Does Your Business Need a Non-Disclosure Agreement? A Guide to Non-Disclosure Agreement

In a business world full of competition, safeguarding confidential company information is necessary to guarantee your business's success. A non-disclosure agreement (NDA) is a vital legal framework that protects sensitive business information.

Whether you're a start-up, an established company owner, an employee, or a consultant, you should understand the complexity of the NDAs. This is essential for ensuring legal protection and fostering positive business connections.

This guide will explore the non-disclosure agreements, their significance, and if your business needs them.

What's a Non-Disclosure Agreement?

NDAs are legally enforceable contracts establishing confidential relationships between the party disclosing sensitive information and the party receiving it. In a confidential relationship, one or both parties mustn't share that information.

The non-disclosure agreement is also called a non-closure contract or confidentiality closure agreement. Most of these contracts are given at the beginning of a contract, in a business relationship, or a financial exchange.

For instance, an employer may ask a contractor or client to sign an NDA to protect the company's sensitive data.

An NDA specifically addresses protecting a person's or business's confidential information. It differs from other company contracts, such as service or sales agreements, which outline the terms and conditions of services or transactions.

Here is sensitive business information that an NDA protects:

• Business plans
• Technical data
• Intellectual property (IP)
• Financial information
• Ongoing negotiations
• Research
• Ideas
• Personal information

There are two types of NDA in the UK, namely:

1. Unilateral: this is when one party only one party agrees not to reveal confidential information
2. Mutual: In cases where multiple parties need not disclose confidential information

If a breach of an NDA occurs and the matter is brought to court, the party responsible for disclosing the confidential information (or using it for unauthorised purposes) may be liable to compensate for any financial losses incurred.

The Primary Purpose of a Non-Disclosure Agreement

The purposes of a non-disclosure agreement are confidentiality and protection. Information safeguarded by a confidentiality agreement can range from product specifications to client lists. An NDA establishes the legal structure to protect ideas and information from theft or sharing with competitors and third parties.

An NDA protects the company, addressing and covering even accidental breaches.

Let's explore the functions of an NDA:

1. Identifying protected information: an NDA draws a line between confidentiality and the information that could be disclosed. This enables parties to operate within the parameters established by the confidentiality agreement.
2. Protecting patent rights: public disclosure of an ongoing invention may violate patent rights. Fortunately, an NDA can protect the inventor as they develop their new concept or product.
3. Protecting sensitive data: once one signs an NDA, they enter a legal requirement to keep the sensitive data confidential. If they leak the information, it will be a breach of contract.

When to use a Non-Disclosure Agreement in your Company

As a company owner, assuming the discussion between you and the other party will remain private is wrong. Therefore, before having any business discussion, weigh whether the information you're about to share could make your business vulnerable in any way.

If necessary, you should hire an attorney to draft an NDA and ensure it is signed before engaging in business discussions. Keeping a secret could be the best way to keep your data confidential, but it's impossible in the business, especially in a growing company.

Cases when your Business needs an NDA

Here are cases that warrant an NDA

1. When partnering with another company

You should consider an NDA when entering a business relationship with a supplier, customer, partner, or company. This is because you will discuss sensitive information about your business or theirs. An NDA guarantees that the two parties will keep sensitive information confidential.

For example, suppose you are developing a new formula for a dietary supplement to add to your product line before the release. In that case, you must share the formulation with your manufacturing partner to begin production. However, ensure your partner signs an NDA before disclosing to them to protect your proprietary formula and prevent your competitors from mimicking your innovation.

2. When seeking business advice or investment

You must discuss the company's activity in detail when seeking investment or business advice. You can use an NDA to protect yourself and your business.

For example, suppose you're a tech start-up seeking investment to develop a groundbreaking mobile app. To secure funding, you must share sensitive information about your company's proprietary technology, market strategies, and projected financials with potential investors. To protect your intellectual property, you must prepare NDAs for each investor. These NDAs should be signed before sharing confidential details during investor meetings or pitch presentations.

3. When your employees can use the data against you

An NDA should also be used when dealing with your employees. Remember, your employees know more about your company than any competitor.

For example, a company formulated a unique shaving cream that caught the attention of the grooming industry. As demand escalates, you will need additional staff to meet the production demand. Employees should sign an NDA to ensure they understand intellectual property. By having employees sign these agreements, you protect your innovative formula and prevent them from exploiting company secrets for personal gain.

