What is a Confidentiality Agreement and when do I need one?
Confidentiality Agreements, also sometimes known as non-disclosure agreements or “NDAs”, are becoming more common in business - and can sometimes be seen as a burden.
At Gerrish Legal, we want to remove the stress associated with Confidentiality Agreements, and breakdown any legal jargon. Here are some practical tips on why, when and how to use Confidentiality Agreements.
Is a Confidentiality Agreement even needed and if so, when?
Most businesses need to have discussions with outsiders at some point - e.g., suppliers, clients, professional advisers, investors, prospective development partners or even resellers - on issues concerning sensitive and secret information, such as intellectual property, know-how, financial information, and business information and strategy. In such situations, it is important to protect your confidential information so that it does not become public knowledge or go further than the intended recipient. For this, a Confidentiality Agreement is often drafted and agreed between the parties.
A Confidentiality Agreement allows the disclosing party (i.e., the party sharing their confidential information) to oblige the receiving party (i.e., the party with whom the confidential information is shared) to keep this information secret.
Confidentiality Agreements can be mutual, whereby both parties can be deemed to be the disclosing and receiving parties if confidential information is to be shared by both parties, or, one way where only one party is doing the disclosing. In practice, however, business is a two-way street, so a mutual Confidentiality Agreement is usually the most appropriate way to proceed.
A Confidentiality Agreement has 3 key benefits:
Legal protection: A Confidentiality Agreement is a contract that creates a legally binding obligation, and in the case of a breach by the receiving party, the disclosing party may be entitled to redress.
Reminder of confidentiality requirements: the recipients of any confidential information are clearly warned that any information provided is of a confidential nature and may not be disseminated.
The discloser means business: Often, startups or freelancers are afraid to issue a Confidentiality Agreement, but by requiring such a contract, a party is showing maturity and seriousness; signing a Confidentiality Agreement gives weight and gravitas to your business.
What is a Confidentiality Agreement worth in practice?
It is usually better to have a Confidentiality Agreement in place than to not have one.
However, if a Confidentiality Agreement is vaguely drafted or if key clauses are missing, e.g., it is not clear what information is indeed “confidential”, or it is not clear who the receiving party is allowed to share this information with, there is arguably little weight in the Confidentiality Agreement.
Indeed, badly drafted Confidentiality Agreements can do more harm than good – such as where a party breaks its confidentiality obligation, but the Confidentiality Agreement does not provide for any solutions.
Usually when confidential information has been disseminated, the damage that has occurred cannot always be repaired, no matter how good the Confidentiality Agreement is. Confidential information that has been released into the public domain will quickly and easily become common knowledge – and will lose its confidential nature. This can be catastrophic for a business.
Real Life Case Study: Without naming names, a startup based in Denmark undertook several meetings with investors, including pitches for fundraising organized by a local incubator. At each meeting, the startup revealed details about its innovative product, the technology behind it and its overall business strategy – all in the hope of securing funding to take this amazing project forwards. No Confidentiality Agreement was in place or ever signed with the investors or other parties who attended these meetings. A few months later, the startup noticed adverts on Facebook for a product that was essentially the same product and concept as the one it had recently pitched. Of course, the investors saw they were on to a good thing and had the funds to make it happen – so they simply ran with it – totally cutting the startup out of the chain.
Whilst this is obviously highly unethical behaviour by the investors, and the startup may have some redress under unfair competition laws, it did not have the funds to pursue or engage expensive litigation – this could have been avoided had a Confidentiality Agreement been in place at an early stage and issued to the attendees of each meeting. Such conduct is not limited to tech products – even the fashion industry is notorious for this!
Next Steps – understanding Confidentiality Agreements
The importance of a well-drafted Confidentiality Agreement goes without saying.
The next step is to understand what the relevant provisions in a Confidential Agreement mean and importantly, how to negotiate them.
The best way of ensuring you get more favourable terms in any Confidentiality Agreement - regardless of whether you are receiving information, disclosing information, or both – is to provide your own Confidentiality Agreement up front, or as we say in the business: “provide your paper”.
This way you can ensure all of your Confidentiality Agreements are aligned, and that you have a good basis on which to negotiate, and ultimately conclude them.
Of course, your Confidentiality Agreement will have to be amended and adapted according to your specific use case, such as by setting out details of the other party, the duration of the confidentiality obligation, the governing law (if things go wrong), and last but not least - the purpose of the Confidentiality Agreement, i.e., the reason that information is being disclosed.
Depending on the purpose of your Confidentiality Agreement, the type of information to be shared, and the risks involved, you should have a Confidentiality Agreement which covers areas such as:
the definition of confidential information;
the purpose of the disclosure;
what happens if a party breaches its confidentiality obligation; and
how information is returned to the discloser at the end of the relationship.
Luckily, Gerrish Legal has created an automation tool to help you prepare your own bespoke Confidentiality Agreements, by breaking down these provisions to ensure you and your contracting party have a secure and coherent agreement.
You can access our tool here and can book in a 30-minute consultation with one of our human lawyers if you need any bespoke advice!