Crisis of confidence: is a non-disclosure agreement worth it?

Non-disclosure agreements are much maligned, but there’s no getting away from the fact that they can provide much needed peace of mind for enterprises that are entering into new relationships

Crisis of confidence: is a non-disclosure agreement worth it?

It’s undeniable that non-disclosure agreements (NDAs) get a lot of flak in entrepreneurial circles, with many claiming that they “aren’t worth the paper they are written on”. However, it is true that a degree of confidentiality is required in certain circumstances to protect an enterprise’s secret sauce and its commercially sensitive information. For this reason, we asked a selection of law firms how enterprises can make best use of NDAs and how to ensure they are putting them to work effectively.

The first thing to cover is, in basic terms, what NDAs actually do. “They are contracts that require one or each party to keep certain information that is disclosed by the other party confidential,” explains Rhys Williams, partner in the commercial technology team at Taylor Vinters. The agreements not only cover how said information cannot be shared but also for what applications it can be used. “The information in an NDA may only be used for a particular specified purpose,” he says.

There are a range of scenarios which might require the imparting of confidential information, as Williams outlines. “[It might be] a proposed new business venture involving both parties, the entry into a new market by one or both parties or the technology and the related intellectual property underpinning a proposed transaction that is owned by one party but needs to be examined by the other,” he says.

While it might be readily apparent that a new relationship is going to require the sharing of confidential information, what sometimes trips enterprises up is the expectation of what kinds of information an NDA might cover. “Broadly, the law of confidentiality will protect information which is confidential in nature – it is not public property or public knowledge – and is shared in circumstances where the method of disclosure is controlled,” says Sean Kelly, partner in the corporate team at Pitmans. This means that information already in the public domain and that has been shared on a non-confidential basis cannot then be effectively protected as confidential in an agreement with a new party.

As with most legal agreements, the first line in ensuring an NDA’s effectiveness is making sure the terms are watertight and clearly cover all scenarios. “If there is any ambiguity about what information needs to be kept private, then lawyers could have a field day and cause problems,” says Robin Campbell-Burt, associate director at Spreckley Partners.

There are key provisions that need to be made by an NDA if it is to be effective. “It should be broad enough to cover the information shared, any inadvertent or deliberate disclosure by you of information and any works which may be derived from the confidential information,” Kelly says.

While it sounds like an obvious step, the contract needs to clearly state that key information cannot be shared, with terms that explicitly state that the aforementioned details must be kept secret. This also requires one to detail cases where it is acceptable to share information. “You need to clarify when the information may be disclosed to third parties, [for example] if required to do so by law or regulation or if the information is no longer confidential,” says Williams.

Lastly, there need to be clauses in place that handle the end of a relationship. “If the transaction does not proceed, the recipient should be required to return all information or to destroy it,” Kelly explains. Another case that needs to be considered is when confidentiality naturally expires. “Information will only be considered to be confidential for so long as it truly maintains its ‘nature of confidentiality’.”

Even if one gets the terms exactly right, an NDA won’t always be an appropriate catch-all solution for every relationship. One case that often gets questioned is start-ups assuming that issuing investors with NDAs is going to be appropriate.

Williams feels that the majority of investors will understand the case for an NDA. “Most investors are sophisticated individuals who understand the purpose of NDAs,” he comments. However, it is important to note that the nature of the relationship and stage at which one is seeking investment will affect things. While at a later-stage funding round a new investor will be more comfortable being asked to sign a confidentiality document, asking at an investment seed round, where they might be seeing 20 start-ups at a glance, might not be so well received.

Perhaps the biggest question mark around NDAs, however, is how much they can actually help enterprises deal with a breach once it has occurred, with many noting they do little but shut the barn door after the horse has bolted. “It should always be remembered that one of the NDA’s strongest characteristics is to act as a deterrent,” says Kelly. “Once the information protected under the NDA has come into the public domain, the NDA is of little or no use.”

This means that rapid action is required if an NDA is to prevent serious operational damage. “[If] confidential information has started to leak into the public domain, the most important thing is to plug the leak as quickly as possible,” says Williams. Legal action is best applied to hold another party to the contract, rather than trying to retroactively clean up the mess afterwards. “English courts have a well-established process for enforcing interim injunctions, which will be the primary objective for most companies,” he says.

Financial reparation can be obtained after the fact in circumstances when a breached agreement does cause losses. “They’ll have to account to you for any profits made as a result of using the confidential information and compensate you, in the form of damages, for the loss you have suffered,” Kelly says. But it’s important to note that seeking damages is a far more complicated process and involves much more legal wrangling than holding someone to contract.

Ultimately, there will always be a case for confidentiality agreements, as long as they are approached in the right way. “NDAs provide us with greater legal protection,” says Campbell-Burt. While you can’t expect them to be a cast-iron defence, they are definitely better than the alternative. “If they are done correctly, there is no ambiguity for both us and the client,” he concludes. “We are both better protected.” 

Josh Russell
Josh Russell

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