What to look for in confidentiality agreements
You might be asked to sign a non-disclosure agreement (NDA) in a wide range of business relationships – from carrying out due diligence on a business to evaluating another company’s products as a precursor to a licensing agreement.
The daunting thing is, you are often asked to sign the NDA – or confidentiality agreement – on the spot.
With this in mind, here’s a handy checklist with some of the issues you should be aware of when reviewing an NDA.
Ensure 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.
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:
- limiting the definition to information disclosed in writing (or oral disclosures that are subsequently recorded in writing)
- specifying the particular information that is to be regarded as confidential
- 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 as well as the circumstances in which you are permitted to disclose or use the confidential information.
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 means that they will apply indefinitely. We typically recommend that recipients limit their confidentiality obligations to a maximum of three to five years (depending on the nature of the information that is being protected).
Consider if 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.
Be careful of giving an indemnity
Confidentiality agreements often require the recipient party to indemnify the disclosing party for 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. 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.
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.
Check for 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. Make sure you take the time to read the confidentiality agreement carefully and have it tailored to meet your specific needs.
Haigh Lyon can provide advice on what to look for when reviewing a non-disclosure agreement and a wide range of other contracts. Contact Ron Arieli on [email protected] or 09 306 0614.