Often, most business entities fear the protection of their confidential business information including trade secrets or business strategies that make it unique and competitive. Whether it is the financial information of the company or any potential intellectual property in its early developmental stages, there is an immense requirement to have adequate mechanisms in place to ensure its protection.
In case your business is a start-up, your business needs to work continuously towards products or technological innovations to get an edge over the existing market competitors. Thus, start-ups could only succeed in their business, if they are successful to keep their information under wraps carefully. On the other hand, if the business or start-up fails to protect their sensitive data and any other competitor uses such information, it may not only result in loss of clients but also lead to misuse of the information for criminal activities such as frauds.
Which, the first & foremost solution that comes into mind is entering a Non-Disclosure Agreement (NDA) with any person who you think might come to the knowledge of any sensitive business confidential information such as business partners, employees, interns, or like persons. Therefore, a Non-Disclosure Agreement (NDA) is a legal agreement that is an agreement entered between parties with the aim to define the confidential information for the business organization and prevent disclosure of such information. It is legally binding on the parties entering the agreement and any breach of the agreement may have legal consequences.
Therefore, Agreements like NDAs are of the utmost value for the integrity of the business organization in the age of technology and have global applications. Though commonly it is known as a Non-Disclosure Agreement (NDA), it is also known as a Mutual Confidentiality Agreement, Confidential Disclosure Agreement or Secrecy Agreement, Proprietary Information Agreement, etc.
However, there are some exceptions to an NDA, which means that there would be no legal consequences despite revealing confidential information in case of –
- Information Disclosed in the course of a legal procedure;
- Any inquiry made by a judicial authority and
- Information Disclosed by any third party who is not a party to the agreement.
Types of NDA
There are three types of NDA agreements as provided below-
i.Unilateral NDA – A unilateral NDA is an agreement involving two parties out of which one party prohibits the other from the disclosure of sensitive information to ensure its protection.
ii.Bilateral NDA – A bilateral NDA is signed between two parties under which both of them agree to disclose confidential information to each other with an intent to keep such information protected from dissemination to any third party
iii.Multilateral NDA – A multilateral NDA is an agreement signed between three or more parties, under which at least one party agrees to disclose confidential information to the other parties and all of them agree to protect the information from any further disclosure. Instead of agreeing to two-three unilateral or bilateral NDAs, a Multilateral NDA is to be signed with the concerned parties.
Importance of signing a Non-Confidentiality Agreement
Since the main purpose behind entering a Non-disclosure Agreement is to ensure that none of the confidential information is disclosed without authorization, it reduces the scope of breach of the Agreement from any disclosures which will give the aggrieved party a legal recourse to sue the other party. Provided below are some of the benefits of signing a Non-Disclosure Agreement-
i. Protection of Confidential information–
Every business has its confidential information which, if leaked could lead to irreparable loss & damages to the business. Thus, an NDA is useful to expressly prohibit parties involved from any such disclosure including the legal implications of doing so.
ii. Intellectual Property Rights (IPRs)–
In times of innovations & technological advancements, IPRs have gained special importance in terms of business growth & profits. However, leaking such important information to any third party or competitive rival could harm the business. Hence, having an NDA in place inhibits any disclosure of IPR related information to any outsider except where it is allowed in pursuance of the Agreement.
iii. Mechanism for Legal Recourse–
A Non-Disclosure Agreement is entered under the provisions of the Indian Contract Act 1872, and is legally binding upon the parties. Thus, whenever any of the parties involved fail to abide by the terms of the agreement, the other party could sue the other in a court of law and seek damages for the losses caused.
iv. Encourages Out-of-Court Settlements–
The long& tedious procedure of the court system is known to all. However, the parties could insert a provision providing for dispute resolution in the event of any dispute or breach of the agreement through any processes such as mediation, conciliation, or arbitration. Further, parties may mutually agree upon either a sole arbitrator or an Arbitration Tribunal to decide the matter that will have the same bearing as of a civil court.
