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Confidentiality agreements and NDAs: when and how to use

Everything you need to know about legal documents that are indispensable in the business sale and buying process

The terms non-disclosure agreement (NDA) and confidentiality agreement are often used interchangeably. Strictly speaking, however, the confidentiality agreement is a ‘company’ contract which you as an employer may sometimes require employees to sign, whereas an NDA agreement is used for contracts between your company and external third parties.

So what are NDAs/confidentiality agreements?

These agreements are used to keep ‘proprietary’ information secure  – that is, information which:

  • Is not in the public domain
  • Is secret and confidential
  • Required some effort to compile
  • Is valuable to business rivals who could use and expect to profit from it

 You may need an NDA when sharing sensitive data with others in the course of selling a business or commercial assets.

Unilateral or mutual NDA?

The difference between unilateral and mutual NDAs lies in the scope of protection offered. The unilateral NDA is the most often used and applies when you disclose business information to someone else on the strict understanding that person will not make a subsequent disclosure to others.

A mutual NDA covers circumstances in which each party mutually agrees not to share the other’s confidential data as it passes between them in the course of business.

Special types of agreement

While all business agreements demand general confidentiality, certain circumstances require specific protections. For instance, with a potential transaction involving the sale of a business, property or other commercial assets, your prospective buyer will need to see sensitive, non-public financial data in order to make a purchase decision.

Likewise, as an inventor, you will wish to protect the rights to your invention when seeking the support of investors. And your company may wish to set up confidentiality agreements to prevent employees and/or contractors from sharing privileged commercial information to which they have access.

Why are NDAs important?

The existence of a signed non-disclosure agreement has real value as a deterrent to unauthorised disclosure because (for the later benefit of a court) it clarifies the extent of each party’s responsibility to safeguard sensitive information. And if a breach occurs, the document can be used to claim punitive damages.

What an NDA contract generally covers

An NDA agreement must show an effective date and define the time in which it remains in force – sometimes indefinitely. Most importantly, the document must accurately specify the protected information in order to safeguard your interests in the event of a legal dispute.

An NDA agreement must also be drafted to secure a court injunction preventing the other party from making a disclosure if and when that possibility seems imminent. In the event of a breach of confidence covered by your agreement, your company could then sue the perpetrator.

What an NDA contract cannot cover

Your NDA won’t cover information in the public domain or disclosed before the contract became effective. Neither will it cover what the other party already knows or can find out from an alternative source.

Agreement signatures

To avoid later challenges, you should ensure the document is signed by someone with full authority to do so. And while an electronic signature given via an email exchange is not illegal, a hand-signed document is invariably the preferred choice because it is more easily verifiable and thus offers a higher level of protection.

Next essential read: Which documents will I need when buying or selling a business. 



Adam Turnbull

About the author

Adam manages all editorial content on BusinessesForSale.com as well as on all other titles in the Dynamis stable. He has written and commissioned content on a wide range of business topics, producing news, comment and market analysis.

@adamturnbulluk

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