Key Clauses: Drafting a Non-Disclosure Agreement (NDA)
Updated: Apr 22, 2022
Every business requires sharing or exchange of information for running its operations. It can simply be sharing of employee data for payroll processing or a business idea for developing new products or prototype of software for seeking investment. But then how does one ensure that the information shared is protected and not disclosed to third parties for personal gains. Thus comes the requirement of Non-Disclosure Agreements which are legal documents signed amongst the parties to protect and preserve the confidential information shared with each other.
Below listed are the key sections to take care of while drafting NDAs which if overlooked can cause irreparable damages to the involved Parties:
1-Mutual vs one-side NDA
Determining the appropriate type of NDA is of utmost importance. If both parties are providing information to the other party, a mutual NDA is appropriate, for example in scenarios of merger, acquisition, and joint venture. While in the case of unidirectional sharing of information, a one-sided NDA can suffice. All aspects of the transaction should be carefully examined to decide on the type of NDA as it can put business owners in a difficult position if they enter into a unilateral NDA when a mutual agreement is most appropriate.
2-Description of the Party/parties
The preamble of the Agreement describes the Parties/ entities. It is important to check for the use of the words like affiliates, assigns, or agents as by virtue of adding them in the description, you might unknowingly allow them access to your confidential information. In such a scenario, a need-to-know restriction to limit the access of information by personnel and contractors becomes even more important.
Every NDA must clearly and sufficiently define the purpose of entering into the agreement. It sets the intent or context for use of the confidential information and helps in ascertaining the implied or incidental usage of the confidential information.
4-Definition of Confidential Information
While every NDA defines confidential information, it is crucial to ensure that the definition of confidential information details exactly which information is protected under the agreement and, at the same time, is all-inclusive to take into consideration all information shared whether directly or indirectly, oral or written, marked confidential or not.
Every NDA must have a defined time frame. It must clearly mention the commencement date which should be equal or prior to the date the parties started exchanging information. In the same way, NDA must have an end date as a perpetual obligation of confidentiality cannot stand the test of reasonableness in many jurisdictions.
6-Return of Confidential information
Every NDA must have a clause about return or deletion of confirmation information and a fixed time period within which this obligation shall trigger. It is advisable that the Parties request for a certificate towards deletion of information especially in case the same was shared electronically. If the information is difficult to erase, the clause can include verbiage to prevent the recipient party from using the information in the normal course of business or sharing it in the future.
7-Consequences of breach of confidential obligation
Should one party breach the contract (i.e. divulge the confidential information), the agreement there stipulates the remedies like injunction, indemnification, penalties. Also, it is advisable to lay down a detailed protocol to be followed in case of breach or suspected breach of the obligation under the agreement.
8-Internal Safeguarding Procedure
Lastly, and most importantly, before entering into any sort of NDA, one must ensure that the internal safeguards to protect information that one will receive or disclose are in order, for example having written policies and procedures as well as executing NDAs with sub-contractors, agents, employees.
Growing awareness amongst new businesses have made NDAs very common but the strength of protection for your startup’s confidential information depends on a combination of your non-disclosure agreement and its terms, your business practices, the Receiving Party’s integrity and work practices, and your ability to take action to prevent breaches.