Non-disclosure Agreement ("NDA") is invariably the first agreement that any parties execute to start any business relationship which involves exchange of confidential, non-public and proprietary information.
General perception is that NDA is a simple, routine, no-frills agreement executed by parties just to exert moral pressure on each other to protect their respective confidential information.
It is true that the core aspect of an NDA is to protect confidential and business information of a party; however, it is quite an intricate document more than offering protection to confidential information. NDA covers a variety of aspects, including:
a) Method of disclosure of confidential information
b) Timing of disclosure of confidential information
c) Criteria for defining confidential information
d) Information excluded from the purview of confidential information
e) To whom confidential information can be disclosed
f) Under which circumstances confidential information can be disclosed
g) Security measures to prevent unauthorized use or disclosure of confidential information
h) Return, destruction or retention of confidential information upon termination / expiry
i) Responsibility for acts of disclosee's representatives
j) Disclosure of confidential information as required by law
k) Remedies for breach of NDA
l) Governing law which will decide disputes arising out of the NDA and jurisdiction of courts which has competent authority to adjudicate such disputes
Different NDAs serve different purposes – as they can can pertain to business transactions, investment transactions and other professional engagements. Further, there can be different types of NDAs on the basis of disclosure flow (unilateral, mutual and tripartite / multilateral agreement).
In a unilateral NDA, only one party discloses the confidential information to other party.
In a mutual NDA, both parties will exchange the confidential information with each other.
In a tripartite or multilateral NDA, exchange of confidential information will be between three or more parties.
Some elementary provisions of NDA are listed below:
a) Definition of confidential information: It is crucial to define as to which information will constitute confidential information otherwise recipient has to treat all information received from the discloser as confidential.
Qualifiers: Qualifiers to treat certain information as confidential is not a mandatory requirement, however, generally the following qualifiers will be used to define confidential information:
i) Marking or identification requirement: This means to say only information that is marked or identified as confidential will be treated as confidential.
ii) Circumstances of disclosure: This says that recipient needs to treat information as confidential based on the nature of the information received or the circumstances of disclosure of information
Special class of information: Trade secrets, personal identifiable information, price-sensitive information and third party information are special class information protected by applicable laws, so it is crucial from recipient perspective to check with discloser if discloser intends to disclose any special class of information and accordingly appropriate care can be taken by the recipient.
Exceptions: Another crucial aspect from recipient perspective is exceptions to confidential information as information which comes under exceptions will relieve recipient from the confidentiality obligations. In general, exceptions to confidential information may include the following:
a) Information available to public
b) Information already known or available to or in the possession of recipient
c) Information received by or available to the recipient from a third party
d) Information independently developed by recipient without use of, reference to or reliance upon the confidential information
e) Information declared by discloser as non-confidential
f) Information disclosed by recipient with the permission of the discloser
Scope of use of confidential information: It is advisable to indicate that the recipient will be permitted to use confidential information only for the purpose of the NDA. Purpose can be different from NDA to NDA based on nature of the transaction.
Authorized disclosures: Recipient is permitted to disclose confidential information to its representatives who are required and need to know the confidential information and further such disclosure of confidential information to the representatives maybe subject to requirement of a back-to=back written agreement by such representatives to abide by the terms of the NDA. Generally, such representatives may include affiliates, agents, partners, employees, officers, directors, advisors, attorneys, accountants, consultants, financial advisors, financing sources and other representatives.
Requirement to execute a confidentiality agreement by representatives may not be viable option all the time. However, even in such cases the recipient should be obliged to be responsible for the acts of the representatives, particularly in case of breach of the NDA.
Permitted disclosures: Apart from disclosure of confidential information to representatives, recipient may be permitted to disclose the confidential information to the extent as required by law. In certain cases, recipient maybe required to notify the disclosure requirement to the discloser in advance so that discloser will have the opportunity to contest or challenge such disclosure requirement. Further, discloser may impose obligation on the recipient to contest or challenge such disclosure requirement directly by the recipient or may require cooperation and assistance of recipient in discloser efforts to contest or challenge the disclosure requirement. However, recipient has to be careful in drafting this provision and has to ensure nothing in the NDA shall prevent recipient from complying with request or requirements of law or other competent authority to disclose confidential information. The recipient should not be inviting any legal troubles by not disclosing the confidential information as required by a competent authority.
Return, destruction or retention of confidential information:
Discloser must also make sure its confidential information is appropriately protected and not retained by the recipient following the completion of the purpose or termination of the NDA and if retained only for certain permitted purposes.
