This article explains the terms you might find in a confidentiality agreement.
A confidentiality (or non-disclosure) agreement is used before sensitive information is exchanged in order to prohibit the undesirable use or further sharing of that information.
The exact terms of the contract will depend on the parties involved, what information is shared and their reasons for sharing it.
The contents of a good confidentiality agreement are described in more detail in the following paragraphs.
What an agreement should contain
Generally, a confidentiality agreement will:
- identify the parties to be bound by the agreement
- state the context and reasons for the agreement
- define what information is considered confidential
- set out the length of time over which the agreement is to be upheld
- specify the restrictions on the disclosure and use of the information
- define exceptions to the restrictions
- address the security of disclosed information
- prevent solicitation of employees
- specify ownership of information
- include penalties or remedies for breach of contract
Parties to be bound by the agreement
As well as identifying the discloser and receiver of information, the agreement should also ensure that the receiver is responsible for breaches by associates who may be privy to the information, such as co-directors, consultants and accountants. In some cases the discloser may insist on a separate confidentiality agreement for each of them.
It should not be necessary to obtain a signed agreement from a solicitor, or accountant who is a member of a proper professional association.
Context and reasons for the agreement
This will vary depending on the situation.
An example could anything from a company and business purchase to an employer requiring an employee to keep business knowledge confidential during and beyond the term of his employment.
Definition of information to be considered confidential
It is essential that the information to be protected is clearly defined - the rest of the agreement uses this material as its subject.
It will be in the interests of the receiver to make sure that the information defined is not something they possess already, or they will effectively lose control of it.
The agreement cannot apply to information that is in the public domain already, so a definition of public knowledge is also often needed.
Length of time (or term) over which the agreement is to be upheld
For many purposes a long or indefinite term is preferable to ensure that the discloser maintains sole and continuing control of the sensitive information.
For example, an employee may still be bound by a confidentiality agreement after his employment has ended.
Restrictions on the disclosure and use of the information
The discloser will want to prevent the receiver from using the information for his own benefit or allowing it to enter the public domain. He may also want to prohibit the copying or retention of information.
Exceptions to the restrictions
It may be important that confidential information is shared for some purpose, and that this purpose is not restricted by the agreement.
For example if you are disclosing information about a business you own in the hope of selling it, the agreement must permit the potential buyer to use the confidential information to make their assessment of the business.
The receiver will want acknowledgment of certain exceptions as well: for example if an independent party not bound by any agreement discloses the information, or if they develop the same information independently.
Security of disclosed information
While a confidentiality agreement cannot fully protect against accidental or unintentional disclosure, it can specify that the protected information be held in a secure way to prevent this. The discloser may also require any records of the information to be returned or destroyed after a specified time.
Prevention of solicitation of employees
This is not regularly seen in an NDA, but we believe it is important, and a source of litigation, so we give it to you for extra protection in our confidentiality agreement templates. It may be the case that one party will not proceed with a business deal but will attempt to poach employees from another business.
The agreement can help prevent this from happening.
Ownership of information
The document will state which party is the originator of the confidential information and acknowledge any intellectual property rights, copyright or patents.
Penalty clauses and remedies for breach of contract
The discloser may wish to put a value on the confidential information, as a sum they can claim to if the contract is breached.
Some information, such as entrepreneurial ideas, can be very difficult to value. In those cases it may be more appropriate to provide for the remedy of an injunction - a court order to prevent specified action.
For some situations it may also be a good idea to include a confidentiality clause that requires that the agreement itself is kept secret.
Next, you might like to read further about when to put a non-disclosure agreement in place.