What is a Non-Disclosure Agreement?

When a business wants to hire new employees or work with a prospective buyer, they may need to let them in on trade secrets or business strategies.

To protect yourself from potential information breaches, you can ask them to sign a non-disclosure agreement (NDA). This type of contract helps keep your valuable information away from rival companies and the public domain.

There are many confidentiality obligations when it comes to non-disclosure agreements. Despite that, you must know how to draft them properly. If you don't, employers could end up facing data breaches, financial damages, and court attendance.

In this guide, we'll look at what non-disclosure agreements are, why they're useful, and how to draft this type of confidential contract.

What is a non-disclosure agreement (NDA)?

A non-disclosure agreement (NDA) is a legally-binding contract that establishes a confidential relationship between two or more parties. They're sometimes known as a 'confidential disclosure agreement' (CDA).

NDAs are often used between two businesses, but they can be used for individual people. The employee (or parties) will sign an agreement stating sensitive information or trade secrets cannot be shared with any other party.

Non-disclosure agreements are commonly used when a business enters into negotiations with another business. This legal contract helps them decide whether it's best to engage in a working relationship with them.

Why are non-disclosure agreements used?

Non-disclosure agreements are used for a variety of reasons. As mentioned earlier, they're usually needed when two companies want to start working together - but want to protect their own business interests.

When you're drafting an NDA, you must disclose (i.e., state) the purpose of creating it to the other party (This is known as the 'permitted purpose').

Let's look at reasons for using non-disclosure agreements:

Manage confidential information

Some businesses may have asked a former employee to sign non-disclosure agreements. This might be because they previously had access to confidential information, intellectual property, or trade secrets. The agreements help minimise the risk of legal breaches, especially if the former employee goes to work for a rival company.

Some businesses will also ask resigning employees not to disclose their reasons for leaving their job. They’ll ask employees to sign NDAs to legally enforce this.

Seek potential funding and investors

Non-disclosure agreements are also used when a business seeks funding from potential investors. They'll draft an NDA to prevent other companies from obtaining their trade secrets or business strategies.

However, many investors become disinterested in doing business if they're presented with a confidential NDA. That's because some agreements prevent them from working with other companies until the NDA ends.

Protect trade secrets

Non-disclosure agreements can be used to protect a business's trade secret or intellectual property rights. This includes things like customer lists, manufacturing processes, or even proprietary information.

This type of confidential information gives them a competitive advantage over other companies. If it's leaked, the guilty party could end up paying financial damages.

Other reasons

There are endless reasons why a business will use non-disclosure agreements. This could be to protect information in the following areas:

• Customers: Like; consumer preferences or even personal data, or contact details.
• Financial: Like; information on company revenue, manufacturing costing, or employee payroll.
• Intellectual property: Like; a business's trade secret, patents, or copyrights.
• Operations: Like; information on employees, suppliers, or any internal company data.

What are advantages of non-disclosure agreements?

A non-disclosure agreement helps protect the confidentiality of sensitive information. This can include things like research data, patent designs, negotiation terms, and more.

The agreements provide clarity to employees or parties so they understand that the information cannot be made public knowledge. They'll also know the consequences for what happens if they do disclose information protected by the agreement.

NDAs can be low-cost as they're essentially just a signed piece of paper. That's why these contracts are seen as the most cost-efficient way to manage confidential information. This then allows businesses to build work relationships in a comfortable and risk-free way.

What are disadvantages of non-disclosure agreements?

One of the biggest disadvantages of a non-disclosure agreement is that it can present a sense of mistrust straightaway. When an employee or parties are presented with them, they’ll either agree or refuse to sign it. They're left thinking whether it's really worth forging a business relationship with you.

Some companies may end up hiring legal professionals to ensure they're not signing something that will bring detriment to their own company.

It's also hard to prove if an NDA has been breached. That's because most of them include an overarching confidentiality clause. Meaning, it's difficult to pinpoint whether breaches happened with or without intention. Despite that, legal breaches will still resort to financial penalties.

Are there different types of non-disclosure agreements?

Yes, there are generally two types of non-disclosure agreements: mutual and non-mutual NDAs. Let's look at the two agreements in more detail:

Mutual NDAs

A mutual NDA is probably the most common contract used by companies. This is often referred to as a 'two-way NDA'.

If two businesses want to start working together, they'll usually agree to terms that protect their own assets first. Either company may also need to disclose confidential information about their own operations or capabilities as a potential business partner.

In other cases, mutual NDAs can be used if both parties decide not to disclose anything. This happens often when parties receive sensitive information on a regular basis.

Non-mutual NDAs

A non-mutual NDA is often used when one party has a distinct authority or power over the other. This is often referred to as a 'one-way NDA'.

For example, it's often used when hiring new employees. The employee is the only party asked to sign the NDA and is therefore legally bound by the terms. This is especially common if the employee will have access to trade secrets or intellectual property.

