Non-Disclosure Agreement

Overview of Non-Disclosure Agreement

A legal contract which is used by the parties to safeguard their confidential information or trade secret, etc and limit access to such information is called a Non-Disclosure Agreement. It is broadly classified into 3 types. These are:

• Unilateral
• Bilateral
• Multilateral

Unilateral Non-Disclosure Agreement

In this type of agreement, only one party to the agreement is prohibited from using confidential information. This type of agreement is mostly given to the employees in an organization. The employee has to sign a non-disclosure agreement with a clause restricting him/her from leaking or disclosing the company’s confidential information to other people.

Confidential information is one which will cause harm to the company if disclosed to the general public or competitors. This is the most common and frequently used non-disclosure agreement. It is frequently used by organizations to protect their secret information generated with the help of employees.

Bilateral Non-Disclosure Agreement

A bilateral NDA is also called a Mutual NDA. Under this type of mutual agreement, both parties to the contract are restricted from using the information or material provided to them. This type of agreement is usually preferred by business entities forming joint ventures that involve sharing of confidential information and propriety details. These are helpful for the parties in an agreement for easy settlement of disputes occurring between them.

Multilateral NDA

The above two mentioned agreements usually involve two parties, but in the Multilateral NDA, there are more than two parties. Under this type of agreement, one party discloses confidential information with the other parties to the agreement and expects that they won’t disclose the confidential information further to any other party who is not a party to the contract.

Where NDA’s are required?

There are certain situations where parties need to form Non-disclosure agreements. These are as follows:

Presenting an invention or business idea to a prospective partner, investor, or distributor

Businessmen or an inventor who usually have creative business ideas or work models try to contact potential business partners, investors and distributors to work on the creative idea and earn money. It is very possible that such a potential partner, investor or distributor might try to steal the idea and share the same with other existing businesses for their growth and expansion.

Thus, such a businessman or an inventor should enter into a non-disclosure agreement with such potential parties before presenting their ideas in order to avoid such loss by stealing ideas. If such information is stolen and leaked out it might create damage to a large extent to the businessmen who has spent hundreds of hours working on such a business model or unique idea.

Sharing financial, marketing, and other useful information with a potential buyer of one’s business

Whenever a businessman tries to sell his/her business to other prospective businesses, a lot of confidential information related to finance and marketing, etc is shared with such potential businessmen. Thus, in order to protect the confidential details of one’s business, the seller can enter into an NDA with the buyer.

When a person is using services from other companies or individuals and when an employee is using confidential information

When a company or a person receives services from another company who have access to confidential information of such company or person while providing services, or when a company permits its employees to have access to confidential information during their course of the job, it is important for such organizations to form non-disclosure agreements to protect their trade-related secrets.

NDA agreements used in India

In India, business organizations and individuals are constantly using non-disclosure agreements while entering into business combinations such as mergers, acquisitions, takeovers, etc. This sector is governed by established laws in India. The NDA is governed by provisions of the Indian Contract Act of 1872. The use of such agreements has increased as India is becoming a hub for various commercial services and outsourcing centres.

To maintain its legality and enforceability, the law has mandated the payment of stamp duty and registration of a non-disclosure agreement as per the provisions stated under the Registration Act of 1908.

How to draft an NDA?

There is no specific format for an NDA. It is a common Document when a business enters into combinations such as a merger, acquisitions, takeovers, etc. Every NDA is drafted after considering the specific requirements of the business detail. Therefore, while drafting an NDA, the draftsman needs to keep certain pointers in mind. These pointers are as follows:

Identification of the parties

The very first step is to identify the names and designations of parties. The names of parties to an agreement are mentioned at the beginning of the agreement usually. If the nature of the agreement is unilateral, the party who is disclosing the confidential information is referred to as disclosing party and the party to whom the information is being disclosed can be simply referred to as the recipient. It is also necessary to mention the details of the third-party recipients where they also know the confidential information and are required to keep it safe.

The scope of the confidentiality obligations

The agreement must list down all the liabilities and responsibilities of the parties in the agreement as a separate clause. The agreement should also contain a clause related to the purpose of the use of confidential information and who all are allowed to get access to the information. There should be a clause which should mention all the necessary steps required to be taken by parties to ensure that the information remains confidential.

What information is considered to be confidential?

This part of the agreement contains information as to what information is considered to be confidential. Providing information in oral form is a bit tricky. Information shared in oral form can also be considered confidential as per the wish of disclosing party.

It is the responsibility of the disclosing party to provide a statement in writing after some time so that the party to whom the information is being disclosed shall know that information has to be kept confidential and what should be excluded from the list of confidential information. This section deals with the task of defining what information will be deemed confidential according to the agreement.

Exclusions from Confidentiality Treatment

It is important to consider that if the recipient party to the agreement had prior knowledge about the information or gets to know more information about the same subject matter from any other person, then the restrictions laid upon the recipient party related to disclosure of confidential information become invalid. An agreement should also mention situations where the recipient is allowed to disclose the information legally. Such a party must be allowed to disclose the information in a legal proceeding only if prior information of such disclosure has been provided to the disclosing party prior to such legal proceedings.

Terms of the Agreement

There are certain terms and conditions which should be mutually agreed by both parties and mentioned in the agreement. These conditions are as follows:

• There should be a defined duration mentioned in the agreement and a clause stating what should be done with the secret information once the agreement is over.
• If the recipient party to the agreement had access to the disclosing party’s employees, the disclosing party should add an employee solicitation clause in the agreement prohibiting the recipient party from hiring such employees till a defined time period.
• It is necessary to add a clause for the resolution of disputes between the parties. Both parties must decide on a mutual way of dispute resolution. It is important to mention the jurisdiction of the authority that will solve the disputes between the parties, if any. This will help in protecting the rights of the aggrieved parties that have been violated or where the other party has not lived up to the decided obligations.
• An injunction clause will provide a right to the aggrieved party to seek injunctive relief from the opposite party so that the aggrieved party can stop the opposite party from violating the terms of the agreement.

There should be a clause putting a limitation on the receiving party on sharing confidential information with other people and that such a party has no rights over the secret details of the business.

Precautions while creating and signing a Non-Disclosure Agreement

The parties to a non-disclosure agreement need to be careful while creating and signing the agreement. The below-mentioned are a few things that should be carefully considered:

• One must make sure that the information is correctly stated and the language used in the agreement is not vague and ambiguous.
• The parties to the agreement must read the agreement carefully and sign it after its careful examination. Each party should be explained the clauses of the agreement to avoid any future conflicts.
• The draftsmen should not include unnecessary clauses in the agreement or use any sentences which conflict with each other in the Document itself.
• The agreement must have an expiry date and a clause related to the renewal of the agreement, if necessary.

What happens if any clause from the Non-disclosure Agreement is violated?

If the disclosing party finds out that any of the confidential information mentioned in the clause of the agreement has been leaked out to the general public or a potential competitor, then the disclosing party should take necessary and immediate actions. They should find out evidence related to the person who has leaked the information and how it has been leaked. The disclosing party should also find out the exact reason for which the information has been leaked.

Thus, it is suggested to hire a lawyer as soon as possible to take legal action against the person who has leaked the information and for the protection of the confidential information. We, at Corpbiz, can help in fighting cases against such a person who has violated the clauses stated in the agreement.

With the help of clauses related to the punishment of the person who has leaked the information, disclosing parties consider entering into NDA to the protection of their trade secrets and confidential information.