WHAT IS AN NDA AND WHY IS IT IMPORTANT FOR A BUSINESS?

INTRODUCTION

Every business has certain valuable information that is not accessible to the public at large. Such Trade Secrets often distinguish one business from another and make it unique. To safeguard such information, the company implies Non-Disclosure Agreements (NDA). A non-disclosure agreement (NDA) is a legally binding contract that establishes a confidential relationship between the parties signing it.  The party or parties signing the agreement agree that sensitive information they may obtain will not be made available to any others. The non-disclosure agreement works on a very simple principle; it creates a legal obligation on the receiver of the information not to disclose it to anyone else outside the terms of the contract and is governed by the Indian Contract Act, 1872.

IMPORTANCE OF NDA

• It maintains the secrecy of the information shared between two or more parties and reduces the chances of important information going out of the organisation.
• It is an essential legal document that settles any conflict between the contracting parties in the future related to confidentiality.
• The nature of NDA is a legally binding contract. However, in various circumstances, such a contract is breached and the confidential information shared with the party is leaked and misused. The breach of the NDA vests in the party the right to take legal recourse against the defaulting party and sue them for damages.
• In the highly competitive field, there’s always a possibility that employees will quit to join any other entity or establish their own business. Every time an employee leaves, they take valuable knowledge such as customer lists, marketing tools, company procedures etc along with them. The NDA imposes a legal obligation on the employee to keep the company’s classified data secret and not misuse it for a specified length of time, which may extend even after they leave your company.

USES OF NON-DISCLOSURE AGREEMENT

Non-disclosure agreements are extremely important for all types of business deals. Especially in the case of small businesses and start-ups, a lot of work is outsourced to freelancers or contractors. While seeking investments, the start-ups need to share their idea which are in a very primitive state to the investors.  At that point in time, you don’t want the person or company to steal your product/idea or other information and sell it themselves. Therefore, in this scenario, an NDA signed by both parties will help in protecting the sensitive information of such businesses.

While seeking investment, finding potential partners, hiring new employees, obtaining new clients etc, the transfer of information from the company to the potential individuals is required. The importance of an NDA is highlighted in such cases as it helps maintain trust and prevents leakage of any crucial information that can undermine the business’s profitability. Crucial information that requires an NDA is secret recipes, proprietary formulas, manufacturing processes client or sales contacts lists, non-public accounting figures or any other such information that sets the company apart from the others.

In an employer-employee relationship, a non-disclosure agreement usually comes attached with a non-compete agreement, by virtue of which, the employee cannot disclose the information not only during the period of employment but also for a certain period after the termination of such employment.

TYPES OF NDA

There are three types of non-disclosure agreements:

1. Multilateral NDA -Multilateral NDA involves more than two parties, one of which discloses sensitive information. The other parties in the agreement will agree to protect that information from further disclosure.

• Bilateral NDA- Two parties are involved in this type of NDA. One of the parties can share sensitive information, and the opposite party agrees to protect the information from outside parties.

• Unilateral NDA – Two parties are involved in this type of NDA. Here one party discloses sensitive information and the other party protects the information from further disclosure. Most NDAs are unilateral agreements, often involving business employees, vendors, or clients. Though most unilateral agreements are intended to protect a company’s trade secrets, they can also protect copyrights.

CONTENTS REQUIRED IN AN NDA

Any NDA issued by the business should include the following basic headers-

• Definition- Describe clearly what you are characterizing as confidential so that there can be no misunderstanding. Generally, you want to state that your entire business plan is confidential, as well as any supporting material you provide and any discussions you have about the business plan.
• Jurisdiction- The agreement should indicate which state’s laws apply to the agreement.
• End of relationship- If you and the other party receiving the business plan decide not to work with each other and terminate your business relationship, the information you provided should be returned to you, destroyed, or deleted.
• Length of agreement- An expiration date is normally included, as NDAs cannot be open-ended.
• Ownership of the information- The NDA should make it clear that just because you’re sharing information, you’re not giving the receiving party any ownership rights in the information.
• Other people-The parties you’re sharing the business plan with may need to show it to people who work for or with them, such as their accountant or lawyer. The agreement should also state that the NDA is binding on those third parties.
• Signatures- The agreement should be signed by you and someone from the receiving party who has legal authority to enter into the agreement. The NDA should make it clear that this person has the authority to do so and that their signature is binding on their company.

RELIEF, DEFENCES AND ENFORCEABILITY AVAILABLE TO THE PARTIES INVOLVED

In case of a breach of the NDA, the following measures can be taken –

1. Relief to the aggrieved party
2. Monetary Compensation for any damages arising out of breach of contract. The defaulting party is entitled to reimburse the loss to the aggrieved party that was incurred.
3. Injunction-Refrain the defaulting party as per the decree of a court to use or further disclosed the particular information.

As remedies are available for the aggrieved party, defences are also available for the defendant.

• Defences to the defendant
• Legal Compulsion- The defendant will be excused where he is bound to disclose the information under some legal compulsion or obligations.
• Exclusion Clause- When the information is already known to the public domain or was disclosed to a third party, the defendant shall not be held liable

A legal instrument, document or contract has value because it is capable of being enforced in a court of law. In India, NDA is enforceable only when it is stamped and registered for admissibility. Therefore, every NDA should be stamped and registered after being drafted and signed by the parties.

CONCLUSION

An NDA is extremely important for any business organisation as confidentiality agreements make it easy to create legally binding documents between two or more parties that keep the personal information confidential. They are used by organizations and individuals to safeguard their assets and sensitive data, allowing them to collaborate without worrying that their private information will end up in the hands of competitors. It is crucial to be as specific when writing a non-disclosure agreement so that all parties are aware of what information they can and cannot reveal as well as the repercussions of any data breach. However, in a case of a breach, the NDA is governed under the India Contract Act, 1872 and redressal can be sought by the grieving party.

About Author: Sonakshi Arora is a fourth year law student at Symbiosis Law School. With a knack of continuous learning and enhancing her knowledge, she has been regularly interning at legal firms and contributing by writing and publishing articles. Her experience encompasses different areas of law including Mergers and Acquisitions, Intellectual Property Laws, Commercial laws etc. Her focus through Legal writing is to make it easier for the reader to understand legal concepts and at the same time increase her knowledge on different topics.