What is confidential information?

Confidential information is any type of sensitive information disclosed by one party (known as the ‘disclosing party’) to any other party (known as the ‘receiving party’).

The information is usually private in nature or considered to be commercially sensitive. Confidential information covered by the NDA tends to relate to the business or factors concerning the disclosing party.

Parties can share confidential information in a number of ways. For example, it can be shared verbally or in writing; by digital forms; or through inspection (of any documents, systems, or websites).

What information isn't considered confidential?

There are numerous types of information that aren't considered confidential. For example:

• If it's already known to parties at the time of such disclosure.
• If it's already known in the public domain.
• If it comes into the possession of the receiving party from a third party. (This third party usually has no legal or contractual obligation to protect trade secrets or sensitive information).
• If it's a legal obligation to disclose information (by the law, courts, or a government regulating body).

How to draft non-disclosure agreements

There isn't one single NDA template that every company must use during negotiations. These agreements should be customised to suit your business needs.

However, whether you're sharing a trade secret or drafting employee NDAs, there are six criteria they must include. Let's take a look how to draft non-disclosure agreements:

Participants to the agreement

The first criteria for an NDA is outlining who the participants are. They must outline who is involved in the agreement. This includes the disclosing party and the receiving party. Participants can include an employee, all employees within a company, or potential business partners.

Usually, participants are specific parties, but you should also consider any legal or employee representatives. You may not be doing direct business with them, but it might be worth thinking about whether they should sign NDAs.

Definition of confidential information

The second criteria for an NDA is defining what confidential information is being shared. The disclosing party must highlight what information within the agreement must be protected.

It can be certain sections or you could set a confidentiality clause broadly across the entire contract. For example, a company might state all information disclosed within a new marketing project must be kept confidential.

Exclusions in confidentiality agreements

The third criteria for an NDA is highlighting any exclusions within confidentiality agreements. You need to know whether the information can be kept confidential.

For example, a law or governing body may require parties to share the information during court, etc. It's best to figure all this out before you draft and ask the receiving party to sign NDAs.

Proper use of information

The fourth criteria for an NDA is using information in a proper manner. It's best to highlight this in the agreement. For example, disclosing confidential information for certain operational processes. (This is usually outlined through a written agreement).

However, the line is drawn when parties decide to share sensitive information with a competitor. Or replicate intellectual property for personal financial benefit.

Set an expiration date

The fifth criteria for an NDA is setting an expiration date for the agreement. Expiration dates are usually added and will vary depending on the subject matter.

In sectors like research and development (R&D), it's common for proprietary information to be shared over a certain time period as it loses its value or uniqueness over time.

Other miscellaneous terms

The sixth criteria for an NDA is outlining any other miscellaneous terms for the contract. Every company will have its own needs and requirements for using NDAs. And different legislation or governing bodies may influence the terms of your agreement, too.

So, it's best to acknowledge these miscellaneous terms within the agreement. For example, which parties will pay legal fees in the event of a dispute.

What happens if you breach NDAs?

There are many consequences for breaching an NDA. This includes remedies or legal action that's readily available for such contract breaches. For example, a business raises a claim for the misuse of confidential information or trade secrets. If it's proven, the court may award a percentage of financial awards to them.

The losing party could also face an injunction (ie, a court order) due to an exclusive jurisdiction. In these situations, it's best to seek legal advice to avoid suffering from further business detriment.

Is a confidentiality agreement the same as an NDA?

Although they're often mixed up, a confidentiality agreement isn't the same as an NDA.

The biggest difference is that NDAs are more suitable when only one party is sharing confidential information. Confidentiality agreements are typically used when multiple parties pledge to keep the information private between them private.

Is a settlement agreement the same as an NDA?

No, again these two terms are often used interchangeably but they aren't the same.

A settlement agreement is commonly used to resolve a workplace dispute or claim. Here, the contract will usually contain a confidentiality agreement or clause. This confidentiality agreement or clause won't always cover the six criteria needed for NDAs.

What is a disclosure agreement?

A disclosure agreement is the exact opposite of a non-disclosure agreement. It's a legally-binding contract that allows or forces you to share information with other parties.

For example, a GP may need a patient to sign a disclosure agreement so that their medical records can be shared with their health insurer. By signing the agreement, the GP can share personal or sensitive information with another party without worrying about breaching confidentiality obligations.

Get expert advice on non-disclosure agreements with Peninsula

There are many advantages to using non-disclosure agreements. They're low-cost, easy to draft, and help protect confidential information or intellectual property rights.

Despite that, you must know how to draft them in the right method. If you don't. you could end up facing data breaches, financial damages, and court attendance.

Peninsula offers expert advice on non-disclosure agreements. Our teams offer 24/7 HR advice which is available 365 days a year. We take care of everything when you work with our HR employment team.

Want more free and confidential advice? Contact us on 0800 028 2420 and book a free consultation with an HR consultant today.