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WHAT IS A NON-DISCLOSURE AGREEMENT?

A non-disclosure agreement (NDA) is a legally-binding contract in which one or more parties agree not to disclose confidential information or any proprietary information pertaining to a company or entity. It’s typically used to safeguard trade secrets, specialised processes, client lists or any other information that a business relies on for its survival.

Otherwise known as a confidentiality or trade secret agreement, it covers everything from confidential discussions in meetings and analysis reports to product and design patents, marketing strategy and brand plans, source codes and manufacturing processes. A prime example is the Coca-Cola recipe and KFC flavouring which have been kept a trade secret for over a 100 years.

When is a non-disclosure agreement used?

A non-disclosure agreement is used to limit and/or prevent confidential material, knowledge or information leaking out of an organisation to third-parties who may or may not use that information against the company.

Other examples include doctor-patient confidentiality, attorney-client privilege, priest-penitent privilege and bank-client confidentiality agreements. These are not always written and signed contracts between the two parties but expected based on a profession’s code of ethics.

A non-disclosure agreement is commonly produced and signed before negotiations begin; when two companies, individuals, partnerships or societies are considering doing business together and require confidential information or review confidential processes on which to base their decision.

An employee may be required to sign a NDA that serves as a warning that he/she may not divulge confidential information during the time they’re employed by the company and specifically, if they leave.

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Types of non-disclosure agreements

A non-disclosure agreement is classified as unilateral, bilateral or multilateral.

Unilateral

A unilateral NDA is a one-way agreement where only one party expects the other party to disclose confidential information. For example, an employer (the disclosing party) anticipates an employee (receiving party) will divulge confidential information.

Bilateral

A bilateral NDA is a two-way agreement where both parties are disclosing confidential information, and there’s the possibility that either party will disclose vital information. It’s commonly used in a joint venture or merger.

Multilateral

A multilateral NDA involves three or more parties where at least one party anticipates any one of the other parties will disclose confidential information. This type of NDA groups the different entities together and does away with having to separate unilateral or bilateral NDAs between the different parties. It’s typically used when multiple parties are bidding on a tender such as a major construction project.

What does a non-disclosure agreement cover?

A basic non-disclosure agreement will cover:

Details of the parties

What party, individual or parties are bound by the non-disclosure agreement to keep important information confidential.

Definition of confidential information

This might be brief or a long list of information and/or processes that are regarded as confidential. It generally covers patents, intellectual capacity, financial information, strategic planning, customer and vendor lists, specialised processes and such.

Non-disclosure period

The period of time the information may not be disclosed or shared with a third-party. This generally applies to an employee, partner or contractor that is no longer involved with the company. It’s like a restraint of trade but applies to disclosing information rather than working for a competitor.

Exclusions

What is excluded in the NDA; either because there was prior knowledge or it’s already in the public domain.

Consequences

A description of the action that will be taken if one or more parties breaks the agreement. This includes the law and jurisdiction governing the parties.

Mistakes companies make with non-disclosure agreements

A non-disclosure may be deemed invalid and/or not stand up in a court of law for the following reasons:

  • confidential definition is too broad
  • the wrong receiving party is included in the NDA (includes incorrectly spelling a company or individual’s name)
  • scope is too broad, unreasonable or onerous
  • information is provided by a third-party and not the actual company itself
  • information is already known to the receiving party or is in the public domain
  • the receiving party was collaborated in developing what is deemed confidential and has a right to the intellectual capital
  • the confidential information was disclosed before the NDA was signed
  • signed by a person with no or insufficient authority to make it a legally-binding document

Things you should know about a non-disclosure agreement

A non-disclosure agreement offers no guarantee that your trade secrets will be kept secret. It is a binding legal document but disclosure of confidential information is often hard to prove and a NDA is often hard to enforce.

The courts look at several factors, the main one being “reasonableness”. In other words, whether or not the terms and conditions of the NDA was reasonable and enforceable. Other factors include:

  • whether it was in the best interests of the receiving party to disclose the information
  • whether it was in the best interests of the public that the information was disclosed
  • whether the information was already know to the receiving party before the NDA was signed and/or was already in the public domain
  • whether the disclosing period was reasonable
  • whether the burden of compliance on the receiving party was fair
  • whether the information was actually confidential, unique or extraordinary
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