Five Key Elements of an Effective Non-Disclosure Agreement

Non-Disclosure Agreements -NDAs- or Confidentiality Agreements are not uncommon in supply or other commercial relationships. We live in a world where laws vary significantly from country to country and even from one province to another. Yet, millions of business transactions occur across borders every day, relying on contracts and agreements made among the involved parties. Frequently, for these transactions to eventuate, one party needs to disclose confidential information -the discloser- to another -the receiver-, knowing that if the said information were to become public or misused, there could be irreparable damages to the disclosing party’s business competitiveness.

NDAs help companies and individuals formalize the sensitive character of the information shared and document their intentions to safeguard the said information in the interest of their joint business’ prosperity.

Although the best course of action is always to consult a legal counsellor when presented with or preparing any business agreement, and this article does not intend to replace expert legal advice; the following five key elements of an effective NDA will surely help enhance your understanding of these valuable but often intimidating documents.

1- Clear Definitions and Scope: 

Types of Information:  An effective NDA is not general. Beware of NDAs that deem all information shared during the entire business relationship as confidential. Such a statement is too broad and often leads to the receiving party not distinguishing and, as a result, not safeguarding the actual confidential information. Instead, make sure the type of confidential documents that will be shared are identified, such as drawings, specifications, measurements, strategic plans, price lists, production volumes, and the like. It is okay to say that the agreement is not limited to these documents only, but listing the common ones helps the receiver easily identify them. To cover all bases, the NDA should then indicate that when these or any other confidential documents are shared, the word “confidential” or “sensitive” should be visible to reinforce their sensitive character.

Duration and Expected Efforts:  Likewise, the NDA must specify the receiver’s expected efforts to protect the information and the period during which such protection will occur, including, if applicable, the period after the business relationship has ended. Consider that an NDA that demands confidentiality to be maintained indefinitely, through utmost and costly efforts, or throughout excessive periods, may be considered an unreasonable ask and is unlikely to be fulfilled by the receiving party, even if signed.

Trade Secrets:  These are not the same as confidential information; these are secrets, for example, a machine, device, recipe, or method explicitly used to manufacture products. If confidential information is compromised, it can hurt your business; if trade secrets are compromised, it can end your business. If you will share trade secrets, make sure to mention this fact in the NDA clearly, and don’t just group them all as “confidential information.”

2- Accuracy of the NDA information:  

Company names: The incorrect spelling, wrong or incomplete name of the companies entering into the NDA can be reason enough for the agreement’s nullity. When you request an NDA, ensure the name of the company signing is correct, and it is their “legal name.” A “legal name” is the company’s name registered with the government authorities. If a company has different names or if the business transaction will include multiple divisions of the same company, make sure to incorporate all names into the NDA so that all are represented correctly in the agreement.

Legal authority: A potential reason to invalidate an NDA is to have it signed by an individual with no authority to bind the company to the agreement’s terms. Typically, companies have articles or minutes that specify the power given to a partner or employee to sign contracts on their behalf. Likewise, the NDA should include a clause where the partners declare that the individuals representing them in the agreement have sufficient authority to sign and to agree that the NDA will continue to be valid even if employees or partners leave the company or change roles.

Geographical location and jurisdiction:  Laws may vary from country to country and even within a country’s various provinces or states. Always clarify in the NDA to which jurisdiction it applies. For example, if the confidential information includes a patent registered in a given country or state, it may be a good idea to make that same location as the NDA jurisdiction. Another way to look at it is to ask, in the event of a breach, where will the damages occur? Then establish “that” location the jurisdiction where the parties will go to resolve the matter. Remember that although business transactions occur beyond geographical borders, a court ruling from one country may take considerably more effort and time to be validated and enforced in another country. As much as possible, define the proper jurisdiction for your agreement.

3- Timing and Treatment of the confidential information: 

Although this point does not refer to clauses that we write in the agreement, it is equally relevant. When the disclosing party does not demonstrate efforts to care for confidential information, it may lose its sensitive character, and it may not be easy to reinforce it to the receiver, much less to demonstrate it in a court of law.

Timeless introduction of an NDA: When a party discloses confidential information before an NDA’s existence, the receiving party may not be willing to sign an NDA at a later date that includes the already announced information. And even if the receiving party is willing to sign the NDA, the discloser’s behaviour implies that they don’t really take their data’s confidentiality too seriously, so why should the receiver?

Administrative treatment of “confidential information”: The discloser’s administrative procedures should reflect their care for sensitive information. For example, confidential documents should not be accessible to all employees; the word “confidential” should be visible on these documents, they should not be photocopied, and certainly nor emailed without encryption. If these basic measures are not in place at the discloser’s company, the receiving party will eventually notice and hardly make significant efforts to protect the information anymore. Although this sort of conditional behaviour may sound like a children’s game, it could be a relevant argument in court and lead to declaring an NDA invalid.

4- Ownership of the Confidential Information: 

When defining “confidential information” in the NDA, it must refer to data that the disclosing party truly owns.

For example, suppose the receiving party already received the information being deemed confidential through another supplier, service provider, university, or any other partner with no relationship to the disclosing party. In that case, the disclosing party cannot include such information as confidential or proprietary in the NDA. Likewise, suppose the so-called “confidential information” has already become public (but not through disclosure of the receiving party). In that case, it is no longer private, and the receiving party cannot be deemed responsible for continuing efforts to maintain it secret.

It may also occur that disclosing and receiving parties operating in the same industry or field could independently discover similar knowledge. In such a case, the NDA can not include the said knowledge as confidential information belonging to the discloser, as the receiver already knows about it through its research efforts before learning that the disclosing party also knows it.

5. Provisions for exceptional circumstances

A situation may arise where the receiver is required by the law to disclose the sensitive information belonging to the discloser.

Therefore, the NDA should include a clause indicating that, if the relevant authorities make such a request, the receiver will disclose the information without it being a breach of the NDA terms, and whenever possible, will notify the discloser about this situation so that the discloser can take provisions.

We hope you have found these items helpful.

May all your agreements be successful 🙂

By: The Ana Lovera Inc and Sourcing Values Editorial Team. Copyright 2022.

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