Non-disclosure agreements (NDAs) play a key role in protecting the commercial interests of limited companies. Unfortunately, all too often, limited companies use standard template NDAs rather than tailoring a document to their own unique needs. Using template NDAs that are freely available for download from the internet can lead to commercial exposure and may be difficult to enforce legally if the other party breaches their side of the agreement. In this article we will explain how to draft a legally enforceable and effective non-disclosure agreement for your limited company.
What is a Non-Disclosure Agreement (NDA)?
An NDA is a legally enforceable contract between two parties that is designed to keep commercially sensitive information (e.g. trade secrets, ideas and strategies) from being released. NDAs are also known as confidentiality agreements (CAs), confidential disclosure agreements (CDAs) and proprietary information agreements (PIAs). By such an agreement, the other party may not discuss with unauthorised parties any of your company’s information that is protected under the agreement.
NDAs can be used in different contexts, including between employer and employee and between parties to a commercial relationship. In an employment context, employers may not necessarily draw up a standalone NDA but they will include confidentiality clauses in employment contracts and settlement agreements.
What information can be protected by an NDA?
NDAs can be used to protect a wide range of commercially sensitive information, such as:
- Trade Secrets – This may include highly sensitive business information like manufacturing processes, formulas and techniques (e.g. the KFC secret recipe).
- Business Plans and Strategies – e.g. future business plans, business strategies, and operational details.
- Financial Information – this may include sensitive financial data such as revenue, profitability and other company performance metrics.
- Intellectual property (IP) – including any information related to patents, trademarks, copyrights and other valuable intellectual assets.
- Customer and Supplier Lists – intended to keep the names and details of customers, clients or suppliers from being used by another party for their commercial gain.
- Product Designs and Prototypes – e.g. details of new and existing product designs, development and features.
- Software source code – i.e. intellectual property in software product development.
- Research and Development – this may include any confidential details regarding ongoing or planned research and development projects.
- Employee Information – to protect the disclosure of employee details including names, roles and responsibilities.
Are NDAs legally enforceable?
If drafted correctly, NDAs are enforceable in the UK. To be enforceable the terms of the NDA must be reasonable and not overly broad. The document should be clear and specific about what information is considered confidential, the obligations of the parties and how long the agreement lasts. It is also important to bear in mind that a court may refuse to enforce an NDA if it would not be in the public interest to do so or if the information in question is already in the public domain.
It is essential to ensure that each NDA is drafted to meet the legal requirements of the specific circumstances of the parties involved. Seeking legal advice when drafting or entering into an NDA is always recommended to ensure that the agreement is ultimately enforceable if breached.
In the last decade, the “#MeToo” campaign has highlighted situations where NDAs have been used inappropriately, e.g. by preventing victims of sexual harassment from revealing the details of any harassment to the police or other parties. As a result, there is now much greater scrutiny regarding the use of NDAs to ensure that they are always used responsibly and only where entirely necessary and appropriate.
When should an NDA not be used?
It is not always appropriate to use an NDA, even if it is believed that it will protect the commercial interests of the company. Specifically, it may not be appropriate to use an NDA to:
- Prevent a protected disclosure (i.e. whistleblowing) – a protected disclosure is one whereby an individual reveals the wrongdoing or failure of an organisation because it is in the public interest to do so (e.g. because it is causing serious environmental damage). “Whistleblowing” occurs when an employee passes on information regarding wrongdoing that they have seen or experienced in the workplace.
- Prevent the disclosure of discrimination, harassment, inappropriate behaviour or sexual harassment.
- Mislead someone.
- Prevent the reporting of a crime to the police.
- Discuss pay with other staff at work.
- Prevent the disclosure of information that is already in the public domain and there is a public interest in the information being released.
Is a confidentiality clause or NDA necessary?
The question of whether a confidentiality clause or NDA is necessary is particularly relevant in the context of employment. The Advisory, Conciliation and Arbitration Service (ACAS) recommends that employers should explore alternatives to NDAs, such as relying on workplace policies and procedures where feasible. Creating a workplace culture in which employees feel at ease discussing their concerns and issues is also highly encouraged by ACAS.
A Solicitor should always ensure that an NDA is drafted according to the core principles of the Solicitors Regulation Authority (SRA). These principles are as follows:
- Uphold the constitutional principle of the rule of law and the proper administration of justice.
- Uphold public trust and confidence in the solicitors’ profession and in legal services provided by authorised persons.
- Independence.
- Honesty.
- Integrity.
- Encourages equality, diversity and inclusion.
- Is in the best interests of each client.
By ensuring that an NDA is drafted by a legal professional in accordance with these principles, the likelihood of the agreement being legally enforceable is considerably increased.
Using the right type of NDA
Contrary to common belief, there are several different types of NDA catering for a range of scenarios. “Mutual” NDAs, for example, are used when each party is disclosing confidential information to the other for commercial purposes. “One-way” NDAs, on the other hand, are used when only one of the parties is disclosing confidential information and such agreements are usually drafted from the perspective of – and weighted in favour of – the party making the disclosure. NDAs can also be drafted, however, so that they are weighted more in favour of the recipient.
It is also possible to enter into a “multi-party” NDA. Multi-party NDAs are used, typically, if three or more parties are planning to disclose or receive confidential information between each other for commercial purposes. In this context each party may be a discloser, a recipient or both.
There are also NDAs for different types of corporate transactions, including cross-border commercial transactions and joint ventures. Again, it is important to ensure that you choose the correct type of NDA for your needs and that this is drafted by a commercial law solicitor.
Should I place a time limit on an NDA?
NDAs will often include a specified time period for when confidentiality is required. This is not always the case, however. The general principle is that confidential information can be protected from disclosure for as long as it remains confidential. If necessary, parties can agree that the obligations in an NDA should last indefinitely. It is important to bear in mind that information often loses its confidential nature over time as it becomes outdated and loses commercial value. A court is unlikely to uphold and enforce an NDA when information is no longer inherently confidential.
Depending on the situation, however, the other party may not wish to accept an open-ended commitment to confidentiality, because to do so would require compliance for an indefinite period. Working out an appropriate time limit for an NDA is normally a matter for negotiation, taking into account the type of information, the type of transaction taking place and the ability of the parties to comply – and monitor compliance – with their obligations.
Non-confidential disclosure agreements
In some cases it may be appropriate to enter into a “non-confidential disclosure agreement”. For example, a limited company may want to consider submissions from third parties for new innovations, software or designs, but they do want to be bound by confidentiality obligations.
In this situation, a non-confidential disclosure agreement can be used to prevent the party receiving the information from being bound by confidentiality obligations. The responsibility is then placed on the disclosing party to ensure its protection. This may be achieved by applying for a patent or registered design.
If you are considering entering into a non-confidential disclosure agreement then it is important to seek legal advice before doing so.
What is contained within an NDA?
The contents of an NDA should always be tailored to the specific requirements of the context or commercial transaction. Most NDAs contain the following key sections:
- Details of the parties to the agreement.
- A clear definition of the confidential information to be protected.
- When the receiving party can use the information.
- To whom and when the recipient can disclose confidential information.
- A clause requiring the return or destruction of information if the transaction and when should apply.
- Duration of the agreement.
Final words
We hope that this guide has given you some useful information on the use of NDAs in commercial situations and the key points to consider when entering into one. As we always advise, engaging a legal professional who specialises in commercial contracts will ensure that your NDA affords you the protection needed and is fully enforceable if it is ever breached.
