What Is A Non-Disclosure Agreement (NDA)?
A non-disclosure agreement (NDA) is a legal contract in which the signatories promise not to reveal confidential information outlined in it to a third party. Participants of such an agreement aimed at serving specific purposes, however, agree to exchange secret information. The party violating the contract may be held accountable for financial damages.
Individuals or businesses that want to collaborate for a particular reason or a project usually sign an NDA. This agreement protects valuable information they share, such as inventions, business ideas, and trade secrets, from third-party disclosure. It is an essential part of business activities like negotiations, mergers & acquisitions, joint ventureJoint VentureA joint venture is a commercial arrangement between two or more parties in which the parties pool their assets with the goal of performing a specific task, and each party has joint ownership of the entity and is accountable for the costs, losses, or profits that arise out of the venture. formations, etc.
- A non-disclosure agreement (NDA) is a legally enforceable contract that contains confidential information about a project or business activity. The signatories agree to share these details but not to disclose them to anybody else.
- Individuals or companies can sign NDA to protect sensitive information, like inventions, innovative ideas, and trade secrets, from third-party disclosure.
- Business activities like negotiations, mergers & acquisitions, joint venture formations, etc., require an NDA. It can be unilateral, bilateral or mutual, and multilateral.
- An NDA is, however, subject to termination in the event of a contract breach. Violation of agreement can result in harsh penalties or criminal proceedings for causing financial damages.
How Does NDA Work?
A non-disclosure agreement allows the parties involved to share valuable information without the fear of it being stolen or misused. It is sometimes referred to as a confidential disclosure agreement, proprietary information agreement, secrecy agreement, confidentiality clause, confidentiality agreement, or confidentiality statement.
A company has a better chance of succeeding in the competitive market if it keeps its ideas, projects, and innovative products a secret. Here, an NDA allows the business to maintain confidentiality by legally binding all parties to not use any sensitive information for their benefit. It, thus, plays a crucial role in establishing trust when seeking investors or partners, or clients for a business venture.
Signing a non-disclosure agreement develops a confidential relationship between the signatories. These parties promise to protect sensitive details by restricting third-party access to the shared information. A non-disclosure agreement should be signed whenever an individual or entity wants to collaborate for consulting, service, or strategic alliancesStrategic AlliancesA strategic alliance is a type of agreement between two companies to reap the mutual benefits of a specific project, in which both agree to share resources and thus result in synergy to execute the project, resulting in a higher profit margin.. Based on sharing of proprietary details, it can be:
- Unilateral – Only one party pledges not to reveal sensitive information to a third party or may share it with the other only.
- Bilateral or Mutual – Two parties agree not to divulge confidential information to a third party with mutual non-disclosure consent or release it to one another only.
- Multilateral – Three or more parties agree not to leak the secret information to a third party, or at least one of them can disclose it to other parties only.
What Does An NDA Include?
An NDA contains different sections, which include the following:
- Names and details of the parties involved
- Definition of what describes a confidential information
- Explanation of how the parties may or may not use the shared information
- Reason and purpose behind information sharing
- Exclusions from confidentiality, if any (already known or public information)
- Implications of the breach of contract, information theft, unfair competition, and copyright infringement
- Terms and conditions
- Disclosure period
- Other provisions
Who Should Sign An NDA?
At least two individuals or businesses that wish to collaborate to conduct a project or business together should sign NDA. These parties can share any information they believe is necessary for each other to know. They also undertake not to steal, misuse, or divulge the information to third parties when they sign the contract.
Some companies require a non-disclosure agreement for employees signed by both the employee and the employer. Signing the contract grants the employee access to sensitive business information but restricts them from disclosing it to any external source. Other instances that need the signing of a non-disclosure agreement include:
- Introducing an invention or business idea, processes, or plans to another entity
- Showcasing an innovative product, service, or technology to a prospective buyer
- Getting service from a party that may have access to sensitive information in the process of providing such services
- Sharing financial informationFinancial InformationFinancial Information refers to the summarized data of monetary transactions that is helpful to investors in understanding company’s profitability, their assets, and growth prospects. Financial Data about individuals like past Months Bank Statement, Tax return receipts helps banks to understand customer’s credit quality, repayment capacity etc. with another party
Which Confidential Information Does An NDA Protect?
An NDA seeks to protect confidential information such as:
- Business plans, inventions, ideas, production procedures, marketing strategies, and other projects
- Trade secrets, chemical compositions, proprietary formulas, and secret recipes
- Financial budgets and projections
- Details of contractors, suppliers, vendorsVendorsA vendor refers to an individual or an entity that sells products and services to businesses or consumers. It receives payments in exchange for making items available to end-users. They constitute an integral part of the supply chain management for providing raw materials to manufacturers and finished goods to customers., investors, creditorsCreditorsA creditor refers to a party involving an individual, institution, or the government that extends credit or lends goods, property, services, or money to another party known as a debtor. The credit made through a legal contract guarantees repayment within a specified period as mutually agreed upon by both parties. , employees, customers, etc
- Blueprints, designs, and drawings
- Technical procedures, research methodologies, etc
- Patent applications
- Software documentation and tools
- Pricing information, sales data, etc
A non-disclosure agreement remains in effect until two or more parties collaborate to achieve a business goal. However, the contract may be terminated if there is a violation of the terms and conditions of an NDA. In this situation, the victim may file a lawsuit in court to stop additional disclosures and seek monetary damages from the guilty party.
ABC and XYZ, two food companies in the same region, plan a merger to share the benefits. In this scenario, it seemed necessary for both parties to sign a mutual non-disclosure agreement. Also, it will ensure that none of them will disclose the information shared between them with a third party.
They prepare a legal contract outlining the confidential information, which both could not divulge with anybody else. It also contained non-confidential material, such as facts already known to the public. Both ABC and XYZ sign the non-disclosure agreement form to move forward with their joint venture.
Here is the non-disclosure agreement template that food companies ABC and XYZ chose to sign:
Source – legaltemplates.net
Importance of NDA
Signing a non-disclosure agreement is an essential aspect of any initiative involving multiple parties. Here are a few reasons that make it mandatory:
- Protects sensitive information, including trade secrets, against disclosure
- Preserves patent rights of inventors
- Specifies which piece of information is confidential
- Ensures a balanced and fair business practice
- Removes risks of conflicts in future
- Maintains trust between the parties
Frequently Asked Questions (FAQs)
A non-disclosure agreement, or NDA, is a legal contract outlining confidential information that the signatories wish to share but not to disclose to anybody else. Individuals, businesses, or other partnerships collaborating for a specific purpose can sign it. This agreement protects valuable information, from proprietary details to trade secrets, against third-party disclosure.
Yes, an NDA is legally binding, leading to severe penalties for parties violating the contract. In case of a violation, it may be terminated even before achieving its purpose.
A non-disclosure agreement necessarily includes the following information:
Names of the parties involved
Definition of what describes a confidential information
Explanation of how the parties may or may not use the shared information
Reason and purpose behind information sharing
Exclusions from confidentiality, if any (already known or public information)
Implications of the breach of contract, information theft, unfair competition, and copyright infringement
Terms and conditions
This has been a guide to the Non-Disclosure Agreement (NDA) and its meaning. Here we discuss how NDA works, what it includes, who signs it, along with an example and importance. You may learn more from the following articles –