4. Using a service

As your company grows, you may need other companies to provide you with a service. However, you may need to be cautious to avoid exposing your sensitive information.

What Information must be included in an NDA?

An NDA must contain various statements that must be written correctly. So, it's advisable not to draft your own NDA since a poorly drafted NDA is worthless.

You can use a professionally written NDA template online if you can't afford a lawyer to draft one for you. According to an NDA example from GOV.UK, the agreement should have the following:

1. Name of person or organisation receiving the data
2. The address of the person or business receiving information
3. Name of the person or business disclosing the information
4. The address of the person or business disclosing the information
5. The reason the confidential information is being disclosed
6. The period when the sensitive should be kept confidential (3,5 or 10 years)
7. The signatures of all parties and their witness
8. Consequence of breach
9. Return or destruction of the information

NDA Limitations

There is certain information that you can't keep confidential. This includes:

1. Public interest: if the information is of public interest, such as illegal activity, government transparency, or public health and safety, you can't use an NDA to prevent disclosure of such information.
2. Enforcement challenges: Enforcing a Non-Disclosure Agreement can present difficulties, especially if the disclosed information is already in the public domain or the NDA's coverage is overly extensive. Demonstrating damages or securing an injunction can be arduous, even if a breach is detected.
3. Limited protection: an NDA protects only the information specified in the agreement. So, the agreement does not prohibit information not covered in the NDA, meaning it's not protected.
4. Limited time protection: NDA has limited time protection; after the time expires, the information is no longer confidential and may be disclosed freely.
5. Limited jurisdiction: an NDA is governed by laws of a specific region. This limits its effectiveness in other jurisdictions, so if the disclosing party is in a different jurisdiction than the receiving party, it is complex to enforce an NDA.
6. Reputational risks: NDAs might cause bad publicity or harm a company's reputation, especially if people think it's a way to hide misconduct.

When can a Business not use an NDA?

According to the Advisory, Conciliation, and Arbitration Service, you shouldn't use an NDA to:

1. Stop an individual reporting harassment, sexual harassment, or discrimination
2. Mislead people
3. Conceal inappropriate actions or misconduct, especially if there's a chance of recurrence, is not advisable.
4. Avoid addressing issues in the workplace.

Remember, an NDA isn't a size-fit-all-all agreement. Therefore, you should amend it every time you use it; specific details could change, like sensitive information.

How to Enforce a Non-Disclosure Agreement

Enforcing an NDA can be challenging, but there are steps businesses can take to safeguard their sensitive information and uphold the agreement's stipulations.

Let's explore the steps.

1. Identify the breach:  The initial stage in enforcing an NDA is pinpointing the breach. This might entail supervising employees, examining records or correspondence, or investigating.
2. Issue a cease and desist letter:  after you've identified the breach, the business should dispatch a cease and desist letter to the party responsible. The letter should detail the violation, instruct the party to halt any further disclosures, and specify a deadline for compliance.
3. Seek injunctive relief: if the party continues to breach after issuing a cease and desist letter, your business could seek injunctive relief from the court. This could entail initiating legal action and seeking a restraining order or a preliminary injunction to halt more disclosures.
4. Pursue damages: if the breach has caused damages to your business, like reputation damage or profit loss, your company may seek monetary damage via a lawsuit.
5. Consider an alternative dispute resolution method: instead of pursuing a lawsuit, it could be more efficient and cost-effective if you consider alternative dispute resolution such as mediation or arbitration.

Non-Disclosure Agreement vs. Confidentiality Agreement: What's the difference?

Although the two phrases are frequently used interchangeably in business, the NDAs and Confidentiality Agreements have specific differences that are important to grasp.

Let's compare the two side by side.

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Winding Up

NDA protects sensitive business information, which is essential for a business's success in a competitive market. As a business owner, you will need an NDA to establish confidential relationships and protect your business against unauthorised disclosure of proprietary data.

Using an NDA before engaging in a partnership with another party, seeking investment, or hiring new employees is recommended. The agreement specifies the protected information and the consequences of the breach. So, does your business need an NDA? You can hire a solicitor to draft one for you at a cost or use the free online template. If you have any questions on non-disclosure agreement, don’t hesitate to contact us here, and we’ll do everything we can to help