In business, there are instances in which you may find yourself in a situation where you have to share confidential or proprietary information with another party. But the best way to doing so safely is ensuring that the other party is bound to respect the confidential information you are looking to share with them and not to use it to your detriment.
One way to protect the secrecy of confidential information shared with another party is through the utilization of Non-Disclosure Agreements (NDA), also referred to as a “Confidentiality Agreement.”
It is a legal contract that prohibits someone from sharing any information deemed as confidential. The confidential information is usually defined in the Agreement, which typically includes but is not limited to confidential/proprietary information, trade secrets, and any other details which may comprise personal information or events.
When Should you Use a Confidentiality Agreement?
There are many instances where it may be appropriate. But the prime situations are those in which you wish to share your ideas or something valuable about your business, but you still want to make sure that the other Party doesn’t steal, share or use the information without your consent.
Here are some basic situations where you may want to use a confidentiality agreement:
- Presenting a business idea or an invention to a potential investor, partner, or distributor
- Sharing marketing, financial, or any other information with a potential buyer of your business
- Receiving services from an individual or company who may have access to some confidential information in providing those services
- Allowing your employees access to confidential information of your business during their job
- When you are looking to employ an independent contractor or consultant, and you wish for them to keep your personal or company information private
Mutual Vs. Non-Mutual Confidentiality Agreements
Confidentiality agreements come in two basic formats: a one-sided agreement or a mutual agreement. The one-sided Confidentiality Agreement is when only one side will be sharing the information with the other while the mutual confidentiality form is for situations where both sides are looking to share confidential information.
Even though there is always some appeal to using a mutual form of a confidentiality agreement, most people really shy away from the mutual form, especially if they are not planning to receive confidential information from the other side. One way to do this is letting the other side know that you are not looking to receive any confidential information from them, so you don’t see the need to sign a mutual confidentiality agreement should they ask for one.
Key Elements of a Basic Confidentiality Agreement
Confidentiality Agreements don’t have to be extensive and complex. In fact, a well-structured confidentiality agreement shouldn’t run more than a few pages long.
The key elements of confidentiality agreements include:
- Identification of all the parties
- Definition of what is to be considered as confidential
- Exclusions from confidentiality treatment
- The terms of the Agreement
Identification of all the parties to the agreement
All the parties to the Agreement are usually a straight forward description set forth at the onset of the Agreement. If it is a non-mutual confidentiality agreement, then the disclosing Party is often known as the “disclosing party,” and the receiver of the information referred to as the “recipient” or the “receiving party.”
The complicated part here is getting to think about whether any other companies or people would also be a party to the Agreement. Does the recipient of the confidential information expect to show the information to a related or affiliate company? To an agent? To a partner? If that’s the case, then the confidentiality agreement should cover those third parties.
Definition of what is to be considered as confidential
This part of the Agreement deals with defining what confidential information means in the Agreement. Is it all the information being shared? Is it only those designated as “Confidential” in writing? Is it a verbal or written piece of information?
Whereas, on the one hand, the disclosing Party would like confidential information to be as broad as possible to ensure that the other Party doesn’t find any loophole and start using its valuable information.
One the other, if you are the recipient of the confidential information, you have a legitimate desire to ensure that the information that you have been tasked with maintaining its confidentiality is clearly identified so that you know and understand what you may or may not use.
Oral information, mainly, can be very hard to deal with. Some recipients often insist that only confidential information conveyed in writing need to be considered as confidential. And, of course, the disclosing Party may say that this is too narrow. The usual compromise is that any oral information can be considered as confidential information, but the disclosing Party has to confirm that the recipient is aware of what oral statements are to be considered as confidential.
The receiving party’s scope of the confidentiality obligation
The main core of the confidentiality agreement is a two-part obligation on the recipient of the confidential information: to maintain the confidentiality of the information they receive and not to use the confidential information in any way without the consent of the disclosing Party.
