What is a confidentiality agreement, when and how to use it
About this type of agreement
Confidentiality agreements are also known as non-disclosure agreements, or NDAs. We use the names interchangeably.
NDA tends to be used more commonly when buying or selling a business or another asset such as a property, reflecting the parties intention not to disclose details of the terms of the sale or purchase.
However, these type of agreements can be used for many purposes.
When to use one
When you need to share sensitive information with someone, but don't want the information to be spread or used beyond your control, you can use a confidentiality agreement to agree the terms under which they can disclose it.
The agreement specifies what information you wish to protect and the extent (if any) to which the recipient of the information can share or use it. If the agreement is broken, or if there is a threat of breach, legal action can be taken.
Of course, nothing can prevent some person from stealing your secrets or passing them on. A legal agreement that he should not do so merely gives you a right to claim in court if he breaks that agreement.
Scope of use
That leaves you with a confidentiality agreement to protect anything else.
Despite not needing an agreement to protect registered intellectual property, a confidentiality agreement can usefully do so. The reason is simply that the less the other party can disclose, the fewer people will ultimately know about it, whether it is registered (and in the public domain already) or not.
Types of agreement
There are two broad types of agreement. Both share common terms.
A unilateral or one-way agreement is designed to protect information given by one party to another.
If information is shared in more than one direction then a reciprocal or mutual agreement is used. Note that a mutual confidentiality agreement does not necessarily have to cover the same information both ways: for example, one party may be sharing financial information and the other may be sharing product related information.
Most commonly, a party offers the same level of confidentiality as it seeks. That way, there can never be a valid objection to providing the information. Of course that is quite different from saying that both sides will actually disclose the same information, or the same amount of it.
When to use a confidentiality agreement
When you run a business, every aspect of the way you manage it could be of some use to someone else. You can protect absolutely everything, so far as the law allows. So a confidentiality agreement should be drawn widely so as to catch “everything” rather than specify a narrow selection of specific categories.
There are many situations in which a confidentiality agreement is used to protect sensitive information. Remember to avoid sharing sensitive information until the other person has signed and returned to you the agreement drawn or approved by you.
Here are some common situations in which a confidentiality agreement could be used.
By an entrepreneur, before sharing valuable ideas with potential investors, manufacturers, licensees or marketing companies.
When inducting new employees who will be in receipt of information which could potentially be used to damage the business.
By companies that need to share valuable information with contractors or service providers. Valuable information could be trade secrets, manufacturing details, invoice information or customer details.
During negotiations for the sale or merging of businesses. Valuable information will need to be shared in order to assess the businesses, but this information will need to be protected if the deal doesn't go ahead.
By a person who wants to share creative work without it being copied or distributed beyond their control.
What are the limitations of a confidentiality agreement?
Of course, an agreement is binding only on the person who signs it (or the organisation he represents). So the signature of a company director would not automatically be binding on a company associated with his, or an expert he has introduced to the meeting.
Neither can the agreement guard against accidental or unintentional disclosure of information.
One of the limitations of a confidentiality agreement is that it is a compromise between the discloser's desire to secure his information and the recipient's wish to be free from legal repercussions.
The discloser will want the agreement to be as comprehensive as possible in order to cover every potential way that information could be shared beyond his control. On the other hand, the recipient will want to be able to use the information as he needs, without risk of a writ.
Many venture capitalists prospecting for entrepreneurial ideas will be reluctant to sign a confidentiality agreement. Here the entrepreneur has a choice between trusting the potential investor and risking his idea, or sharing minimal information - a real teaser.
General guidelines to help you guard against risks which a confidentiality agreement cannot
Think about whether the provisions of the agreement are able to remedy or compensate for a breach by the recipient. For example, it's very difficult to put a monetary value on an entrepreneurial idea, so suing for damages could be difficult. A more appropriate action would be for the entrepreneur to seek a court injunction which prevents the recipient from proceeding to use the information. However if the information has become public knowledge in the meantime its business potential may have been lost.
Carry out diligence checks on the recipient of your information: is he respected and trusted in the marketplace?
Balance the amount of information you share with what is covered in the agreement. Produce a "teaser" to get the other party's interest. This could pave the way to a more definitive investment or licensing agreement.
It's clear to see that the contents of the agreement need to be carefully considered to ensure he cover all possible eventualities. An agreement needs to be considered from both the perspective of the discloser of information and of the recipient.
Breach of an agreement
This depends on the content of the agreement, which should unambiguously define:
the parties bound by the agreement;
the information which is protected under the agreement;
the restrictions on use and disclosure of the confidential information;
exceptions to the restrictions.
Clearly, an agreement is breached if a party bound does not meet his obligations under its terms - for example, if confidential information is used in a way that is restricted under the agreement.
Before you sign an agreement you should make sure that you are fully aware of your obligations. If you are thinking of doing something that may breach such an agreement you should carefully check the contract and evaluate the legal consequences.
What are the consequences of breaking the agreement?
The agreement may set down provisions and remedies to be followed in the event of a breach. There could be an agreed monetary value to be paid in damages to the wronged party. However in some cases it can be very difficult to value the ownership and privacy of confidential information.
How can you value an innovative idea which has no current market equivalent? Could you estimate the on-going business that someone might have received from a customer whom you have solicited away?
Do not make the mistake of thinking that breaching your particular agreement is fairly inconsequential - the courts may decide otherwise. Even if there is no financial loss to the other party, he may be damages awarded on the "Wrotham Park" basis. In that case, the amount awarded was the value that the wronged party might have successfully bargained for in return for accepting the breach.
A similar case was Vercoe and Others -v- Rutland Fund Management Ltd (2010). Vercoe had shared information about a potential acquisition target company with Rutland under a confidentiality agreement. Rutland later breached the contract by acquiring the target and thereby achieved a considerable profit. Vercoe argued that they were entitled to the resultant profits, rather than (a smaller sum) in damages. They were awarded damages based on the value for which they would have allowed Rutland to exit the confidentiality agreement.
Which type of document to choose
Our confidentiality agreement templates can all be found here. These documents are about keeping information private, so the industry of the business is not relevant to your choice.
We have drawn just four templates to cover virtually all situations.
Confidentiality agreement (single party)
Examples of use might be: a proposed franchise; a business acquisition; the appointment of an agent or distributor; demonstration of a plans, ideas or a prototype.
Mutual confidentiality agreement
This document enables parties to explore the possibilities for a deal before signing an agreement that covers the terms.
Being a mutual agreement, both sides agree to the same terms of disclosure, but not necessarily the disclosure of the same information.
Using this document is a good way of protecting your secrets from being used by the other side if the deal doesn't go ahead.
Examples of use might be: sub-contract manufacture; business acquisition; joint product development.
Confidentiality agreement: supplier, contractor or consultant
Use this document where a supplier may find out sensitive information in the course of providing goods or services.
Learning the information may be necessary for the task, or you may just be concerned that private information might be disclosed inadvertently.
Using this document is also an excellent way to remind suppliers of their responsibilities to maintain client confidentiality.
Confidentiality agreement: protect created work
This document should be used by a creator of a piece of work (whether a work of art, a book, film, idea, software code or other intellectual property) to prevent another party from using ideas within the work without the creator's permission.
It will allow the creator to explore development, manufacture, use or sale of the piece of work together with the other party.
Please note that the information provided on this page:
- Does not provide a complete or authoritative statement of the law;
- Does not constitute legal advice by Net Lawman;
- Does not create a contractual relationship;
- Does not form part of any other advice, whether paid or free.
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