When do you need a Confidentiality or Non-Disclosure Agreement?
When do you need a Confidentiality or Non-Disclosure Agreement?
Parties will need to ensure that the confidential business information they will share will not be disclosed or misused, before they can enter into a commercial relationship. A confidentiality agreement or non-disclosure agreement (NDA) is often the first step towards a commercial relationship. This type of document constitutes a legally binding contract. If the disclosing party discloses confidential information to the receiving party under a confidentiality agreement, the receiving party is required to keep that information secret and confidential, and not misappropriate it.
Confidentiality agreements play a very important role in modern commercial relationships as they provide a contractual basis on which commercial information is shared and gives participants the comfort they require in order to share confidential information with others including business strategies, financial information and competitive data.
A confidentiality agreement may operate in both directions as a “two-way” or in one direction only as a “one-way”. In a “one-way”, one party discloses confidential information and the other receives and keeps it confidential. In a “two-way”, both parties receive and keep confidential information secret.
Types of Confidential Information
Examples of Technical and Scientific information
- Inventions and new technology ideas
- Technical compositions of products
- Manufacturing methods
- Designs, drawings, plans, and blue prints
- Computer source code
- Test data
Examples of Commercial Information
- Lists of suppliers and clients
- Consumer profiles and customer data
- Supply data
- Marketing plans, business plan
- Marketing and business strategies
- Sales and distribution methods
- Price lists and formulas
- Profit margin information
This type of information is valuable because it is not generally known to and is not readily ascertainable by competitors or others who could use the information in business. The owner of the confidential information can take steps to prevent others from misappropriating the confidential information.
Requirements for Breach of Confidence
The information of whose disclosure is complained must have the necessary quality of confidence or secrecy about it.
Obligation of Confidence
The information must have been disclosed in circumstances which expressed or implied an obligation to keep the secret.
There must have been, or be a possibility of, unauthorised use of the information to the confider’s detriment.
Key Terms of a Confidentiality Agreement
The following core terms should be covered in a confidentiality agreement or NDA.
The confidentiality agreement should define the parties to whom the confidentiality obligations apply. The NDA should also cover a situation where the receiving party expects to disclose the confidential information to a related or affiliated company or other third party, and, if so, the NDA must also apply to those persons. The parties may agree in the agreement, for example, that the receiving party may disclose the confidential information to employees, advisors or contractors on a “strictly need-to-know” basis provided the received party takes steps to procure that such employees and advisors agree by written contract to agree to similar terms that are no less restrictive than those provided in the existing confidentiality agreement.
Scope of Confidentiality Obligations
A confidentiality agreement should clearly set out the scope of the confidentiality obligations and what it applies to. The clearest clauses define “Confidential Information” as anything the discloser marks “confidential” otherwise the NDA should clearly identify what is confidential information. This may be information that is only marked in writing as “confidential” or otherwise set out a broader definition of confidential information.
The Purpose and Permitted Use of the Confidential Information
The confidentiality agreement should clearly set out the purpose of the exchange of information and how the receiving party can use the confidential information.
Exclusions from confidentiality
The NDA should also set out what is excluded from the obligations of confidentiality. Common exclusions include:
- the confidential information is, or becomes part of the public domain;
- the confidential information is lawfully obtained by the receiving person from another person without any restriction as to use and disclosure;
- the confidential information is required to be disclosed by the operation of any law or governmental agency; or
- the disclosing party has authorised in writing the disclosure of the Information.
Ownership of Confidential Information
The disclosing party should also require the receiving party to acknowledge that the confidential information is proprietary to the disclosing party and the disclosure does not convey any rights to the receiving party in the confidential information.
Terms requiring return or destruction of Confidential Documents
A disclosing party may also consider terms that require the return of the material at the request of the disclosing party, or alternatively, a clause that requires the receiving party to destroy such material and provide a statement disclosing such destruction at the request of the disclosing party.
Consequences of Breach of Confidentiality
These may include damages and the right to apply for an injunction that gives the disclosing party the right to apply for injunctive relief through a court order to prevent a breach of the confidentiality agreement and to compel specific performance.
Term of the Agreement
A confidentiality agreement should define a specific term for the confidentiality obligation which will depend on the purpose of the agreement and the type of information conveyed.
When should you have and sign a Confidentiality Agreement or NDA?
There are many circumstances where a NDA is used. Generally, NDAs are used for new business opportunities between prospective partners, when a business is outsourcing services or resources to service providers, or for the hiring of a new employee. Here are some common situations where you would need a non-dislosure:
- A concept or an idea when approaching third parties for technical assistance or services
- Presenting an invention or a business idea to a potential partner, inventor or distributor
- Sharing a new product or technology to a prospective business partner or licensee for intellectual property
- Sale of a business or company where the prospective buyer carries out any due diligence
- Entrepreneurs who are seeking early-stage financial funding
- Employees who often have access to confidential and proprietary information during the course of their employment
- Receiving services from a business or individual who may have access to confidential or sensitive information in the course of providing those services
Many companies that should use NDAs don’t. Remember, if you are disclosing confidential and sensitive information to an employee or third party, protect your valuable information and trade secrets with a written agreement otherwise risk that information being misappropriated!
Jaclyn-Mae Floro, BCompSc
Contact W3IP Law on 1300 776 614 or 0451 951 528 for more information about any of our services or get in touch at email@example.com
Disclaimer. The material in this post represents general information only and should not be taken to be legal advice.