So, the first part is that the receiving Party has to keep the information a secret. And this typically means that the recipient has to take the necessary steps to prevent any other party from obtaining the information through them. An example of such steps may include only letting a few people within the company gain access to the information if necessary, and they are all informed of the nature of the confidentiality of the information.
The second part is also very critical – that the receiving Party can’t use the information without the consent of the disclosing Party. After all, the last thing the disclosing Party wants is for the receiving Party to take the information or their great idea and use it for self-gain.
If the confidentiality agreements’ scope is broad enough, then the disclosing Party can be able to sue for damages or stop the receiving Party if they breach either their non-use agreement of confidentiality obligation.
Exclusions from confidentiality
All confidentiality agreements have certain exclusions from the obligations of the receiving Party. Such exclusions are meant to address situations where it would be too burdensome or unfair for the other Party to keep and maintain the confidentiality of the information they receive.
Common reasons that may prompt the exclusion of the receiving Party from their obligation include:
- If the information being shared is already known to the recipient
- The information being shared is already in the public domain
- The recipient independently acquired the information without reference to or use of such information of the disclosing Party
- The information has been disclosed to the recipient by some other party who has no obligation of maintaining the confidentiality of such information to the disclosing Party
A confidentiality agreement can also deal with situations in which the recipient is forced to disclose confidential information through a legal process. The receiving Party should be allowed to do so if mandated by a court order without breaching the Agreement as long as the recipient has informed the disclosing Party in advance of such proceedings.
The terms of the Agreement
What is the duration of the Agreement? Some attorneys may argue that a confidentiality agreement should not be time-bound. Why should someone be afforded the right to use your confidential information any time simply because the Agreement has lapsed?
But if you are the receiving Party, you probably would like to insist on a definite term when the Agreement should end. After all, certain confidential information becomes useless after a certain period anyway, and the cost of policing confidentiality obligations can, at times, be too expensive if it is a “forever” obligation.
Therefore, if you agree to the terms of the Agreement, what is reasonable? Well, it all depends on the type of information shared and the type of industry you are in. In some businesses, five to six years may be acceptable due to the rapid changes in technology that may render such information pretty much worthless.
Most confidential agreements normally have a two to five-year time limit. But the Agreement should also state that, even if the duration is ended, the disclosing Party isn’t giving up any rights that are included under patent, copyright, or other intellectual property laws.
Other Provisions that may be Included in a Confidentiality Agreement
Other provisions that you may want to include in your confidentiality agreement to protect your company from further issues depending on the type of information you are looking to disclose, may include:
- Employee solicitation: If the receiving Party has access to your employees, you may want to incorporate a clause that will prevent them from soliciting or hiring your employees for either the entire duration of the Agreement or for the first 12-24 months of the Agreement. The other Party may, at the time, agree to that, with some carve-outs, of course. For instance, the receiving Party may want the limitation to apply only those employees whom they might have come into contact with during their review of such information or interviews.
- The jurisdiction in a dispute: If you are the disclosing Party, you may want to ensure that if there are any disputes as to whether the other Party has lived up to their obligations, the dispute will be handled exclusively in the state in which the Agreement was officiated which in most cases is your city.You don’t have to travel and incur additional costs to enforce your confidentiality agreement.
- Injunction: Your confidentiality agreement should- depending on the type of information being disclosed- have a section that gives you the merit to injunctive relief to stop the other Party from breaching the Agreement. This simply implies that you can get a court order to stop the other Party from doing the breaching act.
- No rights in the recipient of the information: At times, it is important that you have a clause stating that just because you have disclosed confidential information with the receiving Party, they don’t get any rights to the information or your ideas or even a right to enter into a deal with you.
Basic Confidentiality Agreement Template
This Confidentiality Agreement (the “Agreement”) is by and between ____________ with its head offices at _____________ (“disclosing party”) and ____________ (the “receiving party) located at ________________. For the intention of preventing unauthorized disclosure of Confidential Information as defined herein. Both parties i.e. the Disclosing and the Receiving Party hereby agree to enter into a confidential relationship with regard to the disclosure of certain confidential and proprietary information.
