What is Confidentiality Agreement?
Confidentiality agreements which are also called Non-Disclosure Agreements or NDA are agreements entered between parties to protect confidential information exchanged, from being used for business advantage or being disclosed against one party’s will. These agreements, are contracts entered into by two or more parties in which some or all of the parties agree that certain types of information that pass from one party to the other or that are created by one of the parties will remain confidential. Such agreements are often used when a company or individual has a secret process or a unique technology or new product that it wants another company to evaluate as a precursor to a comprehensive licensing agreement or where one party wants to evaluate another’s existing commercial product for a new and different application.
Scope of the Confidentiality Obligation
The basic principle underlying a Confidentiality Agreement is a two-part obligation on the receiver of the information: (i) to keep the confidential information, in fact, confidential; and (ii) not use the confidential information for any unauthorised purposes.
So the first part is that the recipient of the confidential information has to keep it secret. This usually means that the recipient has to take reasonable steps to not let others have access to it. For example, reasonable steps could include that only a few people within the recipient’s organisation have access to the information and they are all informed of the nature of the confidentiality restrictions.
The second part is that the recipient can use the information only for the purpose for which the information is disclosed and not to use it for the unfair benefit of the recipient and against the interest of the discloser.
An important point that must be covered in any confidentiality agreement is the standard by which the parties will handle the confidential information. Usually, each party will treat the other’s confidential information in the same way that it treats its own.
Purpose of entering into Confidentiality Agreements
One of the foremost reasons for entering into confidentiality agreement is to protect sensitive technical or commercial information from disclosure to third parties. One or more parties in the agreement may promise not to disclose technical information received from the other party. If the information is revealed to another person, the injured party has cause to claim a breach of contract and can seek injunctive and monetary damages.
The use of confidentiality agreements can also prevent the forfeiture of valuable patent rights. Many times, the public disclosure of an invention can be deemed as a forfeiture of patent rights of that invention. A properly drafted confidentiality agreement can avoid the undesired—and often unintentional—forfeiture of valuable patent rights.
Confidentiality agreements define exactly what information can and cannot be disclosed. This is usually accomplished by specifically classifying the information not to be disclosed as confidential or proprietary.
The confidentiality agreement can also limit each party’s use of the confidential information. For example, the confidentiality agreement can specify that the confidential information is to be used only to evaluate for particular defined purposes and not for any other purposes, thereby restrict the usage of the disclosed information.
What type of information can be included in Confidentiality Agreement?
The type of information that can be included as confidential information is virtually unlimited. Any information that flows between the parties can be considered confidential viz., documents, records, data, know-how, prototypes, engineering drawings, computer software, test results, samples, models, tools, systems, and specifications. This list is certainly not exhaustive but does illustrate the breadth of items that can be deemed confidential.
What information are excluded from Confidentiality Agreement?
Most confidentiality agreements exclude certain types of information from the definition of confidential information. It is very important that the recipient includes these exceptions in the confidentiality agreement, so as to avoid future legal complications.
The commonly excluded information include that is:
- Already known to the recipient;
- Already in the public knowledge (as long as the recipient didn’t wrongfully release it to the public);
- Independently developed by the recipient without reference to or use of the confidential information of the disclosing party;
- Disclosed to the recipient by some other party who has no duty of the confidentiality to the disclosing party;
- Disclosure made under law, however, when a disclosure is made under compulsion of law, it is normally stipulated in the confidentiality agreement that before disclosing the information, the receiving party shall notify the disclosing party of the order, so that the disclosing party can seek an appropriate protective order from court and also that in the event that such a protective order is not obtained, the receiving party furnishes only that portion of the confidential information that is, legally required to be disclosed.
Responsibilities of the party receiving confidential information
Generally, a Confidentiality Agreement stipulates that the receiving party shall:-
- use the confidential information solely for the purpose stipulated in the agreement and disclose the confidential information to only those persons who are required in the course of their duties to receive and consider the same;
- treat and safeguard as private and confidential all the information disclosed and not disclose without the prior written consent of the disclosing party and in strict accordance with the terms of such consent;
- not make any commercial use of the confidential information, unless permitted by the disclosing party;
- ensure that any person to whom disclosure of the confidential information is to be made, agree to honour the obligations set out in the agreement.
Term of the confidentiality Agreement
The agreement must establish a time period during which disclosures will be made and the period during which confidentiality of the information is to be maintained. It is essential that the confidentiality agreement clearly specifies the time period during which confidentiality of the information is to be maintained. In order to avoid disputes, the confidentiality agreement should also specifically state the starting date for the confidentiality time period.
Though the disclosing party may like to have the term of the confidentiality agreement to last forever, it is not advisable to have such unlimited term and a definite term should be stipulated in the agreement. Depending on the industry and the type of information conveyed, a time period of 2-5 years may be reasonable.