Introduction:
A Non-Disclosure Agreement (herein referred to as NDA) is a legally enforceable, written contract between two parties, who agree to disclose confidential or sensitive information and protect that information from disclosure to unauthorized or third parties. In other words, the NDA contract prohibits sharing confidential information outside the parties to the agreement. The Non-Disclosure Agreements can also be identified as Confidential Agreement (CA), Confidential Disclosure Agreement (CDA), Secrecy Agreement (SA), Proprietary Information Agreement (PIA).[1]
Some common agreements which involve the NDAs are:
- Doctor-Patient NDA
- Attorney-Client NDA
- Bank-customer NDA
Types of Non-Disclosure Agreement:
There are generally three different types of NDAs. The parties that are involved in establishing a legal relationship through NDAs are: Disclosing Party (the party which discloses confidential information) and Receiving Party (the party that receives confidential information).
- Unilateral Non-Disclosure Agreement:
Unilateral NDA involves two parties, out of which only one party shares the confidential/sensitive information and requires the other party to maintain absolute confidentiality of such information.
- Bilateral Non-Disclosure Agreement:
Bilateral NDA involves two parties. Here, both the parties disclose confidential/sensitive information with the intention to protect this information and prohibit divulging the same to external/third parties.
- Multilateral Non-Disclosure Agreement:
Multilateral NDA involves three or more parties, where one party discloses confidential information and the other two parties promise to maintain confidentiality and to not in any way transmit the information to an unauthorized party alien to the agreement.
Legal Implications:
- Non-Disclosure Agreements are governed by the Indian Contract Act, 1872. However, the Indian contract Act does not specifically mention the Non-Disclosure Agreement.
- It is a mandatory requirement to have a stamp on NDAs, for their validity and enforcement.
- Under Section 406 of the Indian Penal Code, an employee can be held liable for criminal breach of trust if the employee is misusing or disclosing confidential information for his/ her benefit.
Note: NDAs should be not be applicable to information that is already available in the public domain.
The necessity of an NDA:
Non-Disclosure agreements grant legal protection to Intellectual property rights of business and bars the receiving party from disclosing any crucial sensitive information that can be used for personal or commercial gain. In case of a breach, it ensures the severity of consequences. The non-disclosure agreements outlines legal remedies and protection against any breach by the suit of injunction, indemnification and reimbursement of litigation expenses. The parties may also refer to Alternative Dispute resolution in event of disputes and conflicts.
The Clauses in NDA act as a shield of protection and maintenance for the disclosing party. If the parties to a contract do not enter into a non-disclosure agreement, the right to seek protection and avail remedies is non-existent and this leaves the disclosing party vulnerable. The NDA is a precautionary step to safeguard the valuable information, and protect against losses.
Important clauses that must be included while drafting an NDA:
“A well-written NDA will cast a broad net for the Disclosing Party and remove any potential loopholes while still retaining a respectable level of fairness and value for the Recipient Party.”[2]
- Identification of the Parties to the agreement:
The ‘identification of parties’ clause shall be the first and the most crucial step while drafting the NDA. This clause is generally a straightforward description of the parties of NDA and it sets forth whether the agreement is unilateral, bilateral or multilateral. The disclosing party and the receiving parties are also identified, to facilitate framing of the clauses, as per the requirement. Furthermore, the clause must also ascertain where the Receiving Party may disclose the confidential information to third parties, during the due diligence or business discussions. It must also be ensured that any information, which is not agreed upon, cannot be disclosed.
2. Definition of what is deemed to be confidential:
One of the most crucial requirements in the NDAs is to define what information can be construed as confidential information. Once the parties agree to be bound by a contract, they must define the information which shall be confidential and only such information will construed to be sensitive warranting absolute confidentiality.
