Non-Disclosure Agreements (NDAs): When, Why, and Consequences
Having established a brand new product, or set up a new business, you will want to make sure that your ideas and sensitive information aren’t stolen by or disclosed to the people that you are doing business with. Non-disclosure agreements (NDAs) are an essential legal framework to ensure that your business's confidential information is protected.
What is a non-disclosure agreement?
A non-disclosure agreement is a contract between two or more parties, designed to create a “confidential relationship”. This ensures that any material that you don’t want leaving your company, stays protected. It is a legally enforceable agreement which allows any information within your company to be treated as a “trade secret”.
There are three types of non-disclosure agreements that serve different purposes and must be used according to your particular situation:
Unilateral (one-sided) NDAs are commonly used with employees.
Bilateral (two-sided, mutual) NDAs are commonly used between two businesses that are working in collaboration.
Multilateral (three or more parties) NDAs are used when one party holds confidential information on behalf of multiple businesses involved.
An NDA may also be a ‘confidentiality clause’ written into the employment contract.
When is an NDA useful?
NDAs can protect the knowledge of product designs that have not been released or are still developing. This can also protect company inventions, like Apple when they seek to protect against any leaks of their next iPhone release.
When disclosing confidential information vital to the operation of your business to any third party, getting that party to sign an NDA, ensures they cannot disclose any of your business’ confidential information to a competitor. NDAs are required in certain situations, like where third parties are involved in reorganising corporate structure, as they are privy to many companies’ inside information.
Another instance an NDA may be useful is when hiring a new employee, including a new director, or with negotiations with a potential investor. An NDA may be important before discussions even begin to allow information to be shared in confidence. Therefore, having a readily drawn-up NDA can be useful for moving discussions forward.
The more complicated your NDA is, and the more non-disclosure clauses you require to protect your business’ confidential information, the more time-consuming and costly. Therefore, it is critical to carefully identify what needs protection and to what extent.
When should an NDA not be used?
As a start-up, having an NDA drafted and ready to use may be crucial when developing your business. While they remain an important part of maintaining confidential elements of your business, it's important not to use them incorrectly.
As useful as an NDA can be, there are situations which cannot be kept confidential. For example, an NDA cannot be used to prevent someone from reporting a crime or ‘whistleblowing’ (where a worker reports certain types of wrongdoing in the workplace). Whether there is a signed agreement or not, an employer cannot prohibit this form of reporting, and will not have an action under the law.
To prohibit this action in the first place, it is recommended that you, in the capacity of an employer, attempt to resolve any workplace issues through disciplinary or grievance investigation procedures, implemented by the business.
An NDA also cannot be used for covering up inappropriate behaviour including stopping someone from reporting harassment, discrimination or sexual harassment.
Consequences for breaking a non-disclosure agreement?
Breaching a legally binding contract may result in a number of consequences. When drafted, each NDA will have its own conditions laid out within it, but most commonly, legal action is taken with damages awarded to the affected party. Although it may be difficult to put a monetary value on your company’s “trade secrets” it is worth considering whether the provision compensates for any potential breach.
Authors: Tanisha Shah, Rita Almazuri & Sofia Martiello -
Authors: Tanisha Shah, Rita Almazuri & Sofia Martiello -
DISCLAIMER
This article has been written by law students for the sole purpose of providing informative insight. The information in this article is intended for educational purposes only and does not constitute legal advice, nor should the information be used for the purpose of advising clients. You should seek independent legal advice before relying on any of the information provided in this article.
Sources
Frost N, ‘The Startup Guide to NDAs: Why and When You Need One (+ Free NDA Template)’ (DocSend17 September 2021) <https://www.docsend.com/blog/the-startup-guide-to-ndas-why-and-when-you-need-one/> accessed 30 August 2022
Indeed, ‘Non-Disclosure Agreements: Pros and Cons for Small Businesses’ (www.indeed.com) <https://www.indeed.com/hire/c/info/signing-nda?hl=en&co=US>
Net Lawman, ‘Confidentiality Agreements: Use, Limitations & Breaches’ (www.netlawman.co.ukDecember 2020) <https://www.netlawman.co.uk/ia/confidentiality-agreement-limitations>
Twin A, ‘How Non-Disclosure Agreements Secure Privacy between 2 or More Parties’ (Investopedia10 July 2022) <https://www.investopedia.com/terms/n/nda.asp>
