ContractsUnderstanding NDAs- I

INTRODUCTION

Safeguarding information has always been one of the most essentials factors to be taken into consideration by an organisation when entering into an Agreement. Trade secrets, sensitive information, data and strategies of an organisation are its biggest assets and must be protected in order to ensure that it has an upper hand in competitive markets. Be it Corporate Agreements, Employment Contracts, IT Contracts and even civil or criminal investigations – a Non-Disclosure Agreement (NDA) is of crucial importance in safeguarding the organisation’s interests.

In order to ensure the confidentiality of their data and information, parties make use of such NDAs, which are legally binding contracts restricting the unauthorised disclosure of the shared confidential information with a third party.

These NDAs specify the safeguards put in place in case of a breach thereof and clearly define the remedies available to the aggrieved party as well.

Historically, NDAs began emerging in the 1940s in matters of maritime law but subsequently came on to be widely included by tech firms in their transactions. By 1970s, there were reports of NDAs being used in the investigation of the Kennedy and King assassinations. However, by the 1980s, NDA became a common element in all kinds of contracts.

The ambit of NDAs is wide and encompasses all information that can and cannot be shared by the parties. Given the grey areas that plague businesses in this advancing age of information, the importance of the safeguards under NDAs and their effect on confidential information and an organisation’s interests cannot be overemphasized.

UNDERSTANDING NDA

It is essential to understand the basics of NDAs and how they are of prime importance in safeguarding confidential information in almost all fields.

A. NON- DISCLOSURE AGREEMENT

A Non-Disclosure Agreement (NDA) is a legally binding contract entered into between two or more parties to maintain confidentiality with respect to sensitive information, effectively prohibiting them from sharing such information with any other party except in accordance with the terms of the NDA itself.

In certain cases, the NDA mandates that such confidentiality is to be maintained for a stipulated period, even post the termination of the Agreement, which further protects confidential information acquired as a result of proximity to a business or an organization.

An NDA is also known as Confidential Agreement (CA), Confidential Disclosure Agreement (CDA), Secrecy Agreement (SA) or Proprietary Information Agreement (PIA).

In India, NDAs are governed primarily under the Indian Contract Act, 1872 (‘Contract Act’) and follow the fundamental principles of contracts, viz. offer, acceptance, breach, consideration, term, indemnification, etc.

It is imperative for a business relationship to flourish that the parties must be freely able to share information amongst themselves without having the fear that their strategies or data might fall into the hands of competitors or general public. An NDA is, thus, essentially a promise between the parties to not divulge information of the organisation which would lead to loss of trade secrets or sensitive information in the hands of current or potential competitors.

B. TYPES OF NON DISCLOSURE AGREEMENT

NDAs can be broadly classified into three categories, namely:

1. UNILATERAL NDA

A unilateral NDA is an agreement entered into between two parties, wherein one party – known as the Disclosing Party – shares confidential information with the Receiving Party, being the party with whom information is being shared. Such an NDA binds only the Receiving Party from further sharing the information with any other party without due authorization.

2. BILATERAL NDA

A Bilateral NDA involves two parties wherein both parties shall be sharing confidential information. Both the parties are hence the Disclosing Parties and Receiving Parties in their respective capacities, and are prohibited from further sharing the confidential information shared with them in an unauthorized manner.

3. MULTILATERAL NDA

A Multilateral NDA is entered into between three or more parties, wherein one of the parties shares confidential information while the other parties undertake to not disclose such information. Thus, in such agreements, there exists one Disclosing Party and others shall be the Receiving Parties.

However, there are chances of confusion and complication in such Multilateral NDAs and hence they are rarely opted for.

C. WHEN NDAs SHOULD BE SIGNED

There are a number of situations under which parties must sign an NDA and these can be categorized as follows:

1. INTELLECTUAL PROPERTY RIGHTS

Entering into NDAs is of crucial importance when the subject matter of the work relates to Intellectual Property Rights (IPR). It can so happen that parties agree to work on an invention or product together which is the basis for a patent or trademark. Such situations must have the backing of an NDA since the information shared between the parties is not only proprietary in nature but also of immense commercial importance to other stakeholders in the concerned field.

