Legal Update | Key Components Of A Non-Disclosure Agreement
Co-authored by Somrita Chatterji (Partner) and Avadhoot Potnis (Associate)
A Non-Disclosure Agreement (“NDA”) is a legal document signifying mutual consent of the parties to render certain information exchanged pursuant to a commercial transaction as confidential. An NDA safeguards sensitive information owned by a party, which is being divulged to the counter party in furtherance of an objective.
Depending on the specifics of the underlying transaction which requires exchange of confidential information, NDAs can be structured as unilateral NDA, wherein one party divulges confidential information to the counter party and the confidentiality obligation is only on such counter party, or as a mutual NDA, wherein all the parties to the NDA share confidential information with each other and are equally bound by the confidentiality obligations.
Maintenance of confidentiality with respect to proprietary business information, processes, trade secrets, and technological know-how is critical for businesses. NDAs can be effectively used by businesses to protect their confidential information while undertaking fund raises, seeking professional advice, human resource management, entering into business relationships with customers and vendors, etc.
Given the crucial importance of NDAs in protection of confidential information, the drafting of such an agreement becomes paramount. There are several considerations which must be given due attention to achieve an effective NDA.
The NDA should, in no uncertain terms, identify the confidential information which is sought to be protected. The definition of confidential information should be carefully drafted to include the nature and specifics of the information being disclosed and which is intended to be protected. It may often be relevant to specifically call out that secondary information, such as any product created or services derived from the confidential material in addition to the primary information being disclosed, would also be confidential. Generally, the definition of confidential information will also carve out certain information from its ambit, such as information which was already available in the public domain, information which was independently developed by a party, or information which was disclosed prior to execution of the NDA.
An NDA should also specify the purpose of sharing of information between the parties. This ensures that the confidential information which has been shared under the NDA is not misused for a purpose which was not intended. Along with purpose specification, the NDA should also clearly stipulate the timelines for which the sharing of information will take place.
The operative clause of an NDA is the prohibition on the disclosure of information to any third party. This clause provides that the party who has received the confidential information will not disclose the information to anyone else, and shall ensure safety of the information. In several instances, this obligation can be extended to impose certain baseline security measures to ensure the protection of information in the receiving party’s possession. An NDA must ensure that the receiving party is not able to, directly or indirectly, intentionally or otherwise, divulge or use the confidential information in contravention of the commercial understanding between parties. However, there are some specific instances which need to be carved out from this obligation, such as, disclosure of information pursuant to any court process or applicable law or disclosure to professional advisors or consultants.
Another key provision of an NDA is the provision dealing with return/destruction of information. Once the purpose for which the sharing of information comes to an end, there are a few options which can be employed to ensure the confidentiality of the information. While the obligation to the keep the information confidential should survive in perpetuity, in the spirit of prudence, the divulging party may insist on return of the confidential information, and in the event the same is not possible, destruction of the confidential information in the possession of the receiving party.
An NDA acts a protective shield that safeguards unwarranted divulgation of priced information, proprietary business ideas and methods, and operational concepts. Additionally, in the event of an unnecessary disclosure or unauthorized exchange of confidential information, an NDA acts as a sword, providing legal remedies against information recipients who benefit from its unlawful use. Every business, irrespective of the domain of work, must assess the extent of the confidential and sensitive information, such as proprietary, intellectual, financial, technical information, which is to be exchanged with an external party to effect the transaction. It must also ascertain the extent of protective safeguards it requires the counter party to observe with respect to such confidential information and should ensure that such safeguards are appropriately captured in the NDA it is entering into.
In the end, it is important for businesses to understand the role of NDAs in protecting confidential and proprietary information which often lends companies their competitive advantage and market goodwill. Therefore, protecting confidential information should be a key consideration while undertaking business decisions.