Non-disclosure agreements: 4 frequently-asked questions
Whether you want to protect your ideas and keep a competitive edge, or you want to keep an acquisition or business sale a secret, non-disclosure agreements (NDAs) are a useful tool to stop your confidential information from falling into the wrong hands.
Here, we’ll give an overview of what non-disclosure agreements are and what they’re used for, through these frequently-asked questions:
- What is a non-disclosure agreement?
- How do I create one – do I need a lawyer?
- How effective are non-disclosure agreements?
- I’ve been asked to sign an NDA – how do I know if I should?
A non-disclosure agreement, sometimes referred to as a confidentiality agreement, is a legal document which prevents parties from disclosing sensitive information. It is a type of contract, which sets out the purposes for which information may be used. They are often one-way; for example in the context of employment, only applying to the employee. Sometimes, for example in the case of a joint venture, they can be mutual and apply to both parties.
Here are a few scenarios in which you might choose to use a non-disclosure agreement:
- You are launching a brand-new service which you don’t want your competitors to know about. You are hiring a web development company to create a website promoting your launch, so you may ask them to sign an NDA, preventing them from telling anyone else about it.
- Your business is being acquired by another company; you don’t want your employees to lift the lid before the deal becomes public, so you may ask them to sign an NDA.
- You’re pitching for investment for your business from venture capitalists; you don’t want your intellectual property to be stolen, so you ask the potential investors to sign an NDA.
As you can see from the above, many transactions which a company enters into with another business may require a confidentiality or non-disclosure agreement before negotiations start.
It is always advisable to get a signed confidentiality agreement in place before any confidential information is disclosed.
Depending on the terms of the agreement, an NDA can last forever or for a specific period of time.
You are not legally required to use a lawyer to create a non-disclosure agreement. However, because an non-disclosure agreement is essentially a legal contract, we would always recommend asking a solicitor or lawyer to draw one up that best fits your purpose. If drafted incorrectly, a non-disclosure agreement could become unenforceable, and therefore worthless; it’s easy for the untrained eye to miss important considerations. The information you are protecting has value – so it’s worth using a lawyer to ensure that your NDA will stand up if needed. Professional advice is needed to make sure the NDA works in your best interests.
If your NDA has been executed correctly, then it is legally binding. If the confidential information
protected by your NDA is disclosed by the other party without your permission, and your business loses out, you can claim against them for losses. Remedies given by a court can include anything from injunctions which prevent more information being shared, damages, or return of profits the third party received as a result of exploiting your confidential information. Remedies that may be given will usually be described in the NDA itself. For this reason, NDAs are an effective deterrent to parties’ unauthorised sharing of confidential information.
If another business or individual has asked you to sign an NDA, whether you should do so depends on many factors, both legal and commercial. The deal you are discussing may not be able to progress unless you sign an NDA. However, it always pays to understand fully the terms of the NDA, your obligations and how long it is effective for. You should also be aware of the consequences if you breach the terms of the NDA. If you have any doubts or do not understand the terminology, you should ask a solicitor or lawyer for advice.
For clear advice on creating and signing non-disclosure agreements, contact our commercial law team. You can also read more in our non-disclosure agreements fact sheet.
Associate solicitor Sophie Martyn works with national, international and local owner-managed private companies, LLPs, charities and public sector bodies across a wide range of industry sectors. She advises on a full range of commercial contracts and commercial law issues, as well as transactional matters.We're here to help