In continuation to our previous blog Structure of NDAs- II, in this blog, we shall discuss the Grey Areas prevalent under NDAs.
NDAs have been in use for a long time now and have been proved to be of the utmost essence in the corporate world. However, there still exist certain grey areas under these NDAs which are most often in dispute.
These can be summarised as follows:
1. SECTION 27 OF INDIAN CONTRACT ACT, 1872
One of the issues under NDA is that of restrictive trade. Section 27 of the Indian Contract Act, 1872 states that:
“27. Agreement in restraint of trade, void.—Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. —every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.”
Exception 1.—Saving of agreement not to carry on business of which goodwill is sold.—One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein, provided that such limits appear to the Court reasonable, regard being had to the nature of the business.”
The grey area created herein is whether an NDA amounts to such restrictive trade practices. If an NDA is proven to be imposing a restriction on lawful trade, profession and/or business being carried out, as under Section 27 of the Contract Act, it shall be held to be void.
In the case of VFS Global Services Private v. Mr. Suprit Roy [2008 (2) BomCR 446], the Bombay High Court held that Section 27 does not include NDA and a Clause prohibiting an employee from disclosing commercial or trade secrets is not a restraint of trade.
Further, in the case of Mr. Diljeet Titus, Advocate v. Alfred A Adebare and Ors [2006 (32) PTC 609 (Del.)] on the issue of termination of employment wherein the Defendant took confidential information, the Delhi High Court restrained the Defendant from misusing such information which was essential and confidential to the database of the firm.
Therefore, the Courts have, from time to time, ensured that the confidentiality of the organisations, corporate or otherwise, is of prime concern and must be protected to ensure that their confidential and sensitive information does not fall into the hands of competitors or become liable to misuse.
2. DISCLOSURE VS. USE
Usually while drafting and entering into NDAs, parties miss out on the fine line between confidentiality of information and the necessary use of such information. Only restricting disclosure of information under an NDA is not enough – One must also clearly ascertain the use of confidential information, and ensure that the information is used only for the stipulated purposes thereafter.
The NDA must, therefore, specify the purpose and stipulated use for which information is being shared, and that the same must be used only as directed under the NDA for the purpose of completing the assigned task.
NDAs help safeguard information which the organization regards as confidential and desires the same not to be shared or the sharing of which would cause damage to the strategic functioning of an organization. This is especially so for Intellectual Property, which has always been a more safeguarded aspect. Therefore, companies and organisation usually take additional steps to ensure that they safeguard and protect their Intellectual Property from competitors, public and other stakeholders.
An NDA ensures that the Receiving Party does not indulge in such practices and, in case of breach, is made liable for the damages to be paid. However, an NDA should be crafted after thorough negotiations and in an exhaustive manner. The parties should be well aware of not only the terms of the Agreement they are entering into, but also of the importance and sensitivity of the confidential information being shared under the said Agreement, as well as the purpose for which the same is being shared. It is only with a true appreciation of the gravity of the issue that the parties can be expected to ensure that the avoid potential disputes.
Strongly worded NDAs are the need of the hour, especially when it comes to transactions related to IPR. However, due consideration must also be taken to ensure that an NDA does not result in a restraint of trade, which would attract the applicability of Section 27 of the Contract Act, rendering the NDA void.
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