As discussed in our previous blog, a Non-Disclosure Agreement (NDA) can be of crucial importance when it comes to most commercial relationships, especially in the current digital era. This importance is underpinned by the various kinds of confidential information shared between parties, varying largely based on the sectors such parties belong to.
This article will discuss the standard and most advisable structure for an NDA which needs to be taken into due consideration while drafting the same. Typically, most NDAs are structured in a similar manner and only differ with respect to the levels of confidentiality to be maintained, the time period and the remedies available to the parties in the event of a breach. Following are some of the essential clauses which give the basic structure to an NDA:
1. PARTIES TO THE AGREEMENT
Parties to an NDA are the parties who will be sharing the confidential information with each other and shall come to uphold the promise of not disclosing the same to any other party without due authorization. This is one of the most basic yet essential clauses as it clearly defines who the parties to the NDA are. This Clause is also the source of the rights available to the parties as well as a direction as to who would be held liable in case of a breach. This Clause must, thus, be the first Clause so as to set a tone for the NDA and refer to the exact parties thereafter.
An NDA, as discussed in our previous blog, can be Unilateral or Bilateral or even Multilateral and, thus, it is important to ascertain who the parties of the contract are. The party who shares the information is termed as the Disclosing Party while the party to whom information is being shared is the Receiving Party.
2. PURPOSE OF AGREEMENT
The main aim of an NDA is set out under the Purpose Clause which helps the parties to the NDA understand the basic purpose and objective for entering into the NDA as well as the limitations to their duties and liabilities. Since this Clause lays down the very foundation of the NDA, it should be well-negotiated between the parties so that they are on the same page about the objectives of the NDA.
3. TERM OF THE AGREEMENT
Commencement and Termination Date of the NDA would fall under the next Clause of the Agreement which explicitly specifies the time period for which such NDA is valid. The date of execution of the NDA is a point that must be thoroughly negotiated upon and agreed by way of mutual understanding between the parties.
Generally, NDAs are signed for a period of 2-5 years with an extension of up to 10 years. However, this time period can be negotiated upon and altered as per the interests of the parties.
It is also to be kept in mind that the term period of the NDA depends on the level of confidentiality and how the Disclosing Party perceives the disclosure of such information.
The Term Clause can also incorporate, inter alia, a Termination Clause which would state any circumstance in which either party wants to terminate the NDA altogether, along with the procedure to be followed for the same.
4. DUTIES AND OBLIGATIONS UNDER THE CLAUSE
The duty of disclosing information under the NDA falls on the Disclosing Party for the purpose of the work or the commercial relationship with the other party, as the case may be. However, the Disclosing Party must also be aware of the necessity of such information to be shared and exercise due discretion with respect to sharing only such confidential information as is absolutely necessary for the concerned purpose.
The Receiving Party is, on the other hand, under the obligation to not disclose this information with any other party without due authorization and unless absolutely essential. They are also obligated to undertake due diligence and precaution regarding the safeguarding of such information. Since the Receiving Party has been entrusted with the confidential and sensitive information belonging to the Disclosing Party, the obligation of duly performing the obligations of the NDA falls on the Receiving Party.
It also means that just because they are privy to such knowledge due to their proximity to the organisation, the Receiving Party must ensure that there is no misuse of such information on its part and no personal gains are made from the unauthorized use or access thereof.
The parties can also list out various other duties and obligations in the NDA that are in furtherance of protecting and safeguarding their interests.
5. WHAT IS CONFIDENTIAL
The NDA must clearly define the kind and type of information that falls within the ambit of ‘Confidential Information’. This is one of the most crucial parts of the NDA and must be well defined so as to avoid confusion or conflicts.
While the parties are engaging in the disclosure of information, the information which does not fall under the purview of confidential information must also be clearly defined so as to limit the ambit of potential disputes under the NDA. Both parties must negotiate on this Clause and reach a mutual understanding.
It would be safer for the Disclosing Party to define this Clause broadly, taking into consideration current or future sensitivity of the information being shared, so that a greater portion thereof is safeguarded.
The Receiving Party must also try to appreciate the importance and sensitivity of the information being shared and ensure that it does not violate the confidentiality thereof and complies with the terms of the NDA.
