Important Clauses In A Non-Disclosure Agreement

Published on 18 Jul 2017 by Team

A company may share its confidential information such as trade secrets, vendor information, intellectual property with its clients or employees. In order to ensure that such information has not been shared by the clients or employees with anyone, the company needs to draft a non- disclosure agreement, wherein the company mandates the employees and the clients not to transfer any confidential information, which may result negatively in the company’s interest.

What is a Non- Disclosure Agreement?

Non-Disclosure Agreement is a legal document that protects any confidential information which is related to business, which the company does not want to leak, which may in future hamper the business of the company. Big companies prefer to start a business by entering into a non-disclosure agreement between themselves and the client. The primary objective of such contracts is to secure the trade secrets and confidential information of the company.

What is Confidential Information?

Information which is specific and does not leave room for ambiguities, which needs to be protected by the company is Confidential Information. A Non Disclosure agreement is a unique agreement, in which one party undertakes to keep the other's information confidential. Hence, there is an added duty of care attached to such a contract. Firstly, the party signing such an agreement has the obligation to maintain confidentiality actively for example- in a simple sense never intentionally or unintentionally give away the information in any form.

The added duty of care comes on the person signing such a contract where he/she must use reasonable security measures to safeguard the information and must at all times act in good faith in relation to the information. The best documentation lawyers can help you in drafting a Non-Disclosure Agreement in India.

Types of Non-Disclosure Agreements

Broadly NDAs can be categorised into Unilateral agreements and Mutual agreements.

  1. Unilateral Agreements can be shorter and fixed agreements which can be templatised for example- Agreements made for various Associates in a Law firm or a business partnership or a company where the same agreement may apply to various employees. These shorter templatised versions of NDAs put the same onus of care and duty on many people together. Alternatively, there can be more detailed documents that cover collateral matters, such as IPR, publicity restrictions and personal data processing. These agreements will generally be people specific and put the special duty of care to be exercised on individuals in different capacities.
  2. Mutual Agreements are not unilateral agreements and as the name suggests they protect the confidential information of both parties (all parties from each other going rogue on any other individual).  All mutual agreements can be distinguished from general NDAs as they are designed for very niche and specific circumstances. Some examples are  agreements safeguarding information relating to a business venture, an invention, a media concept, a design/idea for a website etc

Important Clauses Of An NDA

1. Define what is Confidential: This is the starting point of any NDA. Whatever information that should be considered confidential and what may not be considered confidential must all be defined. For many transactions, some information cannot reasonably be expected to remain confidential for a smooth flow of work and communication with the outside world.For any business deal or NDA negotiation to go ahead successfully, what remains non-confidential must also be outlined clearly in the agreement. The more detailed and comprehensive this clause is the more credible the NDA becomes. The clause must contain a statement which could read as, the confidential information includes, but are is not limited to, oral conversations, written notes, analysis, and documents produced with the use of the confidential information. The must be a special and specfic mention of any material that may be considered to include ‘trade secrets’ of the business.

2. Parties: The Non-disclosure agreement in India shall disclose the name of parties and the representative who shall have access to the confidential information that is shared during the term of business. Typically, transactions in businesses have a variety of players involved. For example-  employees, attorneys, accountants, consultants, financing sources, and other portfolio companies could be reviewing the disclosed information. Ensuring access to the confidential information for these parties is critical for comfortable due diligence and analysis but also to enable the NDA to be a powerful tool the parties must be comprehensively defined and structured.

3. Term of confidentiality: What is the time for which the such an agreement shall last? It is upon the discretion of the company, some may want it for a definite period and the others may want it for infinite period considering that at any point of time why such confidential information be revealed. After addressing to the above-mentioned issue, the question that arises is how does a person or a company decide a reasonable time for keeping information confidential. The answer to this entirely depends upon the industry you are in and the type of information that is shared. In some business type, a few years may be acceptable because the technology may change so fast as to render the information futile after a period. In such cases, it can anywhere between 2-4 years and in other cases, they shall depend on the discretion of the company.

Practically speaking any business transaction which might involve a NDA will have a party providing some service or produc and another party utilising or dispensing or spreading the service or product. For most sellers, the longer the term of the NDA, the better it would be as ‘trade secrets’ may be involved or sensitive information about why the product or service is a success in the first place might have to be disclosed. Shifting the perspective however, very few financial sponsors or receiving parties will sign an indefinite or very long-term NDA; it can leave them legally vulnerable or limit their ability to make investments after the close of their due diligence process. Most potential buyers would prefer a time period of 18 months to two years.

4. Use of confidential information: Such contracts shall clearly mention the intended use of such information and amongst whom such information needs to share. It is should state what is the purpose of sharing the information and where all it can be used. The scope of usage of confidential information should mention the name of all the third parties who will be dealing with confidential information.  The conundrum of inevitable disclosure by parties to a NDA is hard to incorporate into the agreement. for example- most standard NDAs in India are drafted to keep safe the confidential information limited to the particular transaction at hand.

That means the information is shared with the other party or mutually between parties only for evaluation and negotiation of the potential transaction. Now if a person who deals with such sensitive information on a daily and has made a job out of doing that for years, then despite the best of intentions the concerned person it might be impossible for him/ her not to disclose (even unintentionally) or misuse that information in certain scnarios in the future for better functioning of the business itself or other job prospects etc.

5. Mandatory/ Legal Disclosure: The recipient may, at some point, be legally compelled to disclose the confidential information to a government agency, court or lawyers. As a measure of protecting both the parties, the NDA must include a clause that acknowledges that such disclosure will not amount to the violation. The clause could go on to state that the party governed by the NDA, should only disclose that information which is required, and present a written notice to the discloser if required to disclose any confidential information. This written notice allows the discloser to take appropriate action to ensure the confidential material stays confidential, and is not made publicly available during the legal proceedings.

6. Remedy: The remedy in case of breach by the recipient must be clearly stated in the agreement. if the parties wish to resolve their conflict via alternative dispute resolution like Arbitration, the Arbitration terms, the seat of arbitration and number of arbitrators must be mentioned. A well-drafted remedies clause should incorporate in essence the following: 

  • Address the consequences in a situtation where confedentiality is breached. This could further be detailed to ascertain and distinguish intentional, negligent or breach without a fault of the the other party.
  • The clause must preserve the right of the disclosing party to seek equitable remedies by acknowledging that a breach can cause irreparable harm that cannot adequately be compensated with damages; and
  • Thirdly and most importantly this claus must include specific indemnification for any loss or damage (including third party claims) arising from the breach.

7. Jurisdiction: The agreement must specify which court will have jurisdiction over the parties in case of breach of such agreement.

8. The return/ destruction of the information: After the expiry of the term of the agreement, the receipt should either destroy or return the confidential information. The agreement shall include necessary clauses ascertaining the process that needs to be adopted after maturity of such agreement.

9. Non Solicit and Non Hire: NDAs should also include a clause that addresses employee solicitation. This clause can sometimes be the most heavily negotiated clauses in the entire NDA. The non-solicitation provision prohibits the potential buyer (and sometimes its representatives) from soliciting or otherwise inducing target company employees to terminate their employment in order to work for the potential buyer. Parties which are disclosing the information should ask for expansive nonsolicit and non-hire language in the NDA, which manages to encompass all employees in the business. Since this significantly limits the receiving party, the clause usually includes carve outs for non-senior-level employees or for general solicitation.

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