There is no denying the fact that documents are the lifeline for every business in the world, as all fundamental functions like communication, analysis, transactions etc. are heavily dependent on documents. Therefore, in this brand-new series – Know your docs, we will explore all kinds of different documents that exist in the business world.
To kickstart this series, in this guide we will discuss what is a non-disclosure agreement (NDA) and how it protects the intellectual property of an entity from being used without permission. We also highlight some of the benefits and drawbacks of using NDAs.
What is a non-disclosure agreement (NDA)?
In simple terms, a non-disclosure agreement, or NDA for short, is a legal contract (or a part of a contract) that protects confidential information from getting disclosed/leaked, between two parties: one who provides information (the “Discloser”) and another who receives that information (the “Recipient”).
Unlike other business contracts that emphasize more on sales transactions and terms & conditions of specific services, an NDA focuses on maintaining the security of the information shared between the parties.
From a business standpoint, NDAs are essential in establishing and maintaining trust between the parties that sign them. With the help of these agreements that guarantee confidentiality, businesses can cooperate with each other without worrying about their trade secrets and intellectual properties getting exposed to their competitors or the rest of the world.
When only two parties are involved, NDAs can be of two main types:
Unilateral NDA: Where only the Recipient is obligated to maintain the privacy of the information shared by the Discloser. For e.g., when an organization hires a new employee or an external consultant to work on a specific project.
Bilateral NDA: In this case, both parties involved are expected to maintain the confidentiality of each other’s information. For e.g., when two companies reach an agreement for a potential joint venture.
It is important to note that in situations where more than 2 parties are involved, a multilateral NDA is preferred so that all the parties can agree and implement only one agreement for the sharing of any confidential information among them.
What is the purpose of an NDA?
NDAs cover a wide range of information, including trade secrets, technical data, financial information, business plans and proprietary processes. By identifying what information is confidential and what can be shared, NDAs enable parties to collaborate freely while staying within the restrictions imposed by the confidentiality agreement.
NDAs are enforceable in legal courts and by signing an NDA, the recipient party is obligated legally to maintain the confidentiality of sensitive information. If this protected information is leaked, it constitutes a contract violation upon which the responsible party faces consequences like financial penalties, lawsuits, and in worst cases, even criminal charges.
As NDAs offer such a level of protection for a company, even in cases of accidental breaches, it is safe to say that its main purpose is to protect the company and its non-public business information.
When should you use an NDA?
An NDA might be useful in one of the following situations:
- When a company is negotiating the sale of their technology or product, using an NDA ensures that their intellectual property is protected along with all proprietary and financial information. NDA prevents the other party to use sensitive information as leverage in other negotiations.
- Usually when a company hires an employee, NDAs are used to restrict the new hires from sharing confidential company information during their time on the job or once they leave.
- Often when companies present partnership offers to potential partners or apply for investing to interested investors, a lot of sensitive information needs to be shared with the other party. In such cases, an NDA helps keep this information confidential, especially during the negotiation phase.
- When companies undergo mergers and acquisitions, their sensitive information like their financials or how they operate is disclosed to several stakeholders involved in the deal. Thus, an NDA is often used to protect against any possible leaks of such information.
What elements are required for creating an NDA?
Here are the key elements required for creating a fool-proof non-disclosure agreement:
- Parties to the agreement: As the name suggests, in this section, all the entities that are involved in the non-disclosure agreement are identified as either the disclosing party or the recipients. Furthermore, other relevant parties like partners, lawyers, accountants, etc. are also included.
- Definition of confidential information: Under this section, the disclosing party defines what they consider as confidential information and establishes guidelines for how this information is managed.
- Obligations and requirements of the parties: The NDA should clearly state all the requirements and specific behavior expected from the Recipient regarding the handling of confidential information. It is crucial to mention that the information classified as confidential must not be used by the recipient or any third party for any purpose other than those specified.
- Duration period: Ideally, NDAs are only supposed to last for a specific time frame. This term can either be short or long for a specific number of years depending on the length of agreement between the parties. Even if the collaboration between the parties lasts for an indefinite time frame, the NDA must indicate when the sensitive information is no longer protected by it. The time frame of the agreement must be very clear to avoid any misinterpretation in case there is a breach.
- Exclusions to the agreement: Information that is already publicly known, independently developed or obtained by the recipient from a source other than the disclosing party must be included under exceptions to the definition. Special instances where the receiving party needs to share the sensitive information in the normal course of business must be mentioned as well.
- Consequence in case of breach of the agreement: Finally, the NDA must clearly state what will be the consequences in case a party breaches the agreement and confidential information gets leaked. It may include payment for damages, termination of contract or end of an employment agreement, etc.
What are the pros and cons of having an NDA?
Having an NDA is beneficial for a company to protect themselves, their ideas, intellectual properties, and other administrative information. Furthermore, it helps in protecting vital business relationships in an ideal scenario, where all parties respect the agreement, an NDA is an excellent collaboration tool as emphasized earlier. When companies make their employees sign NDAs, it ultimately helps them keep their confidential business information out of their competitor’s grasp as it restricts employees from leaking any sensitive data in exchange for a better paying role. Moreover, as NDAs minimize the chances of data leaks for an organization, it helps businesses avoid negative PR and bad publicity which prevents them from losing clients and revenue.
On the flip side, NDAs are infamous for being overcomplicated which brings a different set of problems with itself. If the terms of the agreement are unclear and difficult to comprehend for the recipient party, misunderstandings are likely to happen. For instance, if a recipient of confidential information accidentally breaches the terms of a confusing NDA without realizing it, it can result in extensive legal costs. Also, NDA can be several pages long based on how much sensitive information the disclosing party wants to protect. This makes the contract creation process very time-consuming and consequently, more expensive. Unless they are using a standardized NDA template, managing multiple NDAs is often a headache for organizations as with each unique contract the tasks of reviewing, negotiating, and signing can be very time-consuming and demanding.
What are the consequences of violating an NDA?
Once all parties agree and sign an NDA, they are contractually obliged to maintain confidentiality or face consequences in case of any violations. Often a breach of the agreement is followed by very serious consequences. The disclosing party has the right to file a lawsuit against the recipient for leaking their sensitive information. If intellectual property is involved in the leak, the sued party can also be charged for breach of fiduciary duty and copyright infringement. The party responsible for the breach may be compelled by the court to pay financial damages for this breach, which then adds up to their associated legal costs. When an employee breaches an NDA with their employer, it usually results in the termination of their employment contract.
Getting started with an NDA…
After learning all about non-disclosure agreements, the next step is to draft one for your business or be prepared in case the need arises. Documill understands the challenges one can face when drafting crucial contracts like an NDA, therefore we offer our document automation and contract collaboration solutions to overcome these hurdles. By taking advantage of features like customizable document workflows, easy-to-use electronic signatures, customizable templates, etc., you can save time as well as reduce costs for the contract creation process.
Just book a demo and learn how you can streamline your contract creation process with our help!