What is an NDA and why might your business consider using them?

Non-disclosure agreements (NDAs) have come into the spotlight quite frequently over the last few years – often in relation to scandals or controversial activity. Contrary to popular understanding, however, NDAs are not all bad and indeed can offer very real benefits. So, why are they important and how can you ensure that they are effective?

In layman’s terms, an NDA is a confidentiality undertaking or agreement which essentially has one purpose: to protect information that is to be provided to another by agreeing how that information can and cannot be used.

When does an NDA make sense and why might your business consider using them?

As a business, you might want to use an NDA in any situation where information is involved that needs to be kept private and where the party providing that information to others wishes to record its disclosure and regulate its treatment. In asking other parties to sign the NDA, this should focus the minds of those involved that the information is confidential and must be treated confidentially.

When should you sign an NDA?

Without a doubt, the best time to put an NDA in place is prior to the disclosure of any confidential information to which it relates. This will mean that the confidential information is protected before it is disclosed to or exchanged with other parties.

What typical examples are there of NDAs being used?

• NDAs are often used in business sale and investment contexts. The prospective seller or business seeking the investment will ask the prospective buyer or investor (and any other parties involved) to sign an NDA before providing confidential information to them for due diligence purposes.
• Where a business is looking to outsource a particular service or operation, it would usually expect the service provider to sign an NDA in relation to confidential information that will need to be provided to it to enable the work to be undertaken.
• In a property context, for example, a prospective tenant under a business lease will expect the landlord to sign an NDA if it needs to disclose confidential information about the business relating to the usage of the property.

NDAs are also often used to protect commercially sensitive information in many other contexts, where commercial partners, customers and/or suppliers are disclosing or receiving confidential information in the course of their business dealings.

How to draft or review an NDA

If you are drafting or reviewing an NDA, the first thing to consider is exactly what information is to be disclosed and how confidential this information is. You should then carefully consider why and how this information is to be disclosed and protected.

This will include careful consideration of how sensitive and important the information is – and what the consequences could be if it is not kept confidential.

If the sensitivity and importance of the information is high, then you should consider taking specialist legal advice in relation to the proposed NDA to ensure that it adequately protects your business.

How to approach signing an NDA

NDAs will usually be somewhat biased in favour of the party drafting the document. As such, if you are the other party involved, you should consider very carefully why certain clauses are included, and what their application could mean. If you are uncomfortable with any of the clauses, you can always ask for them to be removed or changed. An NDA is a commercial agreement and so it is important to use any bargaining power that you may have to maximise your position.

What should an NDA include?

• An NDA will identify the parties that are signing up to the agreement. In the majority of cases there will be two parties, the information provider and the information recipient, but there can be multiple parties in some cases (for example, in relation to a multi-party co-operation agreement or joint venture). NDAs can be unilateral (with one party disclosing information and the other receiving it) or mutual (with both parties disclosing information to and receiving information from the other).
• The NDA will also define in some detail what is meant by ‘confidential information’. This definition is critical to the effectiveness of the agreement. A thorough description of what types of information are to be considered as confidential should be included as well as including examples of specific documents or other information that are covered by the NDA. It should not be too wide in scope (as that would restrict use of information that is not really confidential) nor too narrow (which would mean that some information that is confidential would not be protected).
• The NDA will include a ‘permitted purposes’ clause which spells out exactly what the information recipient is permitted to do with the confidential information disclosed to it.
• There will be a confidentiality obligation provision which sets out the specific obligations of the parties in relation to maintaining the confidentiality of any information disclosed. These obligations should be as specific as possible, so that any breaches can be quickly identified and proved. There will usually be certain exceptions provided for to allow for disclosure of confidential information in certain limited circumstances (for example, where required by law or to employees or advisers who need to know it) and NDAs should always allow for any disclosures that are protected by law that are reportable matters to law enforcement or regulators.
• Within an NDA it is usual to limit the duration of the obligations in line with the “shelf life” of the information, which can vary widely depending on the nature of the information.
• NDAs will often also include a clause that prevents the information recipient from competing with the disclosing party’s business and from poaching their staff or clients. However, such obligations will not always be appropriate or acceptable and in any event will only be enforced to the extent that they lawfully protect legitimate business interests – which will mean that they need to be limited to what is reasonable in respect to both duration and geographical area.
• Other commercial provisions are sometimes also included in NDAs for convenience; for example, a lock-in clause might be included in an NDA relating to a corporate deal where one party needs reassurance that the other is serious about the deal.
• A costs clause setting out who will bear the costs of preparing and agreeing the NDA will usually be included. Normally, each party will bear its own costs in relation to agreeing the NDA.

The best protection is, of course, not to disclose confidential information at all unless it is necessary to do so. However, where disclosure of confidential information is required, you should take all practical measures to ensure that the confidentiality of any information disclosed is adequately protected. This might well include a degree of due diligence in relation to the prospective information recipient and the systems that they have in place to protect confidential information. A carefully considered and well-drafted NDA will also provide important contractual protection where confidential information is to be disclosed as well as remedies where any such information disclosed is not used in the way that it should be.

If you are drafting or have questions on an NDA, please contact Chris Bannister.