Before starting joint venture negotiations, selling products through an agent, or selling a business, almost every company will be asked to sign an NDA, or confidentiality agreement. Most use a template that already exists — sign it, then disclose everything freely.
The problem is that a poorly drafted NDA does not protect your information as much as you think, and you usually only realise this once the information has already leaked. This article summarises the points to check before signing.
What an NDA Can and Cannot Protect
An NDA is a contract, so it can be used to sue a contracting party who breaches it. But there are limitations you must know from the start.
- It cannot bind outsiders. If the information leaks to a third party who did not sign it, you must rely on other laws, such as trade secret law.
- It does not make the information confidential again. What you get is damages, not a way to turn back time.
- Information that you have not kept confidential yourself is difficult to claim as a trade secret.
An NDA should therefore be used together with disclosing information in stages, only as much as is necessary at each phase of the negotiation.
Clauses an NDA Must Have
1. A Definition of Confidential Information Specific Enough to Be Proven
"All information disclosed" sounds comprehensive, but when it comes to proving in court which information was leaked, it becomes difficult. You should specify the categories of information, such as production formulas, customer lists, cost prices, and business plans, and set out the method for identifying something as confidential, such as stamping the word "Confidential" on documents or confirming it in writing within a specified period when disclosure is made orally.
2. Exceptions That Should Be Included
A contract with no exceptions at all is often challenged as unfair. Standard exceptions include information that is already generally known, information the recipient already had beforehand, information developed independently, and information that must be disclosed under an order of a court or a government authority.
3. Use Limited to the Purpose of the Negotiation
A prohibition on disclosure alone is not enough. There must also be a prohibition on use for any purpose other than considering the project being negotiated; otherwise, the counterparty may tell no one but still go ahead and do it themselves.
4. Who Within the Counterparty's Company May Access the Information
Provide that disclosure may be made only to employees and advisers who need to know, and make the counterparty responsible if those persons breach the obligation.
5. Duration
There must be a clear distinction between the duration of the negotiation and the period during which the confidentiality obligation remains in effect, which should be longer. For certain types of trade secrets, it may be provided that the obligation remains in effect for as long as the information remains confidential.
6. Return or Destruction of Information
If the negotiation does not succeed, all documents and copies must be returned or destroyed, including files in systems, and this must be confirmed in writing.
7. Penalty and Remedies
Damages from a leak of information are difficult to prove in monetary terms, so setting a penalty in advance can help. But you must know that if the penalty is disproportionately high, a court can reduce it. It should be set in relation to the project value, and a clause should also be written reserving the right to claim damages for any amount in excess and to seek a court order to stop the conduct.
Non-compete and Non-solicitation of Employees
NDAs used in negotiations for the acquisition of a business or for a joint venture often include prohibitions on soliciting the other party's employees or customers. Such clauses may be included, but if they restrict rights more than is reasonable, a court may give them effect only to the extent that is fair. Restrictions that are tied to the project and have a clear time period are more likely to be enforceable as written.
Who Signs
An NDA signed by the counterparty's sales manager may be challenged as not binding on the company. Check the company registration certificate to see which director has signing authority, how many signatures must be given jointly, and whether the company seal must be affixed, or request a valid power of attorney. Read the details in Who Has Authority to Sign and Bind the Company
Counterparty is a foreign company
- Language Use two languages and specify which version governs when the meanings differ.
- Governing law and dispute resolution venue Consider where enforcement against assets will actually take place.
- Foreign signatory Also request documents evidencing signing authority under the law of that country.
Checklist Before Signing
- The definition of confidential information matches the information that will actually be disclosed.
- Standard exceptions are included.
- Both disclosure and use outside the permitted purpose are prohibited.
- Access is limited to a defined group of people.
- The duration of the confidentiality obligation is clear.
- There is a clause on returning or destroying the information.
- The penalty is reasonable, and the right to ask the court for an injunction is reserved.
- The signatory has the authority to bind the company.
Read more: Reviewing business contracts before signing
📌 See more: Business law · Civil cases
If you are about to disclose information to a business counterparty, consult our team of lawyers to have your NDA reviewed or drafted so that it matches the information you will actually disclose.
This article provides general information and is not a legal opinion for any specific case.