In Short
- NDAs protect confidential business information when working with employees, contractors, advisers, investors or other third parties.
- You can use unilateral NDAs (one-way) or mutual NDAs (both parties share information).
- If someone refuses to sign, consider a mutual NDA, limit what you disclose or seek legal advice.
Tips for Businesses
Use NDAs whenever you need to share sensitive information outside your company. Clearly define what is confidential, how it can be used, and for how long. If a party refuses to sign, weigh the risks before proceeding. Always protect trade secrets and consider legal advice for high-value deals.
It is integral to protect your company’s confidential information. As such, your business may benefit from using a non-disclosure agreement (NDA). An NDA can help protect the most sensitive information and prevent unauthorised disclosure without your consent. Such agreements can be used in employment contracts or when supplying information to third parties such as contractors, potential investors or financial advisors. Information can be easily shared instantly across multiple platforms and jurisdictions; therefore, protecting confidential business information has become more critical than ever. The rise of remote working, increased collaboration with external partners, and the growing value of intellectual property mean that businesses must be proactive about safeguarding their information.
This article will explain when and how your business can use non-disclosure agreements to ensure it adequately protects its confidential information against third parties.
What is a Non-Disclosure Agreement?
An NDA is a written contract that identifies when another party cannot use or disclose your confidential information to others. Many people assume non-disclosure agreements apply to employees only. While it is true that confidentiality clauses are common within employment contracts, they may also be used in other business relationships.
NDAs are legally binding contracts that create a confidential relationship between parties. They establish clear boundaries around what information can be shared, how it can be used, and what happens if those boundaries are breached. The agreement typically includes definitions of what constitutes confidential information, the duration of the confidentiality obligations, and the remedies available if the agreement is violated.
Types of Non-Disclosure Agreements
Understanding the different types of NDAs can help you choose the most appropriate protection for your specific situation:
- unilateral NDAs are one-way agreements where only one party discloses confidential information. These are common when pitching to investors or sharing information with potential partners; and
- mutual NDAs protect both parties when they are sharing confidential information with each other. These are typical in merger and acquisition discussions or joint venture negotiations.
Why Do I Need a Third-Party NDA?
Some readers may question why their business may ever disclose confidential information to someone outside their organisation.
However, in the course of running your company, you may need to:
- use an accountant or tax adviser;
- provide design information to a manufacturer;
- provide financial figures to retailers;
- obtain the assistance of a financial adviser; or
- pitch products to businesses, potential investors or retailers.
What Does an NDA Do?
A non-disclosure agreement usually defines which information your company classes as confidential in nature. It will then constrain the third party by:
- limiting ways they can use or record that information;
- limiting the circumstances in which they can pass on or disclose that information to others; and
- giving rise to a right to request them to return (or destroy) the information.
What if the Other Party Refuses to Sign an NDA?
Some companies, advisers or investors refuse to sign NDAs as a matter of course. In this scenario, it may be worth considering offering them a mutual non-disclosure agreement. This document will confirm that your company will keep their information confidential and within set limits, and it will do the same for your business. Additionally, offering mutual non-disclosure agreements can sometimes build trust between the parties and make NDAs appear less aggressive and more balanced.
When faced with resistance to signing an NDA, consider alternative approaches such as limiting the scope of information disclosed initially or only disclosing information after preliminary agreements have been signed. Let us consider a quick example below.
Example
Suppose your business is doing well but can benefit from external investment. A well-known, reputable investor approaches you. Initial talks go well, and they ask you to pitch the company to them. Because your planned presentation involves confidential information, you ask them to sign an NDA, but they make it very clear that they will never sign one.
You need to weigh the benefits against the risks of pitching to the investor. If the potential investment would be greatly beneficial to your company, the risk of them learning some confidential information may be worth it. However, suppose you have not obtained a patent on a new invention. Instead, it would be a trade secret. Hence, it could prove risky to disclose information about it. In some circumstances, you could potentially lose the ability to obtain a patent for that invention in the future. If the business deal is of high value and high risk, you should consider obtaining legal advice before acting.
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Key Takeaways
Disclosing confidential information outside your company can be unavoidable in certain situations. Therefore, it is a case of limiting information spread as far as possible and seeking third parties to sign an NDA before providing them with the information. Where a party refuses to sign, you may suggest a mutual NDA or weigh up the risks and benefits of disclosing confidential information without any agreement in place.
If you need help with non-disclosure agreements, 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.
Frequently Asked Questions
No. Your lawyer has a general duty of confidentiality towards you and can only disclose information to others with your specific consent.
Your business can use other methods, such as trade marks, patents and copyright. But the first defence is only to disclose confidential or sensitive information when necessary.
The duration depends on the nature of the information and the business relationship. For highly sensitive information, NDAs often remain in effect indefinitely or until the information becomes public. For other confidential information, periods of 2-5 years are common.
Breach of an NDA can result in legal action for damages, injunctive relief to prevent further disclosure, and potentially recovery of profits made from misusing your information.
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