A non-disclosure agreement (NDA) is an effective way of protecting a business’s confidential information. The uses of an NDA for a business are varied, including the protection of trade secrets, business ideas, customer information and technical know-how.

What is an NDA?

An NDA is a contract which governs how confidential information exchanged for a particular purpose between persons shall be used. NDAs prevent the recipient of confidential information from sharing that information with third parties.

In a joint venture project, for example, before signing a joint venture agreement, parties may wish to sign an NDA to facilitate the open sharing of information during negotiations. An NDA would protect the discloser of the information against misuse by the recipient of that information.

Essential terms of an NDA

Parties

Identifying the parties to an NDA is an important initial step when drafting an NDA. Failing to properly identify the discloser and recipient may render the agreement ineffective. Where the signatories are corporate entities, each signatory must have the requisite authority to sign the NDA. Where confidential information relates to intellectual property, it is particularly important to determine who owns the rights to such information in order to determine whether or not they must be a party to the agreement.

Purpose

An NDA can be entered into for a general or a specific purpose. The advantages of a general purpose NDA is that it is flexible and can cover multiple projects between those parties. There is therefore no need to enter into an agreement for each project. On the other hand, general purpose NDAs may lead to vagueness as to what scope of information is covered by the non-disclosure clauses – a drawback which can be avoided by entering into an NDA that is specific to a particular project.

Third Parties

The NDA must define the third parties to the agreement, that is, those people with whom confidential information may not be shared. For example, where the recipient of confidential information is a parent company, one must consider if, because of the nature of the purpose of the discussions, such confidential must also be shared by a subsidiary of the company. In such event, the subsidiary must either be included as a party to the agreement or there must be a term which states that the subsidiary falls within the meaning of a permitted disclosure.

Duration

The confidentiality obligations of an NDA may (and normally should) exist beyond the existence of the contractual relationship between the parties. The question of duration of the agreement will depend on the time-value of the confidential information concerned. The higher the time-value of particular information, the longer the duration of the agreement and vice versa.

Exceptions

Not all information exchanged between parties in discussions shall be protected by the NDA. Specific examples of such exceptions are information that has already been made available to the public; information that was previously known to the recipient of information; and information which the recipient is required to disclose to a third party in terms of the law.

Breach

While an NDA governs how confidential information is to be used by the recipient of information, it must also provide for legal consequences in the event that the recipient fails to use the information as agreed. The breach clause must clearly state what the rights of the offended discloser are and how they must enforce such rights.

This article has been provided for informational purposes only. For professional legal advice, contact our Corporate Advisory team.