The Non-Disclosure Agreement (NDA), also known as a confidentiality agreement, binds two parties under a confidential oath. The parties who sign the agreement consent that some information under certain circumstances will not be accessible to anyone apart from the two parties involved. Some examples of non-disclosure agreements are a doctor-patient privilege, attorney-client relationship, bank-client privilege etc.
This agreement is standard in business negotiations, and it’s a mutual agreement as both parties agree to the same. Employers often use these agreements to protect their private information from outsiders. The information material could be sensitive, material, commercial-like trade secrets etc., and the clause allows you to draft any info vital to the trade.
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Purpose of NDA
- The NDA serves a purpose for several reasons in a business.
- The NDA is drafted when two parties want to start a business together but at the same time protect their rights and interests as well.
- The NDA clause forbids either party from revealing anybody’s information about the other party.
- This clause is valid for only legal contracts and not for businesses whose end goal is for the company to enter into illegal activity.
- The party which violates this contract will face severe legal consequences where the other party can sue for any amount of damages.
For example, this clause is usually drawn during an employee’s onboarding process, where they sign a form that forbids them from disclosing company information. Even when startups pitch their company to potential investors who could back out at the last minute, they are asked to sign an NDA not to disclose the company’s idea.
Sometimes when employees or sportspersons in any field complain about harassment or play the role of a whistleblower, they are compensated and made to sign an NDA where they cannot ever disclose the information.
Types of NDA
1. Unilateral NDA
This is a one-way disclosure agreement where only one party discloses confidential information to the other party and binds them under the non-disclosure agreement. This information could be anything about a secret product release, marketing strategy or trade secrets, and this is an agreement to disclose information without compensating them.
2. Mutual NDA
This is a two-way agreement, where both the parties disclose secret information and sign this agreement to protect the information from further disclosure. Sometimes, the parties could agree on a mutual NDA, but only one party informs the data; the other party is compensated to keep it confidential.
3. Multilateral NDA
This involves multiple parties as three or more parties draft this agreement to protect each other’s confidential information from further disclosure. This agreement can be drawn between the first two parties, first and third, then second and third parties, so they each have different conditions for different parties.
Requirements of Non-Disclosure Agreement
People can draft a non-disclosure agreement for any general information protection. These agreements can be customised to any degree and sometimes can add clauses to protect the party that receives the information without their involvement. However, below are some key elements to be added to every NDA.
- Names of the Parties involved
- Definition of what is confidential in the agreement (financial information, sales strategy, business tactics etc.)
- Duration of disclosure
- Exclusions from confidentiality (If the receiving party had prior knowledge of the data)
- Periods of agreement and disclosure
- Miscellaneous terms
- Signatures of both parties
The terms of this agreement have always been a debacle, as some attorneys argue that the information should be discreet forever. Still, it can get expensive as any notification after some time can become useless. The receiving party cannot reveal any data even on the other party members’ death if the clause does not state it.
Pros and Cons of NDA
Non Disclosure agreements can be tricky to draft as a relationship starts on a step of mistrust. However, this is the most cost-effective way to protect a trade secret without spending millions on compensating each party member. Therefore, make sure the clause states the terms and conditions clearly to maintain transparency.
| Pros | Cons |
Private Information protection provided by law Personal data security against competitors. Low Cost to draft and process the document. Legal consequences upon disclosure of information. | Business relationship starts on a note of distrust Risk of the time duration of NDA. Employees distrust the employer due to signing of the document. No personal credit given to the original idea creator. |
What Happens If You Break an NDA?
The agreement also outlines the consequences for breaking the agreement upon drafting the clause. It is not a crime to break the contract, but considered a violation of terms, and one can face a monetary fine or return of assets depending on the breach of information. The agreement is not specific to trade secrets but anything from brands to entertainment agencies, where these are marketing tactics to boost sales for the respective companies.
The best solution to draft a Non-Disclosure Agreement would be through an attorney as they have the experience to explain the rules to both the parties and draft an agreement.
The bottom line is that the NDA protects the information from disclosure to the competitors and helps joint ventures in business to function in an open relationship. These are some necessary requirements for a business to protect their information and continue their business relationship on a successful venture.
