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Mistakes to Avoid When Entering an NDA

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Protecting confidential information is a crucial concern for businesses of all sizes. One of the main ways to safeguard confidential information is by using a Non-Disclosure Agreement (NDA). This is a contractual tool with essential obligations to ensure a business keeps specific information confidential. However, businesses make common mistakes when entering into NDAs, which could give rise to several risks. This article will explore critical mistakes to avoid when entering an NDA.   

Why Is an NDA a Valuable Document?

Using an NDA protects invaluable confidential data in business relationships and projects.  

An NDA typically provides specific rules governing another party’s use of your information. This often includes:

  • identifying the information deemed confidential;
  • specifying permissible usage;
  • restricting sharing that information to particular individuals or organisations only;
  • requiring timely data deletion; and
  • outlining consequences for breaching the NDA’s obligations, such as strict remedies.

A business will inevitably share confidential information with external third parties for numerous purposes. These purposes can include customer data, proprietary techniques, and intellectual property rights.

Projects requiring an NDA could include those where a business seeks investments, engages external contractors to assist with a project, or collaborates with third parties such as manufacturers or distributors. Such projects will involve disclosing confidential data to those parties, warranting the need for clear confidentiality rules through an NDA. 

By defining detailed boundaries on using your confidential information, an NDA acts as a deterrent. An NDA can also dissuade external parties from misusing or leaking the information. 

What Are Key Mistakes to Avoid When Entering an NDA?

Here are some common mistakes in an NDA which your business should avoid:

A Vague Definition of ‘Confidential Information’

Ensuring clarity in your NDA’s definition of “confidential information” is vital to its effectiveness. 

Specifying the precise types of data you expect the receiving party to protect is crucial. This will avoid any ambiguity and foster a mutual understanding of the information to be safeguarded.

 When drafting this definition, consider addressing nuanced issues such as:

  • Should the definition of confidential information extend solely to data relating to your business, or should it encompass affiliated entities within your corporate group?
  • Does the scope of confidential information include data shared before the execution of the NDA? Your company may have shared sensitive information before signing, which you wish to be protected.
  • What specific categories of information need protection? Should it be limited to details concerning your business operations, financial affairs, and clientele, or should it encompass a broader spectrum of proprietary knowledge and strategic insights?

A vague definition of confidential information can lead to various issues, such as misuse of certain confidential information and the potential for disputes. 

Ignoring Personal Data Considerations 

A critical oversight within NDAs is the failure to address UK GDPR data protection issues upon disclosure of personal data.

It is essential to consider these concerns to avoid legal consequences and regulatory non-compliance for both parties to an NDA. 

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When businesses anticipate sharing personal data as part of their information exchange, additional considerations come into play. Compliance with UK GDPR rules may necessitate the inclusion of specific data protection terms within the NDA. These terms could encompass data-sharing clauses if both parties acted as data controllers in processing personal shared data. 

By considering and incorporating data protection issues and terms, businesses can ensure alignment with UK GDPR requirements in their NDAs to help demonstrate accountability and comply with their legal obligations. 

Failing to Consider NDA Indemnification Risks

A party receiving an NDA needs to ensure it understands the risks involved. 

Indemnity clauses within an NDA can hold the receiving party liable for compensating the disclosing party in the event of a breach of confidentiality. While this might appear reasonable, agreeing to a broad, uncapped indemnity clause can pose significant risks.

Under an uncapped indemnity clause, the receiving party may be held liable for large amounts of compensation far exceeding the relevant value of the project. A common mistake is failing to fully understand the implications of an indemnity clause or neglecting to seek legal advice on its terms. 

This oversight can expose parties signing an NDA to heavy financial risk, highlighting the importance of comprehensive understanding and legal guidance when navigating NDAs. To mitigate this risk, it is vital to only agree to an NDA containing an indemnity clause after seeking legal advice to understand its implications and consider how much compensation your business can be on the hook for.

An experienced commercial lawyer can assist in advising on an indemnity clause in an NDA. A lawyer can also negotiate fair and commercially reasonable limitations, which could safeguard your business from significant financial exposure under an NDA.

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Key Takeaways

NDAs are vital tools to protect confidential information. Drafting an NDA requires careful attention to detail and thought. Critical mistakes to avoid include:

  • a vague definition of confidential information;
  • overlooking data protection issues; and
  • failing to understand the implications of indemnity provisions.

By proactively addressing these factors and drafting robust NDAs, businesses are better placed to safeguard their confidential information from risk. 

If you need help drafting a robust NDA, our experienced contract lawyers can assist you as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers who can answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.

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Sej Lamba

Sej Lamba

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