A non-disclosure agreement (NDA) is a legal contract between at least two parties who want to keep confidential information that they share with one another and want to restrict access of the same by third parties. It is also known as a confidentiality agreement (CA), confidential disclosure agreement (CDA), proprietary information agreement (PIA), or secrecy agreement (SA). An NDA creates a confidential relation between the parties to protect any type of confidential and proprietary information or trade secrets.
TYPES OF NDA
A non-disclosure agreement (NDA) may be classified as unilateral, bilateral, or multilateral.
A unilateral NDA is also known as a one-way NDA. It involves two parties where one party i.e. the disclosing party anticipates disclosing certain information to the other party i.e. the receiving party and requires that information to be kept protected from further disclosure.
A bilateral NDA is also known as mutual NDA or a two-way NDA. It involves two parties where both parties anticipate disclosing information to one another that each intends to protect from disclosure to third parties. This type of NDA is necessary in case of businesses which are considering some kind of joint venture or merger.
A multilateral NDA involves three or more parties where at least one of the parties anticipates disclosing information to the other parties and requires that information to be protected from further disclosure. This type of NDA eliminates the need for separate unilateral or bilateral NDAs between two parties. For example- a single multiparty NDA entered into by three parties who each intended to disclose information to the other parties could be used in place of three separate bilateral NDAs between the first and second parties, second and third parties, and third and first parties.
A multilateral NDA can be advantageous but due to the complexities involved in negotiations parties may find it difficult to enter into such an NDA.
The non-disclosure agreement requires a party to maintain information in confidence when that information has been directly supplied by the disclosing party. However, it is sometimes easier to get a simple agreement signed by the receiving party which requires them to keep the information safe and secure. Some common issues addressed in an NDA include:
- Outlining the parties to the agreement.
- The definition of what is confidential, i.e. the information to be held confidential.
- The disclosure period.
- The law and jurisdiction governing the parties.
- Types of permissible disclosure.
USE OF NDA IN INDIA
The use of non-disclosure an agreement is on the rise in India and is governed by the Indian Contract Act, 1872. Use of an NDA is crucial in many circumstances, such as to bind employees who are developing patentable technology if the employer intends to apply for a patent. Non-disclosure agreements have become very important in the light of India’s growing outsourcing industry. In India, an NDA must be stamped to be a valid enforceable document.
In business, there are numerous instances in which you may want to share confidential information with another party. But the key to doing so safely is making sure that the other party is bound to respect the confidential information you provide them and not use it to your detriment.
One common way to protect the secrecy of confidential information given to another party is through the use of a Non-Disclosure Agreement, which is sometimes also referred to as a “Confidentiality Agreement” or “NDA.”
In this article, I will explain when it makes sense to have a Non-Disclosure Agreement as well as the key terms that agreement must include.
When Does a Non-Disclosure Agreement Make Sense?
When does it make sense to require another party to sign a Non-Disclosure Agreement? There are probably many instances where it may be appropriate. But the principal situations are those in which you wish to convey something valuable about your business or idea, but still want to ensure that the other side doesn’t steal the information or use it without your approval.
Here are some typical situations where you may want to use a Non-Disclosure Agreement:
- Presenting an invention or business idea to a potential partner, investor, or distributor
- Sharing financial, marketing, and other information with a prospective buyer of your business
- Showing a new product or technology to a prospective buyer or licensee
- Receiving services from a company or individual who may have access to some sensitive information in providing those services
- Allowing employees access to confidential and proprietary information of your business during the course of their job
A non-disclosure agreement (NDA) is a legal contract between you and another party not to disclose information you have shared for a specific purpose.
You can use an NDA to:
- share intellectual property
- share commercial or trading information
- formalise a relationship, eg between an employer and employee
You can tailor these agreements to your requirements. You can choose from several types of non-disclosure agreements.
One-way and two-way NDAs
You can use a one-way NDA when only one business is sharing information and the other agrees to keep it confidential.
You can use a two-way NDA (also called a mutual NDA) when both businesses are sharing confidential information with each other and want to be sure that neither will disclose their trade secrets.
Learn about the different ways to prepare a non-disclosure agreement.
Precedent confidentiality agreement
A precedent confidentiality agreement is used for mergers and acquisitions. If a company wants to buy your business, it will want to look at your books and assets. An NDA can provide an element of protection for your confidential information and trade secrets if the prospective buyer pulls out of the deal.
If you don’t know exactly what information you will need to disclose during a commercial relationship, you can still use an NDA. It is a good idea to classify as confidential any information that you will disclose later so that the NDA still applies.
NDAs for employees
Current and former employees are responsible for most breaches of confidentiality. Employees are under an implied duty not to use trade secrets in a manner that will harm your business, but it is best to get this in writing and to specify to the employee exactly what is confidential.
An NDA should also make provision for when the employee leaves your business. Read more about the employment contract.
When to sign a Non-Disclosure Agreement?
