A non-disclosure agreement (NDA), or a confidentiality agreement is an agreement that allows the disclosure of confidential information such as know-how, data and trade secrets without the risk of the disclosure by the receiving party to a third party or the use of the information for a purpose other than the intended purpose of the NDA. NDAs prohibit the disclosure or use of confidential information and allow the disclosing party to apply to the courts for an injunction in the event of a breach to prevent further breaches and claim monetary damages for the losses created by the breach.
Depending on the flow of disclosures, the parties can either enter into a unilateral NDA (one-way NDA) or a mutual NDA (bilateral NDA). Unilateral NDAs are entered into if only one party is disclosing confidential information. On the other hand, a Mutual NDA would be used if both parties are sharing information with each other.
This article will look at 3 instances where unilateral NDAs are used and 3 instances where mutual NDAs are used.
When can you use a unilateral NDA?
- Employer and employee
A first instance where a unilateral NDA can be used is between an employer and an employee. An employee is exposed to a lot of confidential information during the course of their employment. For example, an employee would be privy to the confidential know-how of the employer by virtue of their day to day work. Accordingly, some employers would enter into unilateral NDAs with their employees in addition to their contract of employment, especially in sectors with highly confidential information.
- Investor and startup
A second instance where a unilateral NDA can be used is between an investor and a startup. As startups look to secure as much funding as possible for their business, they will disclose confidential information such as financial information and business plans. Therefore, some startups could ask the investors to sign a unilateral NDA before they could disclose the information to prevent them from using the disclosed information or sharing it with competitors.
- Company and consultant
A third instance where a unilateral NDA can be used is between a company and a consultant. When engaging a consultant, a company might need to disclose some of their confidential information to enable the consultant to perform their task. For example, if a company hires a business development consultant they would need to disclose confidential information such as sales and marketing strategies. Consequently, the company could ask the consultant to sign a unilateral NDA before they could disclose their confidential information to ensure that the consultant would not use the information for his benefit or the benefits of competitors.
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When can you use a mutual NDA?
A first instance where a mutual NDAs can be used is when 2 companies are discussing a potential merger together. While negotiating the terms of the merger, both parties would want to see some of the confidential information of the other party such as their financial records and projections. Mainly, companies look at the confidential information of the other party to ensure that the merger would be beneficial for both parties. Therefore, at the beginning of merger talks, companies would sign a mutual NDA to ensure the confidentiality of the information disclosed while discussing the potential merger.
A second instance where a mutual NDA is used is when a franchisor is negotiating the grant of a franchise to a franchisee. During the negotiations, the franchisor could want to see some of the franchisee’s confidential information to ensure that if they granted the franchise, the franchise would not do anything that may affect the reputation of the franchise. On the other hand, the franchisee could ask to look at some of the confidential information relating to the franchise such as their profit and loss statement to ensure that the endeavour would be profitable. Consequently, the parties could agree to sign a mutual NDA before they start the negotiations to be able to assess the potential of the franchise.
- Joint venture
A third instance where a mutual NDA could be used is during a joint venture. When two companies are discussing a potential joint venture they often want to look at confidential information such as financials and know-how before entering into the joint venture. The main reason is to ensure that both parties would bring something to the table. Accordingly, when two companies are about to enter into a joint venture, they would sign a mutual NDA to be able to discuss the potential of the joint venture.
In conclusion, NDAs are very versatile and can be used in different circumstances whilst serving the same purpose: protecting confidential information. The two main types of NDAs are Unilateral and Mutual. Unilateral NDAs are used when only one party is disclosing information such as an employer, a startup or a company to an employee, investor or consultant respectively. On the other hand, a mutual NDA is used when both parties are disclosing confidential information. A mutual NDA can be signed before discussing a potential partnership, negotiating a merger, franchise or a joint venture.
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The opinions on this page are for general information purposes only and do not constitute legal or financial advice on which you should rely.