How to Draft a Non-Disclosure Agreement (NDA) to Protect Confidential Information?

Introduction

Various entities like companies, entrepreneurs, employees, advisors, investors, and partners enter into mutual agreements detailing confidential information. Any unauthorized disclosure of such sensitive information can result in enormous losses, both financially and reputationally. The document that ensures confidentiality is the Non-Disclosure Agreement (NDA), which protects the parties from unwanted revelations. Nevertheless, too much attention should be paid to the correct formulation of all stipulations regarding the confidential information, utilization of the document, exceptions applied, validity, and the process of conflict resolution.

Why a non-disclosure agreement matters?

Confidential information is often the most important asset of any business.
An example would be a company revealing information about its business model to a potential investor, technical information to the manufacturer, customer information to the service provider, or information on its proprietary software to an adviser. Absence of the proper agreements may result in severe commercial consequences when that information is disclosed. An NDA helps by:

• Identifying information that must remain confidential;

• Restricting the unauthorized use of confidential information;

• Limiting disclosure to persons who genuinely need access;

• Protecting business strategies and commercially sensitive information;

• Reducing the risk of misuse of intellectual property;

• Establishing contractual remedies for breach;

• Creating evidence of the parties' agreed confidentiality obligations; and

• Providing greater certainty when confidential information is shared.

Therefore, NDA should be treated as a preventive legal instrument rather than merely standard formality.

What is a non-disclosure agreement?

An NDA is an agreement between two or more parties in which it is highlighted that certain information must be kept confidential and only used for a purpose agreed upon by the parties.

The person sharing the confidential information is called the Disclosing Party, while the person receiving such information is called the Receiving Party. An NDA may be:

• Unilateral, where only one party discloses confidential information;

• Mutual, where both parties exchange confidential information; or

• Multilateral, where several parties exchange confidential information.

While a startup entering negotiations with an investor will most likely need a one-sided NDA because it will be disclosing sensitive information, a mutual NDA would be more suitable for two companies that are working together on a product and exchanging confidential information. In the agreement, it is necessary to state the purpose of the disclosure of information and to prohibit the recipient from using it in an incorrect way.

Types of NDA

1. Unilateral NDA The unilateral NDA is generally used when only one party is expected to disclose the confidential information. It may be used between the:

• An employer and an employee;

• A business and a consultant;

• A startup and an investor;

• A company and a vendor; or

• A business and a potential purchaser.

2. Mutual NDA The mutual NDA is appropriate wherein both the parties will disclose the confidential information to one another. It is commonly used for:

• Joint ventures;

• Strategic partnerships;

• Mergers and acquisitions;

• Technology collaborations;

• Research projects; and

• Business negotiations.

3. Employee NDA An employee NDA protects confidential business information accessed by employees during their employment. It may cover:

• Customer information;

• Pricing information;

• Internal processes;

• Technical information;

• Business plans;

• Financial information; and

• Proprietary systems.

What information should be covered under an NDA?

One of the most important parts of a Non-Disclosure Agreement (NDA) is the definition of Confidential Information. The definition should be sufficiently clear and specific because an overly vague definition may create difficulties in establishing whether particular information was intended to remain confidential. The parties should identify the categories of information that require protection based on the nature of their business relationship or transaction.

Confidential Information may include trade secrets, business plans, financial records, pricing and costing information, customer and supplier details, marketing strategies, contracts and commercial terms. It may also cover information relating to ongoing negotiations, proposed transactions, business opportunities and other commercially sensitive discussions exchanged between the parties.

Where the relationship involves technology or product development, the NDA may additionally protect product designs, technical specifications, software and source code, algorithms, databases, research and development information, prototypes, manufacturing processes and other intellectual property. The agreement should be tailored to the transaction so that important information is adequately protected without creating unnecessary uncertainty about what constitutes confidential information.

Essential clauses of an NDA

A properly drafted NDA generally contains several important provisions.

1. Identification of the Parties The agreement should accurately identify parties by their legal names and theor relevant addresses or the registered details.

2. Purpose of Disclosure The NDA should explain why the confidential information is being shared. For example, the information may be disclosed for:

• Evaluating a business proposal;

• Providing professional services;

• Negotiating a joint venture;

• Developing a product;

• Evaluating an investment; or

• Discussing a potential acquisition.

The receiving party should not use the information for purposes outside the agreed purpose.

3. Definition of Confidential Information The NDA should define the categories of the information that will receive the protection. The definition should cover both the information disclosed in the written form and, wherever appropriate, the information communicated orally, electronically, visually, or through any access to systems.

4. Confidentiality Obligations The receiving party should mainly agree to:

• Keep confidential information secure;

• Prevent unauthorized disclosure;

• Use the information only for the permitted purpose;

• Restrict access to authorized persons; and

• Take reasonable measures to protect the information.

5. Permitted Disclosure The agreement should identify circumstances where disclosure may be legally required. For example, disclosure may be permitted where required by a court; a government authority; a statutory regulator; or applicable law.

Where legally permissible, the receiving party may also be required to provide prior notice to the disclosing party.

6. Return or Destruction of Information The NDA should explain as to what happens when a business relationship ends or when a disclosing party requests information back. The receiving party may be mostly required to:

• Return documents;

• Delete electronic copies;

• Destroy physical records;

• Remove information from systems where reasonably possible; and

• Certify destruction where appropriate.

7. Ownership of Information The NDA should make it clear that the disclosure does not transfer the ownership of the confidential information. The disclosing party retains its rights in the intellectual property; trade secrets; documents; technical materials; software; designs; as well as any other proprietary information.

8. No Licence Clause Wherever it is appropriate, the agreement should clarify that the disclosure of the confidential information does not automatically grant receiving any party a licence or the ownership interest in disclosing party's intellectual property.

