A Non-disclosure Agreement ("NDA") has gained significant importance in day-to- day business. In some industries, any conversation beyond pleasantries requires an NDA.
An NDA is also known as Confidentiality Agreement, ¬ Proprietary Information Agreement or Secrecy Agreement etc.
PURPOSE OF ENTERING INTO AN NDA: PREVENTION IS BETTER THAN CURE
Prior to entering into any Agreement, a party an disclose certain confidential information to the other party so as to enable other party to evaluate or ascertain or determine or find out the difficulties in the proposed Agreement etc. The parties may further go ahead with the some definite agreement or it is also possible that the party will not be able to go ahead for further definite Agreement.
Regardless of whether the parties enter in to the definite Agreement or not it is necessary to protect those confidential information. Hence, it is necessary to enter into an NDA.
[Note: The Party disclosing information shall hereinafter be referred to as the “Disclosing Party” and the Party receiving such information shall be referred to as the “Receiving Party”.]
IMPORTANT ASPECTS OF AN NDA
Purpose of enterening into an NDA: An NDA that the confidential information disclosed must be used for specific purpose only. This means that if the confidential information is being used for some other purpose not intended by the Disclosing Party then it’s a breach of the NDA.
For example: If a Company XYZ shares some confidential information to VEPRO, a software development company, to develop a software for the internal purpose of the XYZ then to protect the confidential information XYZ may enter into an NDA with VEPRO. By virtue of the NDA entered into, VEPRO shall be liable to not to use those information for any purpose other than developing those software as desired by XYZ.
Further, an NDA should also define who shall use the confidential information.
Types of NDA: An NDA can be mutual or binding unilaterally. A mutual NDA is one, wherein both the parties share confidential information to other party and both parties are wants to keep their information confidential. However, in some cases, only one party disclose the information and other party receives it, in such case, the parties can enter into an NDA wherein the obligation to keep the information disclosed in only on the receiving party.
What is Confidential information: One the most important clause of any NDA is “Definition of Confidential Information”. The Confidential information, which a party has disclosed to the other party or intending to disclose must be defined without any ambiguity. However, at the time of entering into an NDA, parties are not sure of what kind of information they may share with other Party during the period of the Agreement, hence it is suggested that “Confidential information” should be defined in such a manner that it includes into the definition of Confidential information those information which due to its character and nature, a reasonable person under like circumstances would treat as confidential.
Disclosure of Confidential information in certain situation: There is no straightjacket to restrict the use of confidential Information. There are certain situation in which a confidenial information can be disclosed by the receiving party. For ex- those information is required to be disclosed under any relevant law, regulation or order of court. It is always expected from the other party that the effected Party is given prompt notice of disclosure.
Non- Obligation: It should be outrightly mentioned in the Agreement that nothing in the Agreement shall obligate either party to proceed with any transaction between them, and each party reserves the right, in its sole discretion, to terminate the discussions contemplated by this agreement.
Return or destruction of Confidential Information: The Disclosing Party may give confidential information to Receiving Party by various means ex- CD, Floopy, documents etc. The disclosing party must ensure that all the document or other tangible objects including the copy of the same, containing or representing confidential information are promptly returned or destroyed followed by the delivery of a certificate of destruction once the term of the NDA has expired or terminated earlier. In some exceptional cases, parties may insist that the confidential information should be destroyed only in the presence of their authorised representative.
No grant of any right: Since the Disclosing Party is disclosing their cofidential information, any party shall intend to grant any rights to the other party under any patent, mask work right or copyright of the Disclosing Party. A separate clause shall expressly mention this intention of the Disclosing Party.
Rights and remedies available to the disclosing party: Un-authorised disclosure of Confidential information by the Receiving Party cause irreparable damage to the disclosing party. Hence, it is advised that in addition to the indemnification clause the NDA should also contain a clause stating that “Without prejudice to other rights and remedies available to the disclosing party, the disclosing party shall be entitled to seek injunctive relief in case of violation or threatned violation of NDA”.
Dispute resolution: There is no specific formula or trick for resolving any dispute which may arise out of an NDA. However, it is always suggested to take recourse of Arbitration at the first instance. This allows to avoid a lawsuit. Further, Arbitration is cheaper and faster than a lawsuit, so it’s usually a good idea to include this provision.
Protection of Confidential information: How are you protecting your confidential information? Disclosing Party should make it very clear to the Receiving party that Receiving Party shall take at least those measures that it takes to protect its own most highly confidential information and shall also ensure that its employees who have access to Confidential Information of Disclosing Party have signed a non-use and non-disclosure agreement in content similar to the provisions hereof, prior to any disclosure of Confidential Information to such employees.
It’s always in the interest of the party to an NDA to take following steps:
(i) Mark the confidential information as “CONFIDENTIAL”.
(ii) Keep track of all confidential information shared with the other party.
(iii) Check the history of the person with whom confidential information is being shared.
(iv) Also try to know from the other party how they are going to protect your confidential information and if necessary, help or suggest how they should keep the confidential information.
(v) Inform the other party of the legal course avaiable with you in case of un-authorised use of confidential information; it shall act as a deterrent.
Term or Period of NDA: The clause pertaing to the term of the Agreement is the most difficult part of any NDA. The party disclosing the information wants to keep the term as long as possible and most of the time “in Perpetuity” at the same time the party receiving the information wants to keep the term as short as possible. Since there is no straightjacket to restrict the revelation of any confidential information, it is suggested that to keep the term not unreasonably long but it should be enough to suffice the purpose, say- 3 to 5 years.
The terms and conditions of an NDA depends upon the facts, circumstances & the negotiation between the parties. Hence, please dicuss with your lawyer before entering into NDA with other party.
Anti Competitive effects of NDA: When two indirect competitors sign an NDA while doing a deal. One Party may disclose a future business or product plan to other Party under the NDA. If any party aborts to go ahead with the proposed business then even if the other Party proceeds legitimately with any third party then it has significantly more risk.
Conclusion: An NDA is a piece of Paper and can only act as a deterrent and in case of unautorised disclosure, it shall avail you the right to take action against the defaulting party. But at times disclosure of confidential information can lead to irreparable damages. Hence, it is advised that in addtion to enter into the NDA, parties should be vigilent and make sure that there information is in safe custody.
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