At the beginning of a potential business relationship, a party is often presented with a non-disclosure agreement (‘NDA’) also sometimes referred to as a confidentiality agreement, or a party may require the other party to sign such a document which it in turn presents. This process can be presented as something which needs to happen quickly so negotiations can begin, but it should not be too hastily concluded without careful consideration.
A non-disclosure agreement signed before a formal legal agreement is entered into to govern the business relationship between parties (such as a supply of goods or services or licence agreement) should generally have only a very narrow scope.
First, it should prohibit the party receiving confidential information (in this article, ‘the recipient’) from disclosing or using the disclosed information, other than for the specific purpose of evaluating whether to proceed with the business relationship. Both parts of such prohibition are equally and crucially important. Customer lists, supplier information and pricing models may need to be disclosed to the recipient, and it is important the recipient is not permitted to use this information for its own benefit, as well as being prevented from being able to disclose it to a third party. In contrast, a subsequent formal agreement, such as for rendering of services by one party to the other, will likely provide expressly for the recipient to use the information for a much broader purpose, and perhaps even to disclose it, but under carefully prescribed circumstances. In effect the NDA then becomes redundant, and the often-repeated phrase ‘… we can proceed with the services in the interim because we have an NDA…’ could lead to potentially disastrous consequences.
Second, an NDA should also have a time limit placed on its operation. If this is omitted, there could be adverse consequences for the recipient who may be indefinitely prevented from proceeding with a similar venture, if so provided for in terms of the specific NDA. Depending on the nature of the information disclosed, a period of at least six months, and up to 2 years, or even beyond, may be considered reasonable and the parties should negotiate this provision. An attorney will be able to advise you on this time frame.
Third, a well-drafted NDA will also have standard legal clauses such as providing for the law governing the NDA, breach of agreement and clauses providing for the interpretation of the NDA as a whole.
Lastly, beware of other clauses such as non-compete, exclusivity and non-solicitation clauses and clauses providing for the grant of a right of first refusal. These take the basic NDA beyond the scope of what may strictly be necessary, and a party which is presented with an NDA should be careful to look out for, and obtain legal advice from an attorney on, such provisions.
This brief discussion on non-disclosure and confidentiality agreements raises only a few of the matters which may arise in such circumstances and is only a guide and does not constitute legal advice. Please contact us should you require further assistance.
This article should not be used or relied upon as professional advice and is for information and marketing purposes. Please consult with one of our attorneys should you need legal assistance relating to this area of law.