This guide will run you through the basics of Non-Disclosure Agreements (NDAs), including what they are, what they’re used for, when they cannot be used, and what happens if they are violated.
What is an NDA?
Businesses and individuals often want to share information, but in many cases do not want that information to be disclosed to another third party or the public. Such information is normally termed “confidential”. Confidential information can be designated as such by the parties, or alternatively be considered confidential if it would be objectively reasonable to treat that informational confidentially.
An NDA, or as it is sometimes called a Confidentially Agreement, can help protect a business or individual by placing contractually binding obligations on the party receiving the confidential information. Accordingly, an NDA can be enforced like any other contract. NDAs are often used to protect the commercial interests, information, and reputation of one (or both) parties to the contract.
Benefits of NDAs
The benefits of an NDA are clear. It can (but not always) provide legal protections around the sharing of confidential information. Often, the mere knowledge that a party is subject to an NDA can go a long way to ensuring that information remains confidential – there is an incentive to improve security practices and refrain from careless talk. Likewise, NDAs help to establish trust between parties, as both parties know what to expect from the other in this respect.
This facilitates many aspects of commerce. A party interested in selling its business would not do so if it had to reveal to the public all its business practices. But this is not the only use; NDAs are relevant in research and development, intellectual property, financial information, the security of data, negotiations, and so on.
When might an NDA be used?
As stated, NDAs are often used in commercial transactions to protect trade secrets and commercially sensitive information. They allow the parties to the NDA to share sensitive information without the possibility of this information being given or sold to third parties.
NDAs might also be used to keep an organisation’s information confidential, when an employer needs secure protection for customer or client identities, intellectual property or other sensitive information relating to business. In an employment context, employers rarely require employees to enter into an NDA (it should usually be dealt with in the employees’ contracts) but still might do so. For example, a start-up tech company may require all of their employees to sign an NDA which provides for the protection of trade secrets which might have otherwise got out to the general public. Or, at a later, date, when that start up is contemplating an IPO it may want to get its employees or subcontractors to sign an NDA restricting their ability to share information about that IPO.
Other examples of where an NDA might be used are:
- Developing software.
- Identification of natural resources.
- Discussions between businesses about potential joint ventures.
- Mergers and acquisitions.
Types of information which can be protected with an NDA:
- Customer information: contact information, personal data.
- Financial information: includes specific financial information relating to any customer or any financial information not required to be publicly disclosed.
- IP: including patents, trade secrets, research, advertising.
- Operating information – employee data, supplier information, payroll information, any aspect of internal costs requires to operate the company not required to be publicly disclosed.
A request for an NDA can come from any party, either individual or company, who wishes to protect their confidential information, no matter if it appears insignificant, from their information getting into the wrong hands without their consent.
When can NDAs not be used?
Although NDAs are made to create confidential relationships and security, they cannot be used where this is not appropriate or even illegal. The non-exhaustive list below gives some examples.
- Prevent or deter someone from co-operating with a criminal investigation or reporting misconduct.
- Prevent and disclosure required by law.
- Include clauses which are illegal or unenforceable.
- Take unfair advantage (such as if the other party lacks legal knowledge or capacity).
The Solicitors Regulation Authority in 2018 published a ‘warning notice’ around the use of non-disclosure agreements, reiterating the need for solicitors to be mindful of the above concerns when drafting NDAs. In 2019 the UK government contemplated restricting the use of NDAs in certain contexts; in 2021 a private members’ bill was introduced to Parliament seeking the same, although this has not been sought in the new Parliament.
What kinds of NDA are there?
There are two primary types of NDA. The first is known as a mutual NDA and the second is a non-mutual NDA.
Firstly, a mutual NDA is where both parties agree not to disclose information. An example of a mutual NDA would be where two or more businesses are discussing the possibility of merging together. As part of initial discussions, both companies in a possible transaction may disclose information about their operations to inform the other side of their capabilities. In this kind of agreement, both parties often contract not to disclose information as each side often receives confidential information – this could include financial information, employee information or future plans for their company.
The other kind of NDA is a non-mutual agreement, which would normally just apply to one party of the NDA. For example, a non-mutual agreement may be used with new employees if they have access to sensitive information about the company. In this type of agreement, usually only one party signs the agreement. Here, this would be the employee as the only party signing the agreement and they are therefore prevented from sharing confidential information.
What happens if an NDA is violated?
As an NDA is a legally binding agreement, if it is violated it constitutes a breach of contract. The consequences follow the normal rules of contract law, and the financial implications for the violating party are typically proportionate to the loss (which can be significant).
In some circumstances, the NDA may set out what is to happen if the NDA is breached and the financial consequences of that conduct. If so, the parties are contractually obliged to follow the NDA.
A disclosure of confidential information may also give rise to a claim for breach of confidence at common law. In practice, the claimant usually brings an action for both breach of contract and breach of confidence.
What to do if a party has broken your NDA
As above, a breach of a non-disclosure agreement can give rise to a claim for breach of contract. This means you can take the other party (or parties) to court.
Aside from recovering your losses caused by the breach, you could also seek an injunction. Injunctions are court orders that require a party to litigation to do or stop doing something. In the context of an NDA dispute, the violating party may be instructed, by injunction, to stop using or giving out confidential information contained in the NDA.
NDAs are legally binding and prevent confidential information from being given to those who should not have access to it. They provide a level of certainty and security in commercial relationships, and ensure a level of trust between the parties subject to it.
However, it is important to be aware of the pitfalls and appreciate that NDAs are not bullet proof. Careless drafting or a lack of awareness around the unenforceability of particular terms (i.e restricting an individual’s ability to report something to the police) can expose you to unexpected consequences. It should also be noted that NDAs are often difficult to enforce.
At EM Law, our lawyers are experts in contracts and enforcing your rights. We can help you draft your next NDA, or check over a potentially faulty one. Please feel free to contact Neil Williamson or Colin Lambertus here.