The parties must carefully and cautiously understand this clause to avoid accidental disclosure. The disclosing party shall render the provision flexible to encompass as much information as possible so that the receiving party does not get the opportunity to circumvent. The receiving party is obligated to understand the scope of confidential information
It must be noted that oral information can also be considered confidential at the instance of parties, however, the disclosing party may consent to it in writing. The disclosure period and exclusions must also be covered within this section.
3. Exclusions from Confidentiality Treatment:
According to this clause, the receiving party shall not be held liable for disclosing information excluded from the scope of confidentiality. The clause will shield the receiving party from attracting liability for violations that are not covered under the agreement. For instance, in an NDA with Party A (disclosing party) and Party B (receiving party), wherein B will have access to the confidential information as communicated by A, if B discloses A’s confidential information, he will not be held liable if the information:
- Exists in the public domain.
- Has been approved for usage, through prior written permission by the disclosing party
- Is required to be disclosed in case of legal proceedings, Statutory Requirements or Court’s Order.
- Is developed independently by the party without using confidential information.
- Is not under the definition of confidential information.
It is to be noted that limitations on disclosure or divulging confidential information is invalid, in the following conditions:
- If the receiving party had prior knowledge.
- Such information has come in the public domain or was already in the public domain.
- The receiving party gains the subsequent information from any other source.
4. Date of Entering into contract and Execution:
The agreement should clearly specify the dates of entering as well as execution of the contract, to avoid unnecessary confusion. The dates may differ, with mutual understanding and suitability of the parties.
5. Term of the Agreement:
The term of NDA is mutually decided by the parties (in a Bilateral agreement) or solely by the disclosing party. The period is usually 2 to 5 years or shorter depending upon the nature of assignment, but extendable up to 10 years as mutually decided by the parties. However, in the case of trade secrets, longer terms put an unnecessary burden on the receiving parties as trade secrets cannot remain a secret forever. Hence, the clause must clearly define the term of the agreement and specify the treatment of confidential data when the agreement terminates.
6. Duties and obligations of parties:
This clause mentions the duties and obligations fulfilled by the parties, which is mutually agreed upon by the parties or voluntary by the disclosing party. This clause includes sub-clauses like –
- The parties are obligated to not disclose any sensitive/confidential information to an unauthorized party without written prior approval.
- The parties are required to take due diligence and utmost care for the protection of sensitive/ confidential information.
- In case any confidential information is revealed, even after due diligence, parties are bound to jointly secure that information.
- The parties cannot use the confidential information for their personal purposes or gains.
While the above-mentioned clauses are necessary clauses, they are not exhaustive. The parties are free to include additional duties and obligations to protect their confidential information.
7. Purpose of entering into NDA:
The intention or the purpose of entering into a non-disclosure agreement should be clearly mentioned. The purpose must be a transparent and true reflection of both the parties’ intention to avoid any misinterpretation.
8. Use of confidential information:
The parties have to name the third parties and specify the motive of sharing this information with them. The third parties shall also abide by the agreement and carry out their purpose while securing the confidential information. A prime example of such agreements can be observed in case of a Doctor-Patient relationship. Hospitals usually provide sensitive microscopic slides of patients to their diagnostic affiliates which further use this information to construct a digital diagnosis tool, to enable the doctors in carrying out their operations much more effectively. Similarly, legal advisors, accountants etc. are legally bound to maintain the confidentiality of the agreements.
9. Return of confidential information:
After the term of the agreement terminates or expires, the receiving party shall destroy, erase, return or remove the confidential information transmitted by the disclosing parties within the time period stipulated by the disclosing party. The clause is important because the sensitive information of the disclosing party is at risk and vulnerable to exploitation by the receiving party or third party upon termination or expiry of the agreement. To avoid such menace, the disclosing party spells out that his information must be returned and destroyed. However, complete destruction (physical or digital form) is impossible, but the clause shall ensure the information will not be accessible for any purpose, after fulfilment of the contract.
