Pitching to an investor, talking partnership, or negotiating business? You may need a Non-Disclosure Agreement (NDA) to protect you or your business’ confidential information.
- NDAs can protect your ideas, unique products, proprietary information, designs, plans, records and finances, trade secrets, databases and other commercially sensitive information.
- Without an NDA in place, it is more likely that your confidential information will be disclosed without your permission and you could lose the chance to patent your invention or maintain information as your own trade secret.
- Singing an NDA means that you must not disclose the confidential information provided to you by the disclosing party, any breach of this may result in significant damages or legal action being taken against you.
- An NDA is necessary when working with third parties, like contractors or developers. Failure to use and NDA in such instances runs the risk of having your business plans stolen.
- NDAs must be drafted properly and signed by all parties involved or to which such information has been disclosed to in order for them to effectively protect you.
- Have you disclosed confidential information to people or businesses? Have you checked whether you and your business are provided against the disclosure or misuse of such information?
What is an NDA?
An NDA is a legal contract between two or more parties setting out the confidential information shared between the parties and restricting the disclosure of any confidential information with others.
NDAs can also be one way, where one party discloses information to another the party receiving such information agrees not to disclose the information. For example, a potential investor signs an NDA, keeping this information confidential serves in their best interests if they later invest in the business.
An NDA will typically describe the type of information that is considered to be confidential, who can access the information and the length such obligations last to keep such information confidential. However, generally confidential information is that which is:
- not public knowledge;
- information considered confidential, for example, personal information, trade secrets, business financial data and plans, client databases and;
- disclosed in the course of employment; or
- its disclosure would be unfavourable to you or your business.
The importance of an NDA
The use of an NDA is to protect you or your businesses confidential information.
NDAs are commonly used in businesses. Often between two companies considering partnership or merger or instances where an employee is being hired for a position that requires access and use of confidential information. This confidential information can also be seen as the ‘intellectual property’ of your business, which itself keeps your business unique from its competitors.
Nonetheless, NDAs can also be used in personal situations, for example two people discussing potential business ventures or ideas. The moment any confidential information is shared with another party, a possibility/threat arises that this information could be disclose to others or misappropriated.
To protect yourself and or your business against the misuse, disclosure or copyright of your confidential information an NDA should be used, especially when negotiating with the other party.
If confidential information was to be disclosed to the wrong person or misused, significant consequences can follow, such as publication of:
- your businesses client database or personal information which may result in breach of privacy laws;
- designs or invention information about your products, leading to reproduction or replications of your product;
- inventions that are not yet open to public inspection; or
- ideas not yet trademarked.
What an effective NDA includes
- A clear definition of what constitutes the confidential information, to the extent of identifying the features in a product you are seeking to protect, not merely what it is. This is to ensure there is no confusion between parties.
- The length of the NDA, these typically have a term of 1 – 3 years. NDAs cannot be infinite in time, they can for example run for a certain period after an employee’s term of employment.
- The parties, the disclosing party and the receiving party, to ensure each party is aware of their obligations under the agreement.
- The manner in which the party(s) can use the information, how such information (like physical documents or hard drives) must be stored, and the return or discarding of the confidential information at the end of the term.
- The reason as to why the information is confidential and cannot be disclosed by the receiving party(s).
- Exceptions (if any) to confidentiality, for example information already publicly know or where disclosure is required by law.
- Consequences that the receiving party may face if they breach their obligation and any legal action that may be taken.
- Remedies available to the disclosing party for any breach by the receiving party.
Remember NDAs must be reasonable in order for them to be effective. A court will not uphold an NDA if the terms and information required to be confidential are unreasonable and causes difficulty for the other party to comply with.
NDAs are an extremely effective way to deter people from disclosing certain confidential information. Having an NDA in place can protect you and your business from having your ideas stolen, private information leaked to the public, and keep you ahead of your competitors. However, an NDA is simply a legal agreement, it cannot guarantee however that the receiving party won’t disclose or misuse the confidential information. Having a properly drafted NDA in place will however protect you and your business, especially in instances where the confidential information is disclosed as a court can uphold the NDA and award you damages or an interlocutory injunction prohibiting the disclosure of the information by the receiving party.
If you require advice or assistance in relation to considering whether an NDA is necessary for you or your business, and having an NDA drafted please contact us today.
For further information, please call us on (02) 9189 5288
Craig Higginbotham and Nicole Sarraf
28 April 2023