NDA stands for Non Disclosure Agreement, also known as Confidentiality Agreement. It is a legal document to create obligations of confidentiality when one party disclose business plans, trade secrets or other proprietary information to another. An NDA is usually executed when two or more parties are planning to enter into a business relationship with each other, such as joint venture, sale and purchase transactions, investment, manufacturing, distribution, consultancy or employment relationships.
There are two main types of NDAs, (i) unilateral NDA (one way); and (ii) mutual NDA (both ways). In relation to an investment or sale and purchase transaction, where the company discloses information to the potential buyer / investor, typically a one-way NDA is used. In situations where two or more parties are planning to enter into a business relationship or a joint venture, each party may disclose its own confidential information to one another, and a mutual NDA will be executed.
Unilateral NDA is typically to be drafted from the point of view of the disclosing party who will be negotiating with a buyer/investor. Another example is employer asking new employees to sign unilateral a one-way NDA. This document tends to be one sided and should be carefully negotiated. Examples of unilateral (one-way) NDAs are as follow:
As mutual NDAs have obligations binding both ways, they are generally drafted in a more balanced manner. That said, one should ensure that the terms are fair and reasonable in a mutual NDA given one party may disclose more proprietary information than another. Examples of mutual NDA are as follow:
Here are 10 tips on negotiating a unilateral/ mutual NDA from the perspective of a recipient of information:
When negotiating an NDA, it is important to ensure that the range of persons to whom confidential information may be disclosed (normally contained in a definition of "Authorised Recipients" or its equivalent term) is sufficiently wide to meet your needs (from the perspective of the disclose).
You may have companies/ advisers/ consultants/ employees and officers that you need to disclose the information to. You should think not only about who will need Information to initially assess the information, but also about who will need it if the business/ transaction goes ahead, for example:
If professional advisers do not fall within the definition of Authorised Recipients, disclosure to third parties such as other potential buyer/ investor may only be agreed to by the discloser on the basis that such third party advisors enter into a separate NDA with the discloser.
Restrictions on disclosure only to "senior employees" are likely to be unacceptable, as non-executive directors, who may need to approve the transaction at board level, may not be employees. In addition, you may need some junior employees to do the ground work.
If disclosure is restricted to named individuals of the recipient party, this should generally be resisted on the grounds that it is impractical to operate the business within such confines. Both parties should look at the purpose of the NDA (business / transaction / investment / employment) to identify a more practical approach.
As with all NDAs, you should make sure that the definition of "Information" (or its equivalent term) is of sufficient narrowness. You should discuss whether the inclusion of any analyses or compilations produced by you or your advisers in the definition of "Information" could cause problems in relation to the return of Information. It may be important to distinguish these in the definition so that they can be treated differently in dealing with return of Information.
The following are some standard carve-outs from the definition of “Information”:
In addition, there is a standard carve out for the recipient – if the recipient is required to disclose all or part of the Information pursuant to any legal requirement of any country which has jurisdiction over either party or any governmental or quasi-governmental authority it will be entitled to do.
Some NDAs may seek to limit the standard carve-out to the ambit of confidentiality undertakings, which permits disclosure of information required by law or regulation (by, for example, requiring prior consultation with the discloser on the proposed form and timing of the disclosure). You may not want to agree to the narrower carve-outs on the basis that you will want to be able to disclose information immediately when told to do so by the authorities. The most you can concede to make the disclosure immediately upon becoming aware that the disclosure is required, and advising the disclosing party of the circumstances in which the disclosure is alleged to be required (if legally permissible).
Where an NDA imposes responsibility on you for any breaches of the letter by your
“Authorised Recipients” or equivalent, you should decide whether to concede this (e.g. in respect of your lawyers, accountants, advisors, consultants, investors etc). You may resist taking responsibility for certain Authorised Recipients and may prefer them to sign separate agreements with the Discloser or alternatively enter into a back-to-back arrangement. The NDA should be amended accordingly.
Where the NDA seeks to make all members of your group subject to the restrictions and obligations contained in it, this may not be acceptable on the basis that they are part of a larger group over which you have no control. An acceptable compromise may be to limit the obligation to those members who are in receipt of Information.