10. Consequences of breach and reliefs:
If the receiving party violates any provision or clause of the Non-Disclosure Agreement, the consequences shall be adverse and irreparable for the disclosing party. However, no monetary relief might be able to suffice or compensate for the damage caused to the disclosing party. This clause is drafted exclusively to ensure that the rights and position of the disclosing party are not compromised. Therefore, the remedies available to the parties in such an event, are injunction and indemnity. The parties mutually discuss and decide this clause, so that the breaching party is aware of the severity of consequences. The party which suffers as the result of the breach may directly approach the court for an injunction, to bar the breaching party from disclosing the sensitive data. In addition to the suit of injunction, the victim party is entitled to indemnification of all costs (including attorney’s fees and litigation expenses), other expenses and damages.
11. Dispute resolution and jurisdiction:
An agreement drafted with utmost perfection and mutual understanding can become subject to disputes and commotion. In such a scenario, it is always advised to pre-decide dispute resolution beforehand. Before approaching the court, the parties must attempt to settle disputes. Not only will it save on time, but it is also less expensive and convenient. Parties may agree that in case of any dispute in the future course of agreement in respect of breach, termination or any invalidity, the parties shall approach the ADR board under Arbitration and Conciliation Act (1996). It will also specify the number of arbitrators, the place of arbitration as well as the language to be used in the course of the arbitration.
12. Non-Binding Clause:
Last but not the least, no NDA is complete without the clause of Non-Binding. The agreements are generally initiated before negotiations for mergers, partnerships or other collaborative projects. It is essential that parties are empowered to preserve the right to withdraw at any point. However, such withdrawal must be reasonable and consistent with legal and contractual stipulations.
13. Other considerations:
- In a start-up company, NDA must ensure the agreement clearly defines how and where the right of recovery can be exercised by that start-up.
- The language in NDA must be simple, neat and concise. The labels and heading must be clear and organised.
- It is very crucial for the receiving party to sign an executed copy.
- The document must have an expiration date and it must be renewed when it is required to.
Mistakes to be avoided while drafting the Non-Disclosure Agreement:
- The parties are required to be specific about the confidential clause and its scope, however, defining everything within confidentiality can be too specific. It may be problematic for both parties. In a classic case, Lasership, Inc. v. Watson, the company Lasership sued its employee, Belinda for breaching non-compete, non-solicitation and confidentiality provisions of the contract between the two parties. The NDA was ruled unenforceable because the terms regarding sharing employer information were too wide to be interpreted. They covered non-confidential information and were applicable for the whole life.
- Wrongly naming (wrong name of the party of wrong spelling) parties can have a detrimental impact as some companies have legal and trading names.
- Before the receiving party formally signs the confidential information, the information disclosed shouldn’t be communicated. It may lead to conflicts between the contracting parties.
- The disclosing party shall not confirm any provision that authorizes the receiving party to use the information that is not marked ‘confidential.
- The parties must not sign any agreement that assigns their rights beyond the rights to evaluate confidential information.
- There must be proper guidance of terms and clauses, in general as well as in the event of mandated disclosure.
- Where the receiving party receives information via an independent third party and not from disclosure, NDA can be subject to invalidation. In case the receiving party receives information on his own, the receiving party cannot claim interest over that particular confidential information.
Conclusion:
Intellectual Property rights, trade secrets, proprietary information and other confidential information) are of paramount importance to any organisation. NDAs provide a legitimate channel to safeguard these rights as well as the parties. Care must be taken to draft the terms of the NDA with clarity and accuracy. The information stated to be confidential must be clear and unambiguous. The parties must understand the clauses of the agreements as well as the consequences, in case of a breach. There must be no unfair or conflicting clauses in the Agreement. The quality of the Agreement is substantially dependent upon the negotiations between the parties. Happy drafting!
[1]RAZORPAY, https://razorpay.com/learn/non-disclosure-agreement-nda-types-procedure/.
[2] EVERYNDA, https://www.everynda.com/blog/10-clauses-have-non-disclosure/.
YLCC would like to thank Harshima Vijaivergia for her valuable insights in this article.
