Non-disclosure agreements (NDAs) play an important role in facilitating strong business relationships and securing confidential business information. Unfortunately, NDAs—also called confidentiality agreements—are sometimes misconstrued as a sign of mistrust. In reality, business owners are rightly worried about their economically important information, and an NDA is the conventional way to establish the “ground-rules” of information sharing.
The typical NDA often involves a “disclosing” party and a “receiving” party. For the discloser, it’s important to draft a strong, comprehensive, and preferably attorney-reviewed NDA. For the receiver, it’s important to read and understand the terms of the agreement before signing. In some instances, both parties will share confidential information with one another, meaning that each party is both a discloser and a receiver. In these scenarios, the NDA is considered a mutual NDA. Otherwise, it’s called a unilateral NDA.
So exactly what kind of information is an NDA meant to protect? Technically, these agreements can defend almost any information that a business considers sensitive or confidential, so long as it’s clearly stated in the NDA. This commonly includes trade secrets, client lists, market research, computer passwords, and various other types of intellectual property.
It’s important to note that like any other type of binding contract, once an NDA is signed, the involved parties are legally obligated to honor the terms of the agreement. Should the receiving party divulge the confidential information—thus deviating from the NDA and breaching the contract— legal action is sure to follow. For this reason, it’s wise for receiving parties to speak to an experienced attorney prior to signing an NDA.
Key Considerations before Signing an NDA
Unilateral NDAs are generally more common than mutual agreements, in which case the disclosing party drafts a strong, comprehensive contract to be signed by the receiving party. Because the disclosing individual is responsible for drafting the NDA, they tend to be the party that requires an attorney’s expertise. That said, it’s also important for the receiving party to consult a legal professional before signing an NDA.
For receiving parties, signing an NDA without reading or understanding the terms of the contract is a recipe for disaster. Prospective signees should make these five key considerations before agreeing to any sort of NDA or confidentiality contract:
1. Know the Consequences of Breaching the NDA
Awell-written NDA will contain language on the consequences for divulging confidential information and subsequently breaching the contract. Before signing, the receiving party should ensure that the punishment generally fits the crime. In other words, the consequences should be proportionate to the degree of the breach; if the consequences are particularly harsh or extreme, negotiate the terms instead of signing the contract. Additionally, if the NDA fails to detail any consequences, proceed with caution as this might be an indication of a weak or lacking agreement.
2. Ensure there’s a Well-Defined Scope
Like other types of business contracts, an NDA should have a clearly-established schedule or duration. Obviously, you don’t want to sign an NDA without an expiry date. Always ask: what information must I keep private and for how long? Does the NDA specify a hard date, or is it dependent on a certain event (such as a departure or disassociation)?
3. You can Always Negotiate
NDAs are 100% negotiable until they’re signed, at which point the agreed-upon terms and conditions are legally-enforceable. If aspects of the agreement seem unfair or potentially perilous for your business, don’t be afraid to propose changes. Likewise, always ask for clarification if there is ambiguous or overly-technical phrasing. Legal aid can be particularly useful in these situations.
4. Beware of Poorly Defined Terms or Vague Language
NDAs require clear and specific terms to detail two things: 1) exactly what information is confidential and 2) how long this information must remain private. Unfortunately, some parties intentionally draft ambiguous contract terms in an effort to introduce uncertainty into the NDA. Ill-defined terms can render the receiving party liable for a wide-range of offenses.
5. Follow your Gut
If something doesn’t seem right, back-away and regroup. If something about the contract—or the other party—seems suspicious, it likely is. Again, an attorney can provide invaluable assurance and peace of mind in these situations.
Signees Beware: NDAs are Legally-Binding Contracts
It’s worth reiterating that any signed NDA is a legally-binding contract, and as such, signees have an obligation to honor their side of the agreement. For this reason, ensuring the arrangement is balanced, comprehensive, and fair is of the utmost importance.
Breaching the contract—whether by-accident or intentionally—can lead to damages and perhaps litigation. In other words, should the receiving party divulge the confidential information, they can rightly be taken to court. For prospective signees, its crucial to ensure the agreement is satisfactory before any signing takes place. Remember, these agreements are completely negotiable until the minute they’re signed. At that point, the NDA is a legally-enforceable document, and amending the terms is generally difficult (especially if the other parties aren’t receptive to modifications to the original agreement).
In most cases, it’s in the best interest of the signees to consult a legal professional before drafting or signing an NDA. For the receiving party, it’s important to consider the consequences associated with contract breach, as well as the scope of the agreement, the negotiability of the terms, and the clarity of the language. Lastly, if something doesn’t seem right, follow your instinct and back away.