Confidentiality Agreements

What is a confidentiality agreement / NDA?

A non-disclosure agreement (NDA), also known as a confidentiality agreement, is a legal contract between two companies (or more) which outlines the confidential material or sensitive information that the parties wish to share with one another for specific purposes. The purpose of the confidentiality agreement is to protect information disclosed such that the disclosing party’s proprietary information will not be shared more widely or publicly than they intended. If the party recipient of confidential information breaches the terms of the agreement, the disclosing party can take legal action against them.

Confidentiality agreements can be one-way or mutual. A one-way confidentiality agreement (or one way NDA) is usually used if only one party is disclosing information and a mutual confidentiality agreement (or mutual NDA) is used if both parties are disclosing information.

When should businesses use a confidentiality agreement or non-disclosure agreement?

In the course of business, it may become necessary to share confidential information or ideas with another party, such as a potential investor or manufacturer.

Businesses will therefore want to ensure that such material is shared in confidence through use of an NDA. Without an NDA, there is a risk that others may use the ideas or material owned by a company without its permission.

They can be particularly important for a company which needs to protect its trade secrets. Commonly food and drink companies guard their trade secrets closely, and only disclose recipes etc. to a handful of people – and that disclosure will be backed up by a strict confidentiality agreement. They are also very useful to any company which owns valuable intellectual property which they need to protect under a legal agreement before sharing it with the other party.

Confidentiality agreements are not just for tangible intellectual property rights or trade secrets, they can also be used to protect other commercially sensitive information – such as pricing or other financial information, customer lists, valuable ideas and so on.

Non-disclosure agreements are commonly used in sectors which create a lot of intellectual property rights, such as the IT sector or the manufacturing sector.

What if a company is asked to sign an NDA?

Businesses may be asked by other parties, such as their customers or a supplier , to enter into a non-disclosure agreement before they disclose information to them.

In such circumstances, businesses should check carefully the terms of any non-disclosure agreements which they are asked to sign. Businesses should seek professional advice if they are unsure about the obligations being placed on them.

It is important that a NDA does not unfairly restrict the activities of a business or place onerous burdens on a business that, in practice, they will not be able to comply with.

What should the NDA cover?

A confidentiality agreement typically follows a similar format. It should always be a written agreement and will usually include the following:

1. All parties involved in the project or exchange of information should be included. Typically confidentiality agreements are entered into between two parties, however if the project involved multiple parties (such as a joint venture) then all parties involved should be included to avoid any loopholes in protection.
2. A definition of what is deemed “confidential information” for the purpose of the agreement. This might be cover information recorded in a particular format or only information marked ‘confidential’. However it might be widely drafted and cover all information disclosed by one party to the receiving party. Common examples of information protected by an NDA include intellectual property rights, customer lists, financial information, know how, business plans, technical processes, computer programs.
3. A definition of the “purpose” for which the confidential information is being shared – and therefore a limitation that the receiving party may only use the information as is required to further that purpose.
4. A list of what is deemed “permissible disclosure”. Whilst the purpose of the confidentiality agreement is to limit wider disclosure of sensitive information, a receiving party will need to have the ability to disclose information in order to further the purpose. For example, a company will need to be able to disclose the confidential information to any employee working on the project, and may need to disclose it to suppliers or other relevant third parties. Usually there is also provision permitting disclosure by the receiving party if they are ordered to do so by a court order.
5. In exchange for the ability to share information with their employees, the receiving party will usually have to expressly confirm that they will remain liability for any breach of the confidentiality agreement by an employee, and further confirm that each employee will comply with the terms of the confidentiality agreement. Typically a company will have provisions in their employment contracts under which the employee agrees to keep client and company information confidential.
6. As important as it is to have a clear agreement on what is considered “confidential”, it is also important to have clarity on what is not confidential information. For example, anything already in the public domain/public knowledge is not typically covered by the confidentiality agreement.
7. The governing law and jurisdiction relating to the agreement (and any dispute arising from it) should be clarified. Ideally the governing law will be that of England and Wales, and the courts of England and Wales will have exclusive jurisdiction.

It is good practice to restrict the use of ideas and information to a certain permitted purpose. The purpose should be specified in the NDA and drafted as narrowly as possible to avoid future disputes.

The receiving party may need to share the confidential information with others, for instance, employees or professional advisors. It is therefore important that the NDA deals with this point and ensures that any such disclosures are made in confidence.

How long should a confidentiality agreement last?

Every confidentiality agreement should specify how long the duty of confidentiality will last. It common for confidential obligations to survive termination of the NDA. Therefore, a confidentiality agreement will usually contain clauses specifying the duration of the agreement itself (i.e. over what period the the disclosing party (or parties) expect to share information. This is commonly a period of one to five years. It will then have a separate period

On termination of the NDA, the disclosing party will also want to ensure that there is an obligation on the recipient of the confidential information to return copies and records of the disclosed information.

If you need any advice on confidentiality agreements and NDA’s please contact a member of our corporate and commercial law team in confidence here or on 02920 829 100 for a free initial call to see how they can help.