Where do NDAs go wrong and how to get it right?

Here we look at some of the key issues we’ve seen over the years with confidentiality agreements, non-disclosure agreements or “NDAs” in a corporate context. We’re talking here about circumstances where an NDA may be used, for example, to protect the confidentiality of commercial information – perhaps for example when sharing information with a potential collaborator, investor or other third party.

A fundamental issue here is that businesses’ are often dismissive of the NDA process. Perhaps because they tend to be such short documents or perhaps because they are so ubiquitous or readily available online, people take them for granted. They don’t treat NDAs with the same or respect as they would other contracts they may enter in to.

Let’s take a moment to consider why this matters. Firstly, it’s important to remember that with very few limited exceptions (for example in an employee/employer relationship). There is no automatic duty of confidentiality. This means that if you share information with a third party and you want that information to remain confidential or otherwise control how they use that information; you need to impose confidentiality terms. The easiest way to do that is to have an NDA. It’s worth stressing that even fundamental confidences can’t be assumed. For example, if you release commercially sensitive information to a potential investor and you want to ensure that information can’t be shared with your competitors – you can’t assume confidentiality unless you have an agreement to prohibit the sharing of information.

Taking this into account, you can see how an effective NDA can be a very important document for your business.

The next thing to address is the glut of NDAs available on the web. Not all NDAs are created equal and not all NDAs will suit all situations. Even if you do find one which is robust and enforceable (and don’t assume all NDAs are – more information on this later), the chances that it will suit your purposes are slim – you wouldn’t expect to find other contracts online which exactly match your business needs, so why should it be different with NDAs?

So, having established how important these documents can be, let’s take a look at some of the key areas where they go wrong.

1. Lack of payment

In order to be legally binding, all agreements need to have consideration. There needs to be an exchange of some sort between the parties. In the case of an NDA, the person agreeing to maintain confidentiality needs to receive something of value in return of their agreement. This can be a financial payment or something with monetary value.

If the consideration is not sufficient or is missing altogether – the agreement is not binding. In other words, it’s as if the agreement does not exist.

To ensure you don’t fall foul of this trap, careful thought needs to be given to the consideration issue. You may also want to turn the document in to a deed rather than a simple agreement. This sidesteps the consideration issue but adds additional formalities and liability issues, so it’s not always ideal.

2. Don’t make the agreement too restrictive

There can be a tendency to try to lock down confidential information as strictly as possible but, if you go too far, you risk the agreement being unlawful and unenforceable – if this happens; it’s again as if the agreement does not exist. A balance is needed here.

If you place too long a time period on the confidentiality obligations the agreement can be anti-competitive (and hence unenforceable). What is a reasonable period here is nuanced and will be different in every case.

Sometimes there may be situations where the law requires the disclosure of information, regardless of what it says in your NDA – for example, in the event of a court order or investigation by certain authorities. If your NDA is not drafted to deal with these scenarios it can again void the agreement.

As well as dealing with these issues, you will want to consider how you may be able to control and be informed about any forced disclosures – although you can only go so far with this.

3. Don’t give away the information too soon

Remember that there is no duty of confidence until the NDA is signed. The timing of your disclosure is therefore important – don’t disclose until the agreement is signed. Even disclosing the information in a schedule to the NDA before it is signed is risky – if the recipient doesn’t sign, you’ve already given away the information and there is no duty of confidence.

4. Jurisdiction 

If you are a UK business you will want the NDA to be governed by the law of England and Wales – if you are using a precedent from the web, check this carefully. If the precedent refers to other jurisdictions, simply crossing them out and replacing with a jurisdiction which references England and Wales will not work.

5. Check what is being protected

It is surprising how many times businesses sign NDAs which protect not their information but that of the receiving party! Check this carefully.

Check also what will happen to any IP – sometimes NDAs will try to stretch their reach and become IP assignments. This is not always appropriate, so think carefully.

Consider also, especially in situations where the person to whom you are disclosing may be generating new content, who will own that content. For example, if the disclosure is to enable research – who will own that research? If you want to own it, that will need to be dealt with. Remember, a traditional NDA is about confidentiality, not ownership of IP.

6. Don’t forget the purpose

This is an area where you need to be proscriptive, be very clear (and usually narrow) in the purpose of the disclosure (i.e. what the recipient is entitled to do with the information you provide). Keep an eye on the purpose as defined in your agreement to make sure it is still relevant as your relationship evolves.

Often you will find that the NDA paves the way for further collaboration. Where that is the case a further agreement will be needed for that collaboration, so in the NDA it is appropriate for to keep the purpose narrow.

To wrap up – NDAs are powerful documents but are often overlooked. Treat NDAs with the same care and respect as you do other key contracts, and you will find your business is protected for the better.