What to Look for in Confidentiality Agreements
Confidentiality agreements (or non-disclosure agreements / NDAs, as they’re sometimes known) are used in a range of business relationships. You might be asked to sign a confidentiality agreement if you are going to carry out due diligence on a business or commercial property, enter into a partnership or evaluate another company’s products as a precursor to a licensing agreement.
As part of this process, you will often be given a confidentiality agreement to sign on the spot. The best advice we can give you is not to do this until you’ve had a solicitor carefully consider the agreement. To help you with that process, we have set out below a checklist of some of the issues you should be aware of when reviewing a confidentiality agreement.
1. Ensure that the right form of agreement is used
You might be asked to sign a confidentiality agreement that restricts only your use of the information provided to you but doesn’t deal with information you disclose. This is known as a “one-way” confidentiality agreement. If there is to be a mutual exchange of confidential information, then it would be more appropriate to use a “two-way” confidentiality agreement. As a general rule, two-way confidentiality agreements are less likely to include one-sided clauses.
2. Check the definition of “confidential information”
The definition of “confidential information” should clearly and accurately capture the information that is intended to be kept confidential. As a recipient of confidential information, you will typically prefer a narrower definition of confidential information. This can be achieved by:
(a) limiting the definition to information disclosed in writing (or oral disclosures that are subsequently recorded in writing);
(b) specifying the particular information that is to be regarded as confidential; and
(c) requiring the information to be marked confidential by the disclosing party.
It is just as important that you consider the categories of information that might be excluded from being regarded as confidential information (such as information that is publicly available or has been independently developed) as well as the circumstances in which you are permitted to disclose or use the confidential information. Without these exceptions, you could be precluded from using information that your competitors are free to use.
3. Limit the non-disclosure period
An important feature of a confidentiality agreement is the length of time during which the information must remain confidential. Some confidentiality agreements do not specify a time limit, which can create uncertainty for the parties. Other confidentiality agreements require you to maintain confidentiality for an unlimited period of time, which can be unnecessary as the confidential nature of information will diminish over time.
For these reasons, the confidentiality obligations should not last any longer than the expected period for which confidentiality is really needed. For instance, while trade secrets may need to be protected for as long as they remain trade secrets, the confidentiality of other business information may be required only for a couple of years.
4. Consider whether the information should be returned or destroyed
You should be aware of obligations which require you to return confidential information immediately and ensure that you have a reasonable period of time within which to return the information. In some circumstances, it may be preferable for you to have the option to destroy the information (rather than return it), especially if the information is contained within your own documents/notes.
5. Be careful of giving an indemnity
Confidentiality agreements often require the recipient party to indemnify the disclosing party in respect of a breach of their confidentiality obligations. Be especially wary of giving an indemnity as it could significantly increase your liability if you were to breach your confidentiality obligations by expanding the types of losses which are recoverable (to include indirect losses, as well as direct losses). While an indemnity may seem attractive to a disclosing party, in practice, the disclosing party already has the ability to claim damages or seek an injunction.
6. Consider whether you should ask for exclusivity
In some circumstances, you may wish to consider asking for a period of exclusivity in which to conduct your due diligence. This would preclude the disclosing party from making the confidential information available to, or entering into negotiations with, anyone else in relation to the transaction.
7. Check for any non-compete or non-solicitation clauses
Some confidentiality agreements prohibit the recipient party from soliciting the disclosing party’s customers or employees or competing with the disclosing party. If the only purpose of a confidentiality agreement is to preserve confidentiality, then these obligations should be excluded from the agreement.
While confidentiality agreements are commonly encountered, they are as varied as the needs for which they are created in the first place. We encourage you to take the time to read the confidentiality agreement carefully and have it tailored to meet your specific needs.