NON-DISCLOSURE AGREEMENTS - KEY CONSIDERATIONS

Non-Disclosure Agreements, also known as NDAs or Confidentiality Agreements, are agreements which legally bind individuals or organizations to secrecy and confidentiality regarding certain shared information such as data, trade secrets, unpatented inventions, etc. and allows the disclosure of such confidential information without the risk of use of that information for any other purposes than intended, or disclosure by the receiving party to any third party. Depending upon the nature of confidential information shared between the parties, NDAs may be made either mutual or unilateral.

The parties involved in an NDA usually includes the disclosing party and the receiving party. In case of a mutual NDA, both parties may be sharing confidential information with each other and hence, the obligations under the NDA apply equally to both the parties. In case of unilateral NDAs, the agreement is drafted in a manner so as to protect the interest of the disclosing party and there are onerous obligations only on the receiving party, however, the receiving party should ensure that it does not get unduly restricted by the terms of the NDA, which may be broad and vague. Apart from these, there are NDAs wherein the third party information is shared and needs to be protected, these also come from the requirement of an existing NDA, which in turn requires protection of the information disclosed. Back-to-back NDAs are often necessary in business arrangements involving several parties, such as, in cases where the work is being subcontracted or where collaborations involve multiple business consultants, freelancers, or mutual supportive resources.

Below are some key considerations while drafting an NDA from the perspective of the disclosing party and the receiving party:

KEY CONSIDERATIONS FOR THE DISCLOSING PARTY

• The term ‘confidential information’ has to be clearly defined, i.e., what all constitutes confidential information. Specific category of that information should be added for clarity. The overall treatment of the confidential information by the recipient has to be clearly specified as well. The usage and form of the term ‘Confidential Information’ will mainly depend on the party that one is intending to protect. A broad short form confidential information may include information about the products, business plans, documentation, designs, strategies, technology, software, technical knowhow, business operations and financial information.
• The intended use of the confidential information should be specified so as to limit the use to that purpose itself.
• The disclosing party can add special protective measures, tailored as per their requirements, to safeguard their information. For example, a clause stating the restrictions and specifications for destroying confidential information, limitations on copying information electronically, security protocols for storage systems, keeping the information at a specific location and no movement without authorized access, notification of misappropriation or unauthorized disclosure, etc.
• The recipient obligations regarding handling the confidential information should be clearly outlined and the exceptions to the general rules of the NDA should be clearly listed. Illustration: Confidential information shall not include such information: (i) if there is a legal obligation on the recipient to share the information, provided that, a notice is given to the disclosing party prior to disclosing such information; (ii) if the information is independently developed by the receiving party without using the confidential information.
• The events such as breach of applicable law and breach of terms of the agreement, wherein indemnity will be triggered should be clearly specified in the NDA. In case of breach of an NDA, the calculating the quantum of damages may be tricky, therefore, the NDA must provide for liquidated damages. The disclosing party may also add a provision on exemplary damages, if required. Further, in case of breach of an NDA, the damages may not be an adequate remedy for the disclosing party, hence, the disclosing party may considering adding a provision vis-à-vis equitable and injunctive relief. In the case of Homag India Private Limited vs. Mr. Ulfath Ali Khan & Other (2010), there was a breach of the confidential information, wherein, the Court granted injunction to Homag India Private Limited, preventing the use of the their confidential data by Ulfath Ali Khan and the other defendant.

KEY CONSIDERATIONS FOR THE RECEIVING PARTY

• Ensure that the definition of confidential information is clear and limited to information that truly warrants protection. Request specific examples and categories of information that are considered confidential.
• The duration of the confidentiality provisions should be reasonable and aligned with the sensitivity of the information.
• All such information that is to be treated as confidential should be specifically marked as ‘confidential’.
• The exceptions to the general rules of the NDA should be clearly listed and may be broad. Illustration: Confidential information shall not include such information: (i) if the information is or has been made available in the public domain, without any fault of or breach by the receiving party; (ii) if there is legal obligation on the recipient to share the information; (iii) if the information is independently developed by the Receiving Party without using the confidential information.
• Necessary precautions should be in place so as to avoid any unintentional breach of terms of the NDA.
• The receiving party must ensure that the indemnity provision is clear and limited with respect to the events where its liability in case of indemnity arises. It must not be broad and vague.
• There should be a provision on limitation of liability in the NDA to limit the liability of the receiving party.

Apart from the above, the parties must be cautious while stating the boilerplate clauses under an NDA. The clauses with respect to Governing law and Jurisdiction, Dispute Resolution, Assignment, Waiver, Cost and Expenses are essential to both parties, hence, must be carefully looked into.

In a nutshell, it is imperative for the parties preparing an NDA to tailor it according to the specific circumstances and use with respect to the confidential information being shared. It is essential to ensure that the parties’ interests are protected and the confidential information is safeguarded. Usually, in a unilateral NDA, the disclosing party has an upper hand as compared to the receiving party, but with proper vigilance and understanding, both the parties can ensure that the terms of the NDA are suitable for both and not unfair or over-restrictive as against either of them.

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