v. Builds mutual trust & confidence –
Every professional relationship demands mutual trust & confidence to prosper, be it employer-employee, business partners, or any investor-company. Therefore, an NDA naturally creates an obligation on the parties involved to abide by the agreed terms and conditions between parties.
vi. Protection before business Negotiations-
It’s a known fact that businesses are always in dire need of funds to fulfill various goals & objectives of their organization. For instance, to raise capital from investors they may have to disclose their confidential information such as any IPR in the early stages of development. Therefore, to keep such information confidential the company/business seeking funds may require the investors to sign an NDA just before pitching ideas to them. Not only investors, but it may also include any person such as suppliers, contractors, researchers, and other any other kind of service providers, all such parties who may have access to confidential business information should sign an NDA to protect information.
Such information is shared for various purposes such as making evaluations, market analyses, future projections, etc. Even if the business deal is not successful in the later stages of negotiation, the company disclosing such information could be assured about the fact that such information shall be used neither against their business interests nor transferred to any third party.
What are the key clauses of an NDA agreement?
Drafting an NDA is an essential stage of the development of a professional relationship in a strict sense after completion of all the discussions and negotiations and all the terms and conditions are reduced in a clear & precise manner mentioning remedies made available to the parties in case of violation. Therefore, certain clauses are necessitating thorough attention that leaves no place for ambiguity-
i. Defining Confidential Information;
Since an NDA agreement outlines the terms and conditions for the non-disclosure of confidential information, before this, it is important to identify and define which information shall be confidential information to make it easier for the parties to categorize what information is confidential or what is not and save themselves from committing any breach of the terms. The information so provided must be conclusive to the entire agreement.
ii. Identification of Parties of the Agreement
Next, it is necessary to identify the parties including their description (age, father’s/spouse name, and address of residence) in the agreement. It must include all the parties to the NDA agreement.
iii. Permitted Use of Confidential Information
After defining the confidential information, it is also important to include the exceptional circumstances where the disclosure shall not be considered to be a breach under the agreement. For example, any disclosure made in pursuance of any judicial inquiry or to any judicial authority, etc.
Similarly, if the recipient of the confidential information is revealing such information to any consultant or advisor, then the information could only be disclosed if the information is being utilized in the furtherance of business purposes without breaching any terms.
iv. Term of the Agreement
It is also important to set out an effective date of the agreement and the period of validity of the agreement including the circumstances under which the agreement would come to end. Most of the parties prefer to set an indefinite date for the effectiveness of the NDA agreement regardless of the existence of the business relationship to protect sensitive information like financial position or IPR.
Where an NDA agreement is entered between an employer and any employee, the employee must return any related document/information or destroy the same after leaving the company.
v. Applicable Jurisdiction
The parties must decide the jurisdiction in the geographical area where the agreement will be applicable and the court of law to be approached in case of arousal of any cause of action in pursuance of the Agreement.
vi. Legal Costs & Remedies
This clause is similar to NDA entered for any kind of professional relationship. To avoid any confusion, the parties may mutually agree and decide the obligation related to payment of legal fees and other related costs in the event of a breach of the terms of the agreements and the matter forwarded to any arbitral tribunal or court. Since it can be tough to assess the exact costs of the breach of agreement, the parties must draw a mutual agreement up front as to what constitutes a fair remedy to avoid lengthy court battles later on.
Further, this clause can also include the likely consequences of a breach and preserve the rights of the party as the Disclosing Party to pursue equitable remedies.
vii. Return of Information
This clause may provide for the manner of return of any document or information after the termination of the agreement.
viii. Non-Binding
Last, but certainly not least, a non-disclosure agreement is incomplete without a non-binding clause. Since, they are initiated before business negotiations during mergers, partnerships, temporary collaborations, or similar relationships, it becomes sensible to create a non-binding clause that allows both parties to terminate the relationship at any point in time. In simple words, signing an NDA does not always indicate a permanent relationship and the rights related to withdrawal from the relationship at any point in time must be reserved by the parties under the terms & conditions of the agreement.
