When two businesses start working together, they must share confidential information. Sometimes, this information can be so sensitive that the owner may not want it to leak to competitors.
To establish trust and confidence in each other, these parties need to sign a contract agreeing not to disclose any of the information to third parties.
A non-disclosure agreement (NDA) is a legal contract that ensures two parties entering a business relationship maintain the confidentiality of the information shared. Both the owner of the sensitive information and the receiver sign this document to keep everything confidential.
Non-disclosure agreement usually surfaces at the beginning of a business relationship or a large financial transaction. Some industries also require their employees to sign this contract barring leaking sensitive data belonging to the company.
Unlike business contracts that focus mainly on terms and conditions for collaboration, NDA focuses on the data and information privacy of the organization.
The recipient of the information agrees not to copy, share, modify, or use the information in any way not stated in the contract. Breaking the agreement and leaking confidential information is considered a breach of contract.
When Can Businesses Use Non-Disclosure Agreements?
NDA applies in various situations serving specific purposes. For example, when two companies start doing business together, they both need to protect their own interests.
The content covered in the NDA will forbid these companies from sharing information regarding the plans and processes of the other business.
NDA also applies when a company hires a new employee. If employees’ work involves access to sensitive company data, they must keep the information confidential by signing NDA. Some organizations may even require all their employees to sign the agreement.
Lastly, NDA applies between organizations entering a huge financial transaction such as an investment or funding.
In this case, the NDA prevents the investors from disclosing the investment plans of the company. It prevents competitors from obtaining the plans or secrets of the company.
In the cases above, NDA seeks to protect the company’s sales plans, customer information, software inventions, or marketing strategy. The parties signing the agreement agree not to share or copy the confidential information.
Failure to keep their part of the bargain will be considered a breach of contract. The offended company can sue the other party and seek compensation for damages.
Elements for Non-Disclosure Agreement
An NDA should have various elements to be considered official and legal. The elements include:
Identification of Participants
Every NDA must have two participants; the disclosing party and the receiver of the information. They are also known as parties to the agreement.
It uses the names and addresses of the individuals, companies, or representatives of an organization. This part may also include attorneys, business partners, or consultants.
Definition of Confidential Information
Confidential information can vary in many ways and may differ from company to company. The NDA must clearly define what they mean by confidential information and the exact data they consider confidential. They must identify and explain the information that must not be shared with third parties.
Obligations
This part states what will happen if the confidential information is shared. In the event that the party doesn’t keep its end of the bargain, the NDA states the consequences. This could be in terms of monetary fines or lawsuits.
Exclusions
In most cases, all company information is considered confidential, making it hard to define confidentiality. In this case, the company will just state what is not regarded as confidential. This could be information previously shared or data that is already public knowledge.
Time Frame
Some information contained in the NDA might expire or lose value with time. Once the information losses its value, the company will not suffer any losses when it’s disclosed.
At this point, the NDA will have expired. The NDA must have a time frame section when the information will no longer be confidential.
Miscellaneous Provisions
NDAs differ from company to company and may serve different needs. An NDA cannot be the same across industries because each company has its own set of requirements.
The agreement may also include laws that apply in various cases as long as the NDA remains active. For instance, the miscellaneous provisions may state which party pays attorney fees in case of a dispute.
Why Should Businesses Sign Non-Disclosure Agreements?
The business world is always very competitive. People are always looking out to see what their competitors are doing and will do everything to be on top of the competition. This could involve information theft, data leakage, coping, and cyber-attack.
NDA seeks to protect the company and any parties it associates with from such vices and any losses they may bring. Some of the reasons businesses should consider signing NDAs include:
- Establishing trust between various parties
- Protection of confidential information
- Prevention of intellectual property theft
- Protecting client information and personal details
- Attraction of investors
Summary
Businesses must do whatever it takes to protect their confidential information and maintain their competitive advantage.
However, trusting others blindly and expecting them to keep your secrets is not a good business move. The only way to get people to keep your information private is to legally bind them.
A non-disclosure agreement is the only guarantee you have that any parties working with your business will not hurt it by disclosing confidential information.
So, before leaking any private matter to others, ensure you have a properly signed NDA. You can have a lawyer to witness everything and have your back if the parties breach the contract.