NDAs: Are they worth the paper they are written on?

Primarily used as tools to protect and regulate the use of confidential information, Non-Disclosure Agreements (“NDAs”) are arguably the most common types of legal agreements entered into. Nonetheless, there is an ongoing debate as to whether or not they are worth the paper they are written on.

What is an NDA?

NDAs are essentially contracts entered into by two or more parties regulating who can access certain confidential information, and establish the parameters of what is to be considered “confidential”, with a view of preventing sensitive information from being shared with competitors or third parties.

NDAs are commonplace in various transactions, ranging from the sale and purchase of a business to the sale or licensing of a particular product.

Effectiveness and controversy surrounding NDAs

NDAs effectively bind the recipient of “confidential information” and dictate how certain information can be used and to whom it can be disclosed.

These agreements are legally binding and in effect create a relationship of trust and confidence between the parties. If such trust is broken, however, it is disputed as to whether the disclosing party can benefit from having an NDA in place from the outset.

This is because it is often incredibly difficult to prove that a breach has occurred, and moreover, proving the same may result in disproportionately expensive litigation and enforcement.

However, if the disclosing party can prove that the recipient has in some way profited from the breach, then they may be able claim on account of profits.

Legal framework and enforcement

In the absence of such an agreement, a ‘duty of confidentiality’ may well arise, however, the burden of proof is much higher.

In such instances, the disclosing party would not only need to prove that the said information was not in the public domain and therefore was in essence ‘confidential information,’ but also that it was provided or made available in circumstances importing an obligation of confidence, i.e. that the party to whom the information was disclosed ought to have reasonably known, or must have known, that such information had been given in confidence.

This is rather difficult to prove, and therefore having an NDA in place eases the burden, satisfies both requirements, and provides added comfort to the disclosing party knowing that the recipient of the information is effectively placed under an obligation of confidence.

NDA best practice

In order to receive the maximum benefit, parties should ensure that NDAs are specifically tailored to their particular circumstances, and that information that is considered “confidential” be clearly identified and defined within the agreement.

NDAs must also spell out precisely what the recipient is permitted to do with the confidential information, to ensure that such information is not being used outside the scope of such “permitted purpose,” for instance, to gain a commercial advantage or for any other competitive reasons.

Parties should also try to strike a balance when it comes to imposing restrictions on the use of such information. If too many restrictions are sought, then this could impede the progression of the parties’ objectives, whereas if insufficient restrictions are imposed, this could lead to unwanted disclosures.

Disclosing parties should also remain wary of the strict obligation to treat the information they define as “confidential” as confidential themselves, due to the fact that Courts are hesitant to enforce NDAs in instances wherein it is found that disclosing parties have failed to maintain the confidentiality of the said information in their engagements with other third parties.

Conclusion: Importance of NDAs

Whilst having an NDA in place does not guarantee that a recipient of confidential information will not misuse that information, it stands that entering into NDAs remains good business practice.

Not only do NDAs mark the start of an engagement between parties and help focus the minds of the parties on the confidential information in question, but they also act as a tool not only to reassure the disclosing party that they are in control of the information, but also that any such confidential information will be returned or destroyed once the engagement is over.

By effectively putting in place various procedures and rules with a view to preventing certain information from being disclosed to non-authorised parties, NDAs act as a safety net which in effect lightens the load should a disclosing party need to pursue a claim for breach of confidentiality in future.

If you are considering selling your business or require general advice regarding NDAs, please contact a member of our Corporate team on 0113 207 0000.