Introduction – Need for Non-Disclosure Agreements
In business, there are numerous instances in which One party want to share confidential information with another party. But the party sharing its confidential information to another party is always worried about its confidential information might be leaked in market by other party because of which the party needs to suffer loss to great extent. Hence, the party sharing its confidential information needs to be protected from the other party in such a way that the other party is bound to respect the confidential information provided to them and not use for their own profits and in order to cause harm to party sharing its confidential information.
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.” It is very important to make NDA or Non-Disclosure Agreement in those situations in which the party who wish to convey something valuable about their business or idea, but still want to ensure that the other party doesn’t steal the information or use it without the approval of the party who is sharing its information.
What are Non-Disclosure Agreements and their uses?
A non-disclosure agreement is a Legally binding written contract between at least two parties that outlines confidential material, knowledge, or information that the parties wish to share with one another for certain purposes, but wish to restrict access to. In simple words, it is a legally binding contract that establishes a confidential relationship between two parties. It is a contract through which the parties agree not to disclose the confidential information specified in that agreement.
An NDA creates a confidential relationship between the parties, in order to protect any type of confidential and information or trade secrets or business related information. The party or parties signing the agreement agree that sensitive information they may obtain will not be made available to any others except the two parties agreeing. These agreements are also known as a Confidential Agreement (CA), a Confidential Disclosure Agreement (CDA), a Secrecy Agreement (SA) and a Proprietary Information Agreement (PIA).
It outlines the knowledge or information which are confidential and denies the access of that information to any third party. Although NDAs are commonly signed between the two companies, individuals or other entities but an employer can also enter into a Non-Disclosure agreement with his employee. NDAs are often entered upon so that it can help in protecting the intellectual property rights like databases, client lists, proprietary information, sensitive business-related information of a person or business. It helps the parties to understand their duties and privileges better by writing down their Non-Disclosure Agreement. In India, a non-disclosure agreement is governed by the Indian Contract Act, 1872.
Typical Elements of a Non-Disclosure Agreement (NDA):
Key elements of Non-Disclosure Agreements are:
- Identification of the parties
- Definition of what is deemed to be confidential
- The scope of the confidentiality obligation by the receiving party
- The exclusions from confidential treatment
- The term of the agreement
Some of the important requirements of a Non-Disclosure Agreement include, but are not limited to:
- Identifying who the parties are that are signing the agreement;
- Defining exactly what is considered confidential information protected by the agreement, and what is not considered confidential (such as publicly-available reports or information shared by someone else);
- Explaining why the information is being shared now, for what purpose;
- Clarifying exactly how the shared information can and can’t be used, such as not being able to be used for any purpose other than that which has been stated (called a “no use” clause);
- Setting the timeframe or duration of the agreement;
Advantages of Non-Disclosure Agreements:
- NDA helps the parties to accommodate or to adapt their obligations well. It helps them to understand when the obligations do not apply and when they would terminate.
- It helps to describe exactly what is a confidential matter and helps in maintaining their secrecy.
- Non-Disclosure Agreement deals with the provisions which deal with penalties imposed on the contracting party who discloses the information which was supposed to be kept confidential. The one who breaches with the NDA has prescribed punishments in the form of compensation. They have to bear the damages caused. This issue can also be brought to the court where they can receive injunctive relief. This would prohibit the recipient from disclosing such information any further so as to prevent a breach of non-disclosure.
- Non-Disclosure Agreement helps in achieving the purpose of their commitments by performing due diligence in safeguarding the confidential information.
- A court cannot give relief for the breach of confidential trade secret or information if the owner of that information has not entered upon Non-Disclosing Agreement. NDA is like protection given to the owners. A court grants relief to the owner if he has made an attempt to safeguard the confidential information.
Limitations of Non-Disclosure Agreements:
Proof and Traceability:
The first major limitation of an NDA is the near impossibility of tracing the leaked information — and then proving it. For example, if person who had shared information to its former developer discloses the idea of the his to his friend who is in town from USA, and that friend goes back and successfully founds a competing startup that stuffs growth of the person who had shared information to its ex-developer, person who had shared information might never find out. Even if person who had shared information do find out, it’s not likely that he/she going to be privy to documentary proof of the disclosure and the fact that the friend knew such was in breach of an NDA. However, in the interests of making a point, let’s say that person who had shared information do have proof that your ex-developer passed information to his friend. Unfortunately, but the person who had shared information to its ex-developer won’t able to do anything.
A breach of an NDA simply gives the right to sue. In other words, no government agency is going to go after anyone for breach of NDA. Hence, as discussed in above example if party who shares information want to go after their ex-developer, he/she have to sue him and likely have to hire a lawyer. During litigation, the ex-developer will have a number of defenses available, such as (for example) the argument that the NDA is invalid/unenforceable, or that the sensitive information was already in the public domain (and thus not leaked through any fault of his). Regardless of how weak his argument may be, the matter will (with few exceptions) have to run its course through the entire trial process, which can take years depending on how backlogged the court system is. Even if party who shared information win, ex-developer could be having right to appeal, dragging it on even further. This could really become difficult in spite of NDA Agreement.
Conclusion – The Way Forward
The main problem of NDA or Non-Disclosure Agreement is the difficulty to ascertain what has been covered in the contract and what has not been covered. This often happens due to lack of good drafting in the contract. Hence, in conclusion, it is very important to add confidentiality clause and include maximum things in your confidentiality clause because your entire agreement will be based upon confidentiality clause which needs to be protected by good and clear drafting. It is a big issue in India as entering into a contract is easy for enforcing is difficult. This is why entering into a contract with a good arbitration clause that ensures low cost of contract enforcement is critical. NDAs are powerful tools, but must be carefully drafted and read. NDA or Non-Disclosure Agreement is a fundamental tool to protect confidential information and this can be achieved only if it is well-drafted.