How do Non-Disclosure Agreements Work?
Typically, an NDA is agreed upon and signed every time a piece of confidential information is to be disclosed to any party or stakeholder which is necessary to be accessed by such person in the furtherance of the business. Having an agreement in place could build mutual trust between parties and discourage theft or any unlawful disclosure of any IPR/proprietary information. While some NDAs are for a specified period, others bind the parties for an indefinite period so that the information remains a secret forever. The agreement also prescribes the consequences (even criminal charges and penalties) to be faced by the party in case they fail to protect the information and cause damages to the other party in the form of business losses.
Therefore, every person should be considering entering into an NDA in the following cases whenever-
i. Employing Freelancers
Freelancers are self-employed persons who work for a company/business temporarily and are not regarded as employees of the company. They have the freedom to associate themselves with more than one business entity in the due course of their professional services. Since they might come to receive any confidential information such as business strategies or IPRs, it is only sensible to enter an NDA with them before the initiation of their professional engagement with your business.
ii. Hiring employees/Interns
Generally, an employee is made to acknowledge, agree and sign an employment agreement containing a clause for non-disclosure of the confidential information of the company under which they are legally bound not to reveal any confidential information either during their employment or after leaving the company. If required, they could be required to sign an NDA separately.
iii. Potential investors
Businesses or Startups intending to raise capital for their businesses might have to reveal their sensitive business information such as trade secrets, IPRs, financial information, important clients, etc. Thus, it is only logical to sign an NDA with the potential investor before disclosure of such information.
iv. Acquiring businesses
In the due process of gaining control in another business through acquiring, selling, or merging with another business, it becomes necessary to reveal all important financial information for making the final decision. Hence, it is always advisable to enter into an NDA with another company at the beginning of the process of negotiations, so that even merging or acquiring another company doesn’t take place, all the confidential information could be safe and secured and the business could be continued without any fears or risks.
v. During licensing negotiations
It is obvious that a potential licensee would like to review your product, service, or technology for a license before obtaining a license. There are chances that such licensee may misuse the confidential information regarding product/service/technology to benefit himself. Thus, entering an NDA prevents him from misusing the information or reverse engineering your software through the use of such confidential information.
vi. Supplementing NDA with other agreements
The protection of confidential information accessed in pursuance of a business relationship could be required anywhere. Therefore, where parties wish to enter any business/professional relationship through any kind of agreement such as a technology licensing agreement, manufacturing agreement, corporate governance agreement, joint venture agreement, asset purchase agreement, or any other similar agreement, any party should not hesitate demanding protection of information either by providing a clause to the respective agreement or signing a separate agreement.
Miscellaneous requirements for NDA
i. Registration of an NDA
Though, registration of an NDA is not mandatory under the provisions of the Indian Contract Act 1872. But, it is advisable to register an NDA to ensure its enforceability in case of disputes. The agreement shall be registered under the provisions of the Registration Act, 1908, in the office of the sub-registrar having jurisdiction over the area.
ii. Notarization of an NDA
Again, it is not mandatory to get the NDA notarized but to ensure validity and enforcement, an NDA could be notarized by visiting a notary public by submitting the necessary documents along with the applicable fee.
Conclusion
Therefore, the sole purpose behind the execution of a confidentiality agreement is that any information, creative idea, processes, or discussions that are valuable for a business that intends to afford privacy and confidentiality to the same must be allowed under legal protection against disclosure to any third party/competitor. This protection is especially required for young entrepreneurs & start-ups who wish to grow their business based on their innovations & creativity. Thus, protection under the law along with the right to sue for the breach of the agreement helps them to gain confidence and operate fearlessly.
However, to fulfill the above-mentioned purposes, it is essential to draft the agreement carefully and if required discuss the provisions with a legal professional having specialization and years of experience in NDA agreements who will help you to layout a crisp and effective agreement as per your requirement.
