the event of an unauthorised disclosure. If obtained, the indemnity can give rise to a claim for a debt, rather than damages, meaning the ordinary contractual rules of loss will not apply to the claim, a significant advantage for the disclosing party.
- Ongoing obligations
Most NDA’s will have a set duration identified within however, following its expiry it is likely that the parties will want to ensure that the information disclosed remains confidential and as such it is often appropriate for the obligations of confidence to survive the expiry or termination of the NDA. This is a key point to be aware of when negotiating and drafting an NDA and the appropriate length NDA and ongoing obligations will be client and sector specific, necessitating quality commercial legal advice from the outset.
- Return of Confidential information
A clause requiring the return or even destruction of confidential information at the end of the term or on request of the discloser is also common. This type of clause provides an extra level of protection for the discloser but can be resisted by a recipient on the basis it imposes a significant administrative burden in certain circumstances.
Drawbacks to be aware of:
The discloser of confidential information will do well to remember that an NDA cannot provide an absolute guarantee of protection for their confidential information. NDA’s have limitations.
If a breach of the NDA does occur it may already be too late or be prohibitively expensive for the disclosing party to obtain a meaningful remedy. For example, a disclosing party that seeks an injunction (an order to stop any unauthorised disclosure or use of the information) will find it is of little or no use once the confidential information is made public because it can never make the information secret again; the damage is already done.
Damages may also be an inadequate or unquantifiable remedy for the discloser, even if breach of the NDA can be established (which is not always easy). For example, if the value of the information is speculative rather than confirmed at the date of the breach, the disclosing party may fall foul of ordinary contractual principles requiring proof of losses.
Given the drawbacks in terms of remediating a breach of an NDA, it is sensible for the disclosing party to take other additional steps to protect its confidential information, such as disclosing only what is absolutely necessary, providing hard copies only, or limiting the number of individuals who receive the information.
NDA’s are a key tool in the arsenal of companies looking to protect their commercially sensitive information, whilst still furthering their business objectives. However, there are some key terms to be aware of which require careful drafting and some important drawbacks to always keep in mind when negotiating and finalising this type of agreement.
The primary benefit of an NDA comes from its nature, it is a written contract and providing it is properly drafted, will set out clearly the parties rights and responsibilities when confidential information is disclosed. This is far better than having no NDA at all where, the exact confidential information disclosed and protected, as well as the parties rights and remedies will be ambiguous. This leaves the discloser of information vulnerable and scrambling to piece together a breach of confidence claim in the event of an unauthorised disclosure of their confidential information.
For further information or assistance, you can contact Dan Dowen at email@example.com or call 02920 345 511 to speak to the commercial team.