2. POTENTIAL INVESTORS

Another situation wherein NDAs are of prime importance is while working with potential investors. Since investors carry out detailed examination of the ideas and work of a company in the initial stages of ascertaining the worth and profitability of a potential investment opportunity, they are bound to come into possession of a lot of confidential and sensitive information, which the said company might not want to be made public. The company would also want to safeguard such information for the purposes of further investment opportunities with other investors in the same field.

3. EMPLOYING PEOPLE

In the corporate sector, usually at the time of appointment, most companies incorporate a Non-Disclosure Clause in the Employment Contract to be signed by the new/prospective employee. Alternatively, some companies may require the new/prospective employees to sign a separate NDA, especially if the company deals with several types of confidential and sensitive information, which would require the NDA to be worded more exhaustively.

Since the employees of an organization are privy to information about its products/services, strategies, financial affairs, etc., it is essential for the organisation to safeguard this information from competitors as well as the public.

4. WORKING WITH FREELANCERS

Freelancers are individuals, having expertise in their respective fields, who are not associated with any one company but work on a contractual basis with various organizations to perform the task assigned to them. When working with freelancers, the company would have to provide access to confidential or essential information of the organization, as required for the concerned project. Thus, even though the confidential information in such cases is limited to the concerned project, it is necessary that an NDA be entered into between the freelancer(s) and the organization.

In such situations, the ‘Time Period’ Clause and ‘Work for Hire’ Clause are also important. This ensures that work done by the freelancer(s) is under the copyright of the organization as well as the time period within which the freelancer shall return the access of all shared information.

5. MERGING BUSINESSES

When mergers or acquisitions of businesses take place, there is a lot of sensitive information shared from both sides. In the event the merger is unsuccessful, such information may fall in the hands of competitors or be at risk of exposure in general. It is thus advised that in the initial stages of such negotiations, parties must enter into NDAs to safeguard their interests.

6. PART OF OTHER AGREEMENTS

Whenever parties enter into agreements for any purpose like Licensing, Manufacturing, Joint Venture, Asset Purchase, Corporate Governance etc., a Non-Disclosure Clause must be incorporated in such agreements as well. This ensures that there is an added layer of protection for sensitive information shared by and between the parties. 

NDAs not only bind the parties to not divulge information to any third party but also lay down boundaries and extent for the information which the parties are free to share with third parties. In conclusion, an NDA is not only restrictive but also a guideline as to what can and cannot be shared beyond the parties involved.

Arguably, there is also information which does not amount to confidential information and forms an exception to the NDA. Information that is readily available from other sources or public documents cannot be termed as confidential information as this is already in the public domain and cannot fall under the ambit of confidentiality. Similarly, information which a third party has acquired from some other source will also be in exception to the ambit of confidential information.

Since the applicability of an NDA is usually restricted to the receiving party, if a third party is privy to such information without the disclosure by the receiving party, it shall not amount to breach. Lastly, specific orders by higher authorities like Courts will also be an exception to the obligations imposed by an NDA.

AMLEGALS REMARKS

NDAs are important to businesses as they help organisations safeguard the sensitive and confidential information they must share for various purposes without fearing that such information might fall in the hands of competitors or would be at risk of exposure in the public domain.

Organizations are usually prudent enough to keep track of the information shared, the nature thereof as well as the person(s) such information is shared with. This also gives them the liberty to classify information as confidential and not confidential, as well as the discretion about what can and cannot be shared or communicated to other parties and to what extent.

An NDA also gives parties certain remedies and safeguards in the event of breach which ensures that parties have sufficient recourse available in case of their sensitive and confidential information being leaked. This creates an obligation on the receiving party to withhold information in order to avoid attracting liability for the breach of the NDA.

The most obvious downside of not entering into an NDA is that it always leaves room for uncertainty with respect to the information shared. Businesses involve themselves in matters which are of prime importance – they build strategies, products, marketing techniques, trade secrets, intellectual property and even future decisions which can affect their business as well as the sector as a whole. Such confidential information must be protected and safeguarded in order to avoid the irreparable damage that would be caused by unauthorized third parties getting access to the same.

The standard and most advisable structure for an NDA shall be discussed in our upcoming blog.

For any query or feedback, please feel free to connect with rohit.lalwani@amlegals.com or vineeta.tekwani@amlegals.com.