In a typical one-way NDA, there may be a term that required the disclose to return all information to the discloser should the business/ transaction not proceed. Even if your business has not been imposed with record keeping requirements by a regulator, it may still be impractical to return all Information (e.g. including electronic data, which may already be saved on a server).
It will be necessary to ensure that there is an appropriate carve-out in the NDA to the requirement to return and destroy all Information, especially in those cases where you are required to retain it by applicable laws and regulations. For the same reasons you may be reluctant to agree to provide a certificate that all Information has been returned or destroyed. Where this carve out is granted, the recipient of the Information will usually be expected to continue to hold the Information retained in accordance with the terms of the NDA. Another compromise may be an agreement to use reasonable endeavours to return or destroy.
Where an NDA contains an exclusivity provision seeking to prevent you from speaking to other partners/ competitors, you should consider whether you would like operate on the basis of "non-exclusivity" before agreeing to this provision. In relation to consultants or employees, one may include a “non-compete” clause.
Some people will be able to agree to exclusivity for their business, using Chinese Walls to separate it from the other businesses. For non-compete, you should ensure that it is fair and reasonable. If appropriate, the exclusivity/ non-compete provisions will need to be amended accordingly.
It is common for NDAs (particularly those issued in relation to sale and purchase transactions) to contain restrictions on whom within the discloser organisation you are entitled to contact. Where this is the case, you should check that these restrictions do not inhibit its ability to conduct the level of due diligence that it needs to carry out for the business/ transaction and ensure that the list of permitted contacts includes all those persons to whom you need to talk to.
You will need to decide whether or not you will be willing to give an indemnity in the NDA which is triggered by breach of the confidentiality undertaking. Some people will strongly resist this and, in some cases, will be unwilling to proceed if forced to concede the point.
Where it is difficult to reach agreement on the inclusion of an indemnity, you should discuss whether you would be happy to agree to indemnity recovery if this is labelled differently (e.g. as a "reimbursement and hold harmless" provision). Re-wording the clause may make it more acceptable for everyone. Other acceptable compromise may be that a breach has to be determined by a court before payment can be demanded, introducing an obligation to mitigate loss and the exclusion of consequential or indirect loss.
Warranties under contract law are promises or guarantees that the facts given that relate to the subject matter are true and reliable. Some NDAs will seek to restrict the warranties that will be given or to deem all the Information as disclosed for the purposes of the final business agreement. Such restrictions should be deleted.
It is important to consider whether any of the provisions contained in the NDA are inappropriate for you and to delete these, since many NDAs are drafted for certain specific purposes such as a joint venture or an acquisition, and not all provisions are applicable to your circumstances. For example, the NDA may prohibit recruitment of the discloser's employees. If the discloser will not agree to the deletion of such a provision on the ground of irrelevance, carve-outs should be included such as "other than in the normal course of our recruitment process".
A similar point arises in relation to restrictions on dealings with customers or suppliers. A sensible compromise is to qualify the restriction by language such as "other than in the ordinary course of business" and to include an express acknowledgment that "ordinary course of business" may include certain actions that you would need to do.
In addition, sometimes an attempt will be made in the NDA to limit the purpose for which the Information can be used. Where the letter has been designed for a joint venture, new business or an acquisition, this provision may need to be adapted accordingly.
If you are not unduly concerned regarding certain of these provisions that may be applicable for your particular circumstance, they may be useful "easy gives" when in negotiations.
If you are the recipient of information, you should always include an end date in the NDA for the termination of their obligations under it. A three year time limit is fairly standard. It is also important to ensure that the confidentiality undertaking ends if the proposed transaction / business / joint venture does proceed.
Where the business / transaction is aborted, the likelihood is that Information will eventually come into the public domain and/or cease to have any commercial value before any time limit expires in any event. To the extent that it does not and until it does, it is reasonable to agree to continue to keep such Information confidential on the terms of the letter.
Please note that this is a general summary of the position under common law and does not constitute legal advice. As the laws of each jurisdiction may be different, you may wish to consult your lawyer.
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