6. EXCEPTIONS TO CONFIDENTIAL INFORMATION
The next Clause must state the exceptions to the confidential information protected under the NDA. As mentioned before, not all information shared is confidential and details of the same must be specified in the NDA. This Clause clearly lays out for the Receiving Party what can and cannot be shared, and further defines the conditions under which the Receiving Party cannot be held liable.
As discussed above, information which is readily available in the public domain or that which is also known to the Receiving Party cannot be termed as confidential. Further, information acquired by the Receiving Party from sources other than the Disclosing Party, or other than during the course of the concerned project/work/assignment, cannot constitute confidential information.
While there is no law which defines what can and cannot constitute confidential information and the contours thereof are entirely defined by the parties themselves, these basic principles are generally followed by all parties signing an NDA.
7. USE OF INFORMATION BY THIRD PARTIES
In several cases, depending on the task at hand, the Receiving Party might have to share the confidential information with a third party who would be making use of the same for the fulfilment of the task/assignment. This scenario must be communicated well between the parties beforehand and must also be expressly provided for under the NDA. The information so shared must be limited to the extent of the work assigned. The Receiving Party must also ensure that a Non-Disclosure Clause has been incorporated in its Agreement with such third party as well.
8. EXPIRY OR RETURN OF CONFIDENTIAL INFORMATION
Another important point of negotiation is that the Receiving Party must destroy, erase, remove or return the confidential information shared within a specific time period. Usually upon the expiry of the NDA, the Receiving Party is obligated to return the sensitive information so that it cannot be wrongly transferred or shared. This Clause talks about the delivery or time period upon which return of such confidential information will be expected.
Parties must negotiate the terms of the NDA and ensure that they are followed strictly. The notion under such circumstances is that information is under the threat of falling in the hands of people by way of hacking or wrongly acquiring it. It is also possible that the Receiving Party may use such information for their personal gain. In order to avoid these circumstances, this Clause is put in place.
9. REMEDIES UNDER THE AGREEMENT
The most important Clause under the NDA is the ‘Remedy Clause’ which provides for the consequences and reliefs available to the aggrieved party in the case of a breach of the NDA. The Receiving Party would be liable for the stipulated consequences and remedies under this Clause in the event that they share the confidential information or aid in the disclosure of confidential agreement in an unauthorized manner.
This Clause is a must as it safeguards the interest of both the parties, by clearly setting out the contours of the remedies available. Thus, this Clause must be negotiated upon between the parties before its inclusion in the final NDA, taking into consideration the humongous impact it can have on the organization in the event of invocation.
Remedies available in this way can be monetary damages, specific performance remedies, injunction, legal fees and expenses or any other remedies which are available by law.
In some cases, parties to the NDA may also calculate and ascertain the amount of breach beforehand and mention it in the NDA itself as a mutually advanced agreement.
10. DISPUTE RESOLUTION
The Dispute Resolution Clause is the last Clause in the structure of most Agreements, as well as in an NDA. Even when the Agreement has been drafted based on mutual understanding, there can be times where disputes arise as to the parties’ obligations therein. To tackle such circumstances, the Dispute Resolution Clause must be adhered to. It is essential that the parties follow the stipulated mechanism instead of approaching the Courts directly. The parties can further make this clause more exhaustive by specifying the number of arbitrators, jurisdiction, place and language beforehand.
Just like any other contract or crucial clause thereof, the first and foremost step is to ensure that it is drafted in a manner that is exhaustive yet lucid enough for the parties to be well aware of the rights and corresponding obligations that they are agreeing to.
The aforementioned clauses are, thus, structurally essential to all NDAs and help the parties have a clear understanding of what does and does not constitute confidential information, under what circumstances and how they can be held liable, etc. However, there also exist other Clauses which talk about the registration, jurisdiction, notarization and even witnesses under such contracts. These Clauses, however important, are specific to the interests of the parties and must be included in the Agreement as per the negotiations of the parties, rather than as a general rule.
In our upcoming blog, we shall take a closer look at the grey areas pertaining to NDAs and how the same can be addressed adequately.
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