This provision is crucial to accomplish foregoing aspects. Discloser should have the leverage to seek return or destruction of confidential information, yet such return or destruction of confidential information may be conditioned on discloser's written request or termination of the Agreement. It is advisable to avoid automatic triggers, tie request to return or destruction of confidential information to the discloser's written request. This way, discloser will ensure its confidential information is safely returned to it or destroyed by the recipient and recipient will be reminded of its obligation to return or destruction of confidential information by way of sending request to do the same by the discloser.
In certain cases, recipient may be required to retain confidential information even after the purpose is completed or termination of the NDA. For this reason, recipient may be permitted to retain confidential information for legal, compliance, regulatory, audit, backup, archival, record retention, litigation and professional purposes.
Term: Term of an NDA is term for which the NDA will be in effect and terminated or expire .following the completion of the NDA term. NDA can have a fixed term of one, two, three years etc.,
Protection period: Protection period is different to that of NDA term. NDA as an agreement will be terminated upon expiration of NDA term, however, certain of obligations of recipient will survive beyond the term of the NDA with respect to any confidential information retained by the recipient. Protection period can be for fixed period of one, two, three years etc .or perpetual (i.e., so long as the confidential information is retained by the recipient).
Dispute resolution: NDA must include an effective and expeditious dispute resolution system to resolve disputes between the parties with respect to the subject matter of the NDA.
Governing law: Governing law provision will provide for laws pursuant to which any dispute relating to the NDA shall be resolved.
Jurisdiction: Jurisdiction is the place wherein courts located will have authority to adjudicate the disputes relating to the NDA.
Arbitration: Arbitration is a process alternative to traditional litigation process to resolve the disputes without resorting to courts.
Remedies:
Injunctive relief:
NDA provides for discloser to seek injunctive or equitable relief with respect to breach of the NDA by the Recipient. However, in some cases, such provision may confer right on discloser to seek such relief without the necessity of proof of damages or submitting a bond or security – this aspect works in the favor of the discloser.
Indemnity: Typically, parties may not agree to indemnity obligation at the stage of NDA as indemnity is rare provision in NDAs. However, in certain cases, parties do agree to indemnity one another from the loss or damage incurred due to breach of the NDA.
Reimbursement of fees: In case of litigation, party prevailing in the litigation or arbitration matter may get the reimbursement of fees and other costs incurred in such litigation. This reimbursement can be conditional or unconditional. In case of conditional, parties may tie reimbursement of fees as which are reasonable and documented only and further only as determined by a court of competent jurisdiction, otherwise it could be unconditional.
Restrictive covenants:
These restrictive covenants are specifically found in investment and professional NDAs to prevent investors and employees from engaging in non -compete activities.
Non-solicitation: This provision has different components involved as listed below:
a) Non-solicitation or non-hire: This provision puts restriction on a party not to solicit to hire or hire any employee of the other party
b) Employees: This non-solicitation restriction can be extended to all employees of the other party or limit to specific management or senior professional of the other party
c) Timing: Duration of non-solicitation provision applicable to a party. It can be for the term of the Agreement or a fixed term or maybe a combination of both.
d) Exceptions: Exception to non-solicitation provision will enable a party to relieve itself from the application of non-solicitation restriction. Such exceptions may include general recruitment via advertisements or recruitment firms, employment of a person who contacts a party on such person own initiative or employment of other party's employee who is no longer in employment with the other party.
Non-compete: Non-compete is another provision which prevents a party from engaging in business which is same or similar to the business of other party based on the confidential information for a specific period of time as agreed by the parties.
Non-interference with business relationships: This another restrictive covenant which prevents a party from interfering with business or professional relationships of other party for a specific period of time as agreed by the parties. Key components of this provision are:
a) Scope: Primary focus of this provision is to ensure a party do not interfere with business or professional relationships of other party. Such other party may have business relationships with its customers, service providers, business partners etc. and professional relationships with professionals such as employees, consultants, contracts etc. Scope can be limited to a restriction of interference with business relationships or professional relationships or a combination of both.
b) Exception: Major exception to this restriction is that restricted party will be permitted to have its own business or professional relationships to the extent such relationships do not involve use of confidential information or any breach of the NDA.
Trading restrictions: This is specific to investment NDAs wherein investor will be restricted from making investment in target entity securities for a specific period of time. This provision may have variety of restrictions on investor some as follows:
a) No trading in the securities of the target entity.
b) No efforts to support third party to participate in the trading of the target entity securities.
c) No encouragement of any third party to get ownership control in the target entity.
d) Strict restriction on investor not to participate in any transaction that could have the impact to change the ownership control of the target entity.
This restriction may have certain exceptions as listed below:
a) Investor may submit a proposal for procurement of securities of target entity in private.
b) Investor may purchase certain permitted securities subject a specific threshold limitation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
