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Understanding Non-Disclosure Agreements

A non-disclosure agreement (NDA) is the first legal document that should be executed before beginning discussions on commercial relationships which require you to disclose confidential or any sensitive information relating to your business to another entity. For example, it should be (but is not always in reality) executed before you present your business model to a venture capitalist, it should be executed when you hire a consultant with whom you need to share inside information, or when you plan to enter into discussions with a potential joint venture partner. Non-disclosure clauses are even part of employment agreements.


An NDA ensures that information pertaining to a business is kept secret by the receiving party. Since the information pertaining to the business is valuable, disclosure of such information is often likely to cause a loss to the business. For example, if a list of your customers and marketing strategy is disclosed to a competitor by a consultant you hired, your business could potentially lose its competitive advantage (or some of its clients) to the competition.


The entity which receives the information after signing an NDA is under an obligation to maintain confidentiality and must ensure that the information is not disclosed to third parties. An NDA usually applies to top management, employees, officers, consultants and anyone else who receives the information from the receiving party.


The kind of business relationship with respect to which an NDA is contemplated is important. Usually, in an investment transaction, the obligation to maintain confidentiality is only with respect to the investee (since the investee will be providing confidential information to the potential investor). However, if you are contemplating a joint venture, information disclosed by both parties must be kept confidential by the other. So, if the other side sends you an NDA, it is advisable to go through it and see whether information disclosed by you to it is also protected under the NDA. If not, a clause imposing the obligation on the other party should be inserted.


Example: A business hires a consultancy firm to review and identify inefficient manufacturing processes which are adding to costs, but not contributing proportionately to revenues. This may require disclosure of the business model and the financial details of the business. Therefore, it is strongly advisable that a non-disclosure agreement is executed with the consultancy firm.

Six key issues that you should look for in an NDA

1.Examine the obligations under an NDA carefully

If you have received a non-disclosure agreement NDA from another party, you should examine your obligations and restrictions carefully. While the document may be titled a non-disclosure agreement, it may have various other kinds of provisions – say, non-compete and non-solicit obligations. Hence, it is important not to presume that the only obligation under the document is one of confidentiality, and to read the document thoroughly – you may need to renegotiate it some of the obligations if they are too cumbersome or impractical for your situation.

2.The scope of confidential information.

Every NDA will contain some definition of what information is to be considered confidential. The party disclosing the information will want the definition to be broad and cover all information disclosed, while the receiving party will negotiate to have a specific and narrow definition.

Often, the receiving party will ask the disclosing party to specify which particular information being disclosed is confidential, and only such information is then treated confidentially. The disclosing party on the other hand usually demands that all information disclosed, without exception, or with few specific exceptions, be treated as confidential information.

3.Remedies available for disclosure

An NDA must specify the remedy for a breach – which could be monetary damages or injunctive relief. Injunctive relief usually involves an order from a court directing the disclosing party who has breached the agreement return the information and stop disclosing it any further. Sometimes, monetary damages cannot compensate for the harm that may be caused by disclosure, so most NDAs specify that in case of a breach injunctive remedies can be invoked by parties.

Clauses that are relevant if you are the receiver of confidential information, e.g. when you propose to invest or advise an investor, or you are in discussions with a potential joint venture partner or collaborator


4.Requirement to mark documents as ‘confidential’

Some NDAs state that only information that is clearly identified and marked as "CONFIDENTIAL" will be protected. This may not be practical to implement in all situations. For example, the receiver may have access to the entire server on the site of work, and the disclosing party may not be in a position to specifically mark every new document that is already in the server. Therefore, this requirement should be customised depending on the situation. If confidential information pertaining to your business is being provided to another entity, you may want to exclude the marking requirement. If you are likely to be the receiver of information, it is good for you to require that confidential information be specifically marked.

5.Include some standardised exceptions and allow certain disclosures

Should you be liable for wrongful disclosure if you disclose information that was already known to you, or if an entity that is unrelated to you, discloses confidential information to the public? In every NDA, there are certain exceptions to confidential information, which should be carefully considered.

Similarly, there may be situations where it may be necessary to disclose confidential information. For example, what if the other party is required to disclose information pursuant to a court order? What if the law is modified in future and certain components of the information that you have disclosed cannot be kept confidential? It would be commercially impractical if you hold him liable for breach simply for complying with the law or an order of the court. Therefore, the purpose and the extent of disclosure under certain compulsions and legitimate reasons must be specified as exclusions from duty of confidentiality.


6.Return of information

Most NDAs require original and copies of confidential information to be returned upon request. This works best with physical copies or information on a medium (e.g. all the information on a company provided laptop, hard copy plans, manuals, USB tokens, etc.). Return of electronic information may not be practical. However, some NDAs require the receiving party to delete such information from all of their electronic records. Receiving parties, in such circumstances, may ask for a right to retain certain copies for the purpose of record keeping or proper accounting only.

For a consultant: A consultant who receives confidential information may be required to return originals. However, it may be in his interest to exclude the requirement to return copies, so that you can preserve copies of your work. The retained copies of the work can help the consultant in demonstrating his past experience to clients in future, once the term of the confidentiality agreement expires.


Sample Non Disclosure Agreement

The readers can view/download a sample NDA through this link


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