Definition of Confidential Information. For the sole purpose of this Confidential Agreement, “Confidential Information” shall include any material or information that has or could be of commercial value or other utility in the business in which the Disclosing Party is engaged. If the Confidential Information is in the written format, then the Disclosing Party shall designate it in writing with the word “Confidential” or with any other similar wording. If the Confidential Information is disclosed verbally, the Disclosing Party shall, before they disclose such information, promptly provide a writing indicating that such communication constituted Confidential Information.
Exclusion from Confidential Information. The Receiving Party’s duties under this Confidential Agreement do not extend to information that is: (i) known to the public at the time of the disclosure or if the information subsequently becomes known publically through no fault of the Receiving Party; (ii) if the information is already known to the Receiving Party before being disclosed to them by the Disclosing Party; (iii) if the Receiving Party learns of the information through a valid means other than form the Disclosing Party or their Representatives; or (iv) if the information is disclosed to the Receiving Party by the Disclosing Party before a written approval.
Obligations of the Receiving Party. The Receiving Party shall hereby hold and maintain the Confidential Information disclosed to them in utmost poise for the sole and exclusive benefit of the Disclosing Party. The Receiving Party shall also restrict access to Confidential or Proprietary information to employees, third parties, and contractors as is required and shall require those persons first to sign a confidentiality agreement that is as protective as those in this Agreement. The Receiving Party shall not, without the consent of the Disclosing Party, use the confidential information for the Receiving Party’s benefit, publish, copy or disclose to others, or cause to be published, or permit the use of such information by others for their benefit or to the detriment of the Disclosing Party, any confidential or proprietary information. The receiving Party shall return to the Disclosing Party all records, notes, printed, written, or any other tangible material in its possession with regards to the Confidential Information immediately if the Disclosing Party Requests so in writing.
Duration of the Agreement. The nondisclosure clauses of this Confidentiality Agreement shall survive the termination of this Agreement, and the Receiving Party’s obligation to hold the Confidential Information in confidence will no longer qualify as a trade secret or until the Disclosing Party sends to the Receiving Party written consent releasing the Receiving Party from this Confidentiality Agreement, whichever occurs first.
Relationships. Nothing contained in this confidentiality agreement shall be deemed to constitute either Party, a joint venture, employee, or partner of the other party for any reason whatsoever.
Severability. If any part of this Agreement is found to be invalid or enforceable by a court of law, the remaining part of the Agreement shall be interpreted to best to affect the intent of the Disclosing Party
Integration. This confidentiality agreement expresses the complete understanding of both parties concerning the subject matter of this Agreement and supersedes any prior agreements, proposals, understandings, and representations. This Agreement shall not be amended in any way except with the written consent of both parties.
Waiver. Failure of either Party to express any rights provided for in this Agreement will not be considered a waiver of any prior or subsequent rights
This Confidentiality Agreement and each Party’s obligations shall be binding on the assigns, representatives, and successors of either Party. Each Party has agreed that by signing this Agreement, they accept all the terms of this Agreement.
Free Downloads (Samples & Examples)
Although the laws usually vary with each state, Confidential Agreements that address specific confidential information are enforceable provided that:
• The terms of the Agreement are not too broad
• The terms of the Agreement do not unfairly restrict either Party with excessive time frames or burdens
• The information being disclosed referenced in the Confidentiality Agreement is not known to the public
• The confidential information being disclosed is not against the best interest of the public
A non-compete clause prevents the receiving Party from disclosing confidential information to a competing enterprise or starting a business/venture that is in direct competition with your business.
Alternatively, a non-solicitation clause prohibits any other party, for example, a former employee or business partner, from using insider information to poach or entice away other employees or contractors working for your business.