9. Duration The NDA should specify as to how long confidentiality obligations will continue. The duration may vary depending upon the nature of information and commercial relationship.

10. Remedies for Breach The agreement may specify contractual remedies available in the event of unauthorized disclosure or misuse. These may include:

• Damages;

• Injunctive or equitable relief where legally available;

• Recovery of specified losses where enforceable;

• Termination of the underlying relationship; and

• Other remedies available under applicable law.

How to draft an NDA effectively?

The following approach can help:

Step 1: Recognize the agencies. Make sure everyone involved in the contract is properly legally recognized. 

Step 2: Understand the confidential information. Learn what is considered confidential and needs to be preserved in a legal contract.

Step 3: Clarify the objective. Make it known why certain information is getting disclosed.

Step 4: Describe lawful usage. Name ways that the person receiving the information could use it but don’t allow him to do anything illegal with it.

Step 5: Specify available access. Tell who will be able to access necessary information and make the responsible people accountable for confidentiality.

Step 6: Write the exceptions of confidentiality. Define the information that is publicly available, independently developed, legally received from various sources or obligated to be disclosed through the law.

Step 7: Set the confidentiality period. The document must distinguish between simple and hard types of confidential information.

Step 8: Provide for return and destruction. Explain what will happen to confidential materials when the contract ends.

Step 9: Provide for legal solutions. Define all the necessary legal mechanisms concerning this deal.

Step 10: Review the document before finalizing it. Both counterparts need to understand everything before they start giving necessary information.

Information that should be excluded from confidentiality

An NDA should not normally treat every piece of information as confidential without qualification. Common exclusions may include information that:

• Is already publicly available;

• Becomes publicly available without breach of the NDA;

• Was lawfully known to the receiving party before disclosure;

• Is independently developed without using confidential information;

• Is lawfully received from a third party without confidentiality restrictions; or

• Must be disclosed pursuant to the law or valid governmental or the judicial requirement.

Duration of confidentiality obligations

The confidentiality period should be carefully considered. Some of the information may lose all of its commercial value within a short period, while other information, such as the trade secrets, proprietary technology, or the strategic business information, may require the protection for considerably longer periods. The NDA may therefore specify:

• A fixed confidentiality period;

• Confidentiality continuing for a specified period after termination; or

• Continuing protection for information that legally remains confidential for as long as it retains its confidential character, subject to applicable law.

The duration should be commercially reasonable and clearly stated to minimize disputes.

Consequences of breach of an NDA

A breach occurs when a party violates all of its contractual confidentiality obligations, such as by the unauthorized disclosure, misuse, copying, or the distribution of the confidential information. Depending on circumstances, the injured party may seek the remedies available under contract and the applicable law. The potential consequences may include the:

• Monetary damages;

• Injunctive relief where available;

• Termination of the commercial relationship;

• Recovery of losses caused by the breach;

• Protection of intellectual property rights; and

• Any other contractual or the statutory remedies.

NDA and Intellectual Property Rights

An NDA differs from an intellectual property agreement in terms of its purpose. An NDA aims to keep secret information from disclosure.

Intellectual property law may provide protection to trademarks, copyrights, patents, designs, and other recognized forms of intellectual property rights. It cannot be claimed that an NDA suffices for intellectual property.

The parties creating intellectual property, such as employees, consultants, developers, producers, or other partners, must have a separate agreement providing exclusive ownership over the intellectual property as well as intellectual property assignment clauses.

Moreover, the parties should be aware of and apply the Indian laws, contractual agreements and provisions regarding prohibition on trade wherever applicable.

Practical tips before signing an NDA 

One of the most important parts of a Non-Disclosure Agreement (NDA) is the definition of Confidential Information. The definition should be sufficiently clear and specific because an overly vague definition may create difficulties in establishing whether particular information was intended to remain confidential. The parties should identify the categories of information that require protection based on the nature of their business relationship or transaction.

Confidential Information may include trade secrets, business plans, financial records, pricing and costing information, customer and supplier details, marketing strategies, contracts and commercial terms. It may also cover information relating to ongoing negotiations, proposed transactions, business opportunities and other commercially sensitive discussions exchanged between the parties.

Where the relationship involves technology or product development, the NDA may additionally protect product designs, technical specifications, software and source code, algorithms, databases, research and development information, prototypes, manufacturing processes and other intellectual property. The agreement should be tailored to the transaction so that important information is adequately protected without creating unnecessary uncertainty about what constitutes confidential information.

How Lead India Can Help You?

1. Provide the legal guidance for drafting as well as reviewing the Non-Disclosure Agreements.

2. Assist the businesses and the individuals in identifying the confidential information that requires the contractual protection.

3. Draft the unilateral, mutual, employee, consultant, vendor, as well as the business NDA agreements.

4. Review the confidentiality, intellectual property, non-use, return-of-information, as well as the dispute-resolution clauses.

5. Assist in particularly identifying any contractual risks before signing the NDA.

6. Help the businesses to respond to alleged breaches of the confidentiality agreements.

7. Assist with the legal remedies and the dispute resolution arising from the unauthorized disclosure or the misuse of confidential information.

Conclusion

A properly drafted non-disclosure agreement, sort of shields sensitive business and professional information, by precisely defining what counts as confidential information. It also clarifies how it can be used, what your confidentiality duties are, plus exceptions to the rule, and the time period. It additionally covers the rights tied to intellectual property, and what happens if the agreement is breached. Businesses shouldn’t rely on generic templates, and they should not make NDAs for every single situation, just because. When NDAs are handled with good drafting, they help settle disagreements and secure vital information.

One can talk to lawyer from Lead India for any kind of legal support. In India, free legal advice online can be obtained at Lead India. Along with receiving free legal advice online, one can also ask questions to the experts online free through Lead India.