It’s very likely at some stage of your life, you have shared confidential information, and then worried about where it may travel. This often happens in business too.
However, businesses often choose to enter into a confidentiality and non-disclosure agreement (NDA) to help protect their confidential information and maintain control over it.
Rahel Goni, from our corporate and commercial team, is a specialist in preparing contractual agreements, having negotiated many NDAs, including agreements prepared for multi-million-pound business transactions.
Here, he covers the top key questions about confidentiality and non-disclosure agreements and why they are important:
What is an NDA and when may I need one?
An NDA is a contract that is legally enforceable and creates a confidential relationship between parties wishing to receive and/or share sensitive information. It is usually appropriate to use an NDA during the sale or purchase of a business where you may find yourself disclosing sensitive information, that you have little or no control over, to the other party.
If you are disclosing public information or non-sensitive information that you are not too concerned about, an NDA may not be needed. However, in almost all other business transactions it is advisable to consider entering an NDA with the other party.
A typical scenario where an NDA is required:
A manufacturing company, our client, was approached by a larger company with interests in the same sector as our client. The larger company was seeking to expand its business across the region by acquiring companies already established in the North West.
Our client was aware, that if they were to enter any business negotiation, they would need to disclose sensitive information which, if made public, would be detrimental to the business. An NDA was therefore drawn up and used.
What sort of NDA do I need?
The type of NDA you opt for depends on whether you are disclosing information, receiving information, or both.
If you are disclosing information, you may want to push for a unilateral (one-way) NDA which only puts obligations on one party to keep information confidential, as opposed to a bilateral (two-way) NDA. This will be dependent on whether the party disclosing the information will also receive any sensitive information.
What are the risks if I don’t have an NDA in place?
If you do not use an NDA during a business transaction or sale, you may run the risk of exposing confidential information about your business. Without an NDA, you may also have no legal recourse or option to impose legal action against any breach of confidentiality.
Given that drafting and agreeing an NDA can be accomplished quite quickly (depending on its complexity), it is a small price to pay for potentially jeopardising business information that may become public knowledge and available to competitors if a suitable agreement is not in place.
And, if a business deal does not go through, you will at least have peace of mind that you hold a legally binding agreement to protect your sensitive business information.
Should I seek expert legal advice to help draft and/or review my NDA?
If you decide to enter an NDA, it is advisable to have a lawyer draft, review and/or negotiate this for you. Outlined below are some areas of risk which companies can be exposed to if an NDA is not carefully drafted or is negligently agreed:
- Solicitation: This is a restrictive covenant often drafted meticulously to ensure that the receiving party does not use any information to solicit (steal away) employees, directors, customers and service providers of the disclosing party. The risk to the receiving party is that it may prevent them from hiring people not involved in the deal or those they’re unaware of, or even soliciting custom of potential clients that fall under this restriction.
- Contact: Another restrictive covenant found in NDAs is non-contact clauses. This essentially places restrictions on contacting certain parties, however, this can be so widely drafted that it often unintentionally overreaches and prevents parties from contacting relevant people on the transaction or even people they already had contact with, adding a restriction where there was originally none.
- Duration: You may think that this is simply a commercial decision and if the other party agrees to your suggestion to keep the information confidential indefinitely, then so be it. Unfortunately, this is not always the case, and the courts may find this to be an unreasonable and unenforceable term. It is also important to draft precisely when the confidentiality obligations commence as it could cover previous conversations and disclosures, which you may not be aware are caught.
- Disclosure: You want to be able to control who your information is disseminated to, how it is disclosed, in which situation it can be disclosed and how the recipient will comply. To do this, clauses must be drafted with care, ensuring the original party procures that their representatives comply or that such representatives enter into a separate agreement to adhere to the terms.
- Scope: You only want to receive relevant information. Parties often disclose a wide range of information which, although sensitive, may not be necessary. So, it is important the NDA only places a confidentiality duty on information relevant to the transaction.
- Indemnities: This is often the most negotiated clause, and rightly so. If accepted, or not drafted properly, this may lead to the breaching party reimbursing the other party for the indemnified losses on a pound-for-pound basis. Note: indemnities are sometimes drafted within an agreement in such a way that they may go unnoticed.
- Boiler plates: These are the common terms found at the end of most agreements. Although they are often non-contentious, it is important to ensure that omission of such clauses and terms are not detrimental to you. For example: assignment, privity of contract, oral agreements, jurisdiction, and courts.
Rahel Goni is a chartered legal executive in WHN’s corporate and commercial team. He advises clients on a range of corporate and commercial transactions including company and business sales and acquisitions, management buyouts and general commercial contracts. If you require assistance to draft or agree an NDA, please contact Rahel on 0161 761 8068 or email rahel.goni@whnsolicitors.co.uk.
