How Can An NDA Protect My Business?

As a business owner, you have likely spent countless hours and resources on building your business. As a result, it would be in your business’ best interests to protect its confidential information when engaging employees and third parties. A non-disclosure agreement (‘NDA’) is a legally binding contract that prevents one or more parties from sharing confidential information you share with them. In the event that the other party unlawfully shares the information, your business has the option of pursuing legal action against them. This article will explore how an NDA can protect your business from risk.

What is an NDA?

Your business is likely to own a vast amount of valuable confidential information, including its:

• trade secrets;
• customer and supplier lists;
• prospects lists;
• financial information;
• technical designs, drawings and formulas;
• sales and marketing information; and
• sensitive data or personal information, such as data of the staff at your business. 

An NDA’s purpose is to ensure that the party receiving confidential information agrees that they will not use that information for any purpose other than what the NDA permits. Typically, an NDA will:

• define what confidential information means;
• impose limits on how the receiving party can use the confidential information;
• specify who the receiving party can disclose confidential information to;
• impose obligations for the receiving party to return or destroy the confidential information; 
• specify the penalties for breaching the NDA; and
• outline the duration of the confidentiality obligations, such as between three to five years.

When Should Businesses Use an NDA?

Business owners will typically use an NDA in a range of scenarios. For example, business owners might use an NDA if they are:

• developing a new product and discussing funding with external potential investors;
• discussing a joint venture with a third-party business or a collaboration agreement for a new project; and
• in the process of selling the business.

In these scenarios, you will likely disclose confidential information about your business. Depending on the context, an NDA can be one-sided or mutual. This will depend on whether only one party is disclosing confidential information or both are sharing confidential information.

How Can an NDA Protect My Business From Risk?

There are various ways an NDA can protect your business from risk. Let us explore some of the key ways below.

1. Prevent the Disclosure or Misuse of Confidential Information

Using an NDA helps clarify what your business’ confidential information is. As such, it can:

• set clear rules around using confidential information; and 
• inform the receiving party that the information should not be made public. 

By including parameters around the use of confidential information and the consequences resulting from disclosing it, you are more likely to deter businesses from misusing your confidential information.

Without an NDA, you risk losing control of your confidential information. This means that any third parties could get hold of your confidential information and use it for their benefit.

2. Provide Legal Recourse If Confidential Information is Leaked

Your NDA can offer robust remedies if the receiving party breaches its terms. For example, if the receiving party breaches the NDA, you could seek remedies such as:

• an injunction to stop the party from disclosing confidential information; and
• damages to compensate you for any losses you suffer due to breaches of the NDA.

If you fail to use an NDA, your business will need to rely on the law of confidence to protect your confidential information. In this instance, you will need to prove that the information disclosed:

• had the necessary quality of confidence;
• was disclosed in circumstances where a confidentiality obligation could be assumed; and 
• was used without authorisation. 

Based on these factors alone, it is clear that relying on the law of confidence can be a complex claim to prove. Therefore, it is far better to use an NDA where the legal claim and remedies can be much more straightforward. 

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Key Takeaways

An NDA is an essential tool businesses can use to help protect their confidential information. Using an NDA will help: 

• define your business’ confidential information; 
• deter the receiving party from misusing it; and 
• provide you with remedies if the NDA is breached. 

However, you should also take practical precautions before sharing confidential information with third parties, such as limiting the amount of confidential information you share.

If you need help with preparing a non-disclosure agreement, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.