A Nondisclosure Agreement or NDA is a written contract between two parties, organizations, people, etc, that prohibits the parties to share the confidential information which is mentioned in the contract, in other words, it prohibits the sharing of confidential information shared between both the ends.
Although NDAs are commonly signed between the two companies, individuals or other entities but an employer can also enter into a Non-Disclosure agreement with his employee. In simple language, if you are asked to sign a NDA, you are asked to promise that the sensitive information which is shared with you should not get leaked or passed on to another individual or anybody.
On the other hand, if you are the issuer of the NDA, you are asking someone else to not share the information with anyone that you might share with them. In India, a non-disclosure agreement is governed by the Indian Contract Act, 1872. For the validity and enforceability of the NDA, which are to be stamped.
NDAs are often entered upon so that it can help in protecting the intellectual property rights like databases, client lists, proprietary information, sensitive business-related information of a person or business.
It helps the parties to understand their duties and privileges better by writing down their Non-Disclosure Agreement.
Different names of a Nondisclosure Agreement are:
- Confidential Agreement (CA)
- Confidential Disclosure Agreement (CDA)
- Secrecy Agreement (SA)
- Proprietary Information Agreement (PIA)
Key elements of the Non-Disclosure Agreement
A few of the major elements of an NDA include (not limited to the following):
- Identification of the parties that are signing the agreement.
- An accurate definition of what is considered confidential under the agreement.
- The clear reason as to why the information is shared and for what purpose.
- An elaborated explanation as to how the shared information can and cannot be used.
- Clear information about the time-frame or the duration of the agreement.
Three types of Non-Disclosure Agreement
- Unilateral NDA: Two parties are involved in this type of NDA. Only one party of the two discloses confidential information and expects the other party to prevent the information from any further disclosure.
- Bilateral NDA: In this type of NDA, two parties are involved and both parties disclose confidential information to each other with an intention to protect and secure the information from external parties. Example- Joint Venture.
- Multilateral NDA: In this type of NDA, three or more parties are involved, out of which one of the parties discloses a piece of confidential information, and the other parties promise to have that information protected from any further disclosures. These types of NDA eliminate the need for distinct unilateral and bilateral NDAs.
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When to sign a Non-Disclosure Agreement
There are multiple instances when you might require to sign an NDA for your business. A few of them include:
- While entering into a business deal: If you are inviting a vendor or a consultant and want to ensure that the information you share does not go out, signing an NDA is the best option. In early-stage startups and some information sensitive companies, it is a brilliant idea to make each employee sign an NDA. This helps in ensuring that something as simple as the strategies, projected numbers, and funds do not go out of the ecosystem.
- While starting a new project: Let’s say you are an established business and planning to start off a new project. This would require the involvement of both internal and external stakeholders. It is advised to sign off an NDA so as to avoid any ambiguity or claims that may arise from either end at any point in time.
- While talking to investors or during mergers and acquisitions: This was a very common practice in the past. However, modern-day investors deny to sign NDA at a very early stage, and hence, the practice is becoming obsolete now.
- At a point when the need arises to look inside the papers and numbers and the communication reaches the advanced stage, a request to sign an NDA can be made. This should carry clear justifications as to why signing an NDA is needed. The same goes for the process of mergers and acquisitions.
Advantages of Non-Disclosure Agreement
- Since NDA is a legal document, it is of immense importance for any conflict that might arise in the future. Any party infringing the agreement would be legally liable to compensate for damages.
It clearly states (in written format), anything that comes under the bracket of ‘confidential’, in the long run avoiding any ambiguity or loss of information.
- It maintains the secrecy of the information shared between two or more parties and reduces the chances of important information going out of the organization.
- Overall, it protects disclosures of intellectual property (including trade secrets, proprietary information and other confidential information), safeguarding the organization as a whole.
- NDA helps the parties to accommodate or to adapt their obligations well. It helps them to understand when the obligations do not apply and when they would terminate.
- It helps to describe exactly what, the confidential matter is and helps in maintaining their secrecy.
- Non-Disclosure Agreement deals with the provisions which deal with penalties imposed on the contracting party who discloses the information which was supposed to be kept confidential. The one who breaches with the NDA has prescribed punishments in the form of compensation. They have to bear the damages caused. This issue can also be brought to the court where they can receive injunctive relief. This would prohibit the recipient from disclosing such information any further so as to prevent a breach of non-disclosure.
- Non-Disclosure Agreement helps in achieving the purpose of their commitments by performing due diligence in safeguarding the confidential information.
- A court cannot give relief for the breach of confidential trade secret or information if the owner of that information has not entered upon Non-Disclosing Agreement. NDA is like protection given to the owners. A court grants relief to the owner if he has taken attempt for safeguarding the confidential information.
Disadvantages of a Non-Disclosure Agreement
- Bad drafting can lead to confusion: The main problem of NDA is the difficulty to ascertain what has been covered in the contract and what has not been covered. This often happens due to a lack of good drafting in the contract. This is why you need a lawyer to look at your NDA and copying from the internet is not a good idea.
- It can lead to lengthy litigations: It is a big issue in India as entering into a contract is easy for enforcing is difficult. This is why entering into a contract with a good arbitration clause that ensures low cost of contract enforcement is critical.
- Wrongly drafted NDA can cause you problems later: If there are clauses the meaning of which is not clear to you and you didn’t consult a lawyer, you can get into trouble. We had a client who had signed an NDA which prevented him from competing with the counter-party in a business that he was planning to enter. However, the language wasn’t clear to him and later he got sued for this and the court gave an ex-parte injunction against him as well. This led to much legal confusion and legal bills. NDAs are powerful tools but must be wielded carefully.
This article is written by Kush Bhardwaj and edited by Rupreet Kaur Dhariwal.