- NDA while entering into a business deal: While entering into a business deal, like hiring a vendor or supplier or consultant, if you want to ensure that the proprietary information you are sharing with those vendors or service providers, does not become public, then entering into an NDA is a great idea. For example, if you are going to work with a logo designer, and have to tell that person the concept of you’re to be launched business, and you don’t want him or her to go and discuss this with your competitors or other business owners, then entering into an NDA will be very useful. In start-ups and some information sensitive companies, it is a brilliant idea to make employees sign NDAs. In fact usually, their employment agreement itself carries an NDA clause which serves the same purpose. Also, there are many other applications. For example, if you are looking for a potential buyer for your company, before disclosing proprietary information, you may enter into NDAs. Dominos and other such businesses that depend on franchising often make it mandatory for the franchise to sign an NDA that they won’t disclose details like menu or how proprietary food is to be made or details of profit or loss.
- NDA while starting a new project: On starting a new project and the need to collaborate with a few people, even when commercials are not explicit, or company or partnership isn’t framed, and there is no IP to protect yet, it may pay off to enter into an NDA.
- Should you sign NDA while talking to investors? Many people used to do this in the past. However, it is an unnecessary practice and is becoming obsolete now. Most investors will refuse to sign such an NDA for early discussions. Only if and when the need arises to look inside the papers like revenue numbers or a particular technology or some sensitive data at an advanced stage of considering the company for investment, a request to sign an NDA first may be made. Justification may be made as to why signing an NDA is important. Same goes with Mergers and Acquisitions. However, there getting an NDA signed might be easier.
- NDA clauses in contracts: It is a practice that an NDA clause is inserted into all and sundry contracts as a part of special precaution. Unless a part demands its removal, it generally stays. It helps both parties on the whole, as business details have to be treated with caution and can’t be leaked to media, etc., without a doubt even when conflict arises in the course of doing business.
- NDA to protect trade secrets: We often advocate signing a trade secret non-disclosure agreement when trade secret requires protection. It is not yet a practice in India but a very useful step. Top executives and employees should be made to sign such agreements. It goes a long way in preventing them from jumping into business with the same information and competing with the former employer.
An NDA should always be put down in writing.
Important clauses of NDA
- Timeframe of the NDA:The period for which NDAs are made to be maintained. The duration of time for which the recipient of the information is expected to hold the secrecy of that information. This period includes the day when NDA comes into effect till the time it expires due to completion of the contract. It is not a good idea to create NDA that prevents one from holding information infinitely especially when such restriction is causing a restriction on starting a business or carrying out some business or employment directly or indirectly. There should be a reasonable limit to Restrictions in NDA
- What is the Confidential Information ought to be protected under the NDA? This part of NDA specifies that which part of the information has to be kept secret or confidential. Usually, such information is detailed in a schedule and attached to notices sent by email. This mechanism may be specified in the agreement.
- Duties and obligation of the parties to NDA:The contract usually clearly states the responsibilities and obligations of the parties. For example, the party may be required to use a particular kind of encrypted mechanism for communication or may be urged to mark any information meant to be covered by the agreement as “confidential”, etc.
- Consequences of breach of an NDA:What would be the consequence of breach of confidentiality? This must be specified in the contract. Heavy financial penalties may not work in an Indian scenario, though it is often added for psychological impact. However, getting an indemnity for all losses suffered due to a breach is usually sufficient.
- Right to seek an injunction in an NDA:It is often specified in such contracts that monetary compensation alone cannot compensate losses arising out of the breach and that the parties are agreeing to this in the contract itself. This is done so that a party apprehending a breach can reach out to a court and get a stay easily. It is a common practice though the efficacy is doubtful.
- Dispute Resolution clause in an NDA: It is important to resolve all disputes arising out of the agreement quickly and cheaply so that cost of enforcing the contract remains low. In India, this is very difficult. We strongly recommend that institutional arbitration is mandated in the agreement for this reason. You can refer your dispute to Access to justice institute, where you can get things resolved for few thousand rupees through online arbitration provided you include this clause in the agreement: “Any dispute,, controversy or claim arising out of or relating to this contract, or the breach, termination or invalidity thereof shall be settled by arbitration in accordance with the Rules of Arbitration of the Access or Justice Institute, and the award made in pursuance thereof shall be binding on the parties. The parties agree that the arbitration proceedings shall be conducted by way of submission of written pleadings, documents and submissions made by the parties without any oral hearing. The parties agree that the written pleadings will be submitted to the arbitrator appointed by the said Institute who will resolve the dispute and differences hereunder by fast track procedure. The arbitrator shall take a decision in a time bound manner after considering only such written arguments. The decision or award so given by the Arbitrator shall be binding on the parties hereto. In case, one of the parties does not take part in the arbitration proceedings and/or obstruct the arbitration proceedings, the Arbitrator shall pass ex parte order which would be enforceable on both the parties.”
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