Certain categories of information, whether commercial or personal, can be incredibly valuable. In particular, a business idea that has the potential to revolutionise the market can constitute important and commercially sensitive information that should form the subject matter of a non-disclosure agreement if there is concern as to its security.
In both a business and a personal context, NDAs are useful in helping organisations and individuals protect their interests and sensitive information, intellectual property and trade secrets. It is important to protect such information for many reasons, but primarily because the protection of this information prevents the disclosure of valuable commercial know-how to competitors and minimises the risk of business or personal losses.
This article presents a brief overview of NDAs and why anyone in the process of developing a business idea should have an NDA in place before sharing confidential information with third parties.
What is an NDA?
A non-disclosure agreement (NDA), also known as a confidentiality agreement, is a legal agreement, typically between two parties, that prevents one, both or all of the parties involved from disclosing confidential information to third parties and from using the information for an unauthorised purpose.
The obligations in a non-disclosure agreement are usually imposed for a defined period of time, apply only to clearly defined information and cease to have effect in certain circumstances - for example, where the information protected under the NDA is made public.
An NDA is effective because it is legally binding and is an enforceable legal contract. A breach of its terms will mean that the innocent party can pursue legal remedies, including claims for damages.
NDAs can be mutual, unilateral or multilateral. A mutual NDA is used where each party is disclosing confidential information. A unilateral NDA is used when only one party is disclosing information. An NDA between a start-up and a potential investor will be unilateral, as only the start-up will be disclosing confidential information.
NDAs can be used in many different business contexts. For example, businesses often enter into mutual NDAs with potential partners in order to protect sensitive commercial information that may be disclosed by each party to the other throughout the partnership.
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Why is it important to have an NDA in place if you are developing a business idea?
No business can keep commercially sensitive information relating to its activities confidential forever. Inevitably, most businesses seek funding from investors, enter into partnerships with other companies or hire freelancers or independent consultants. In all of these situations, information relating to the business's confidential ideas, trade secrets or commercial know-how must be shared to enable the relationship to function smoothly.
Generally, a non-disclosure agreement should be used every time a business has to share confidential information with a third party.
For example, two businesses that enter into a partnership or joint business venture to develop a new project together often sign mutual NDAs. This allows them to freely and securely share information and know-how in order to enable the successful completion of the project.
It is important to be aware of situations when NDAs cannot be of use. For example, NDAs cannot protect information that is in the public domain. If a start-up, of its own volition, is sharing its business ideas and know-how at public networking events, this information cannot then form the subject matter of an NDA.
Without an NDA, sensitive data and information can be leaked to competitors and can cost the owner of the information its competitive edge.
Important considerations and key terms
While each organisation's NDAs will be unique (depending on the exact nature of the information to be protected and the authorised uses of that information), the format of NDAs is generally standardised and imposes obligations on the recipient party - not to discuss the subject matter of the NDA with third parties and not to use the information in an unauthorised manner.
Most NDAs will typically centre on the following:
- Which parties are bound by the agreement?
- The definition of "confidential information" i.e. exactly what information is to be kept confidential?
- The consequences of a breach
The disclosing party must be clear about the exact purpose for which the recipient party can use the information, and must ensure that the confidential information to be protected is set out as specifically as possible in the NDA.
The bottom line
Keeping confidential information safe by using an NDA often means that work can be done in a way that does not compromise the security of sensitive information. It also prevents any losses that may follow the disclosure of sensitive commercial or personal information.
How do I make an NDA?
An NDA can be created on a contracting platform like Legislate by answering a few simple questions and choosing the key terms of your agreement. The NDA can be signed and sent to the other party to sign on Legislate as well. Unlike getting templates online, Legislate guarantees NDAs which are up-to-date with the law, lawyer-reviewed and simple to understand. You can read our tutorial on NDAs.