When is a Non-Disclosure Agreement (NDA) required?

Categories: News

Lorraine Smith, Corporate and Commercial Law Solicitor at ORJ, looks at why and when a Non-Disclosure Agreement (NDA) may be necessary to protect company secrets 

Non-Disclosure Agreements (NDAs) – or confidentiality agreements as they are also known – are often used in commercial dealings as a way of protecting sensitive business information.

They are regularly used during commercial transactions, employment contracts and business negotiations.

But while NDAs can be an effective tool in safeguarding sensitive information, they must be carefully drafted to ensure they are compliant and legally bounding – and there are times when they cannot be utilised.

When are NDAs used?

NDAs are normally used when businesses need to share private information about their operations, either with another business or with individuals.

For example:

• Business negotiations – NDAs are regularly utilised during discussions around potential mergers or acquisitions when confidential information has to be disclosed to provide a full picture.
• Employee contracts – Many employees will be privy to company secrets, so NDAs are routinely included in employment contracts.
• Start-ups seeking investors – Start-ups and entrepreneurs may need to disclose their ideas and plans when seeking investment. An NDA can offer peace of mind by forbidding investors from sharing their concepts with others.
• Third parties – Some third parties – for example, marketing agencies – may need to know a business’ trade secrets in order to operate effectively. 

Key Elements of an NDA

Clarity is all-important in an effective and enforceable NDA and vague terms such as “business secrets” should be avoided.

Start by clearly specifying what information is being classed as confidential, whether that is business strategies, customer lists or product designs.

Next, the NDA should clarify who is bound by the agreement and what the receiving party can and cannot do with the confidential information they are being made privy to. Any exemptions where disclosure is permitted – for example, when legally required – should be included.

The duration of the NDA should be stated, which could be indefinite if necessary, along with the consequences of a breach.

The NDA should be signed by all parties involved. 

When are NDAs not effective?

There are times when an NDA is ineffective or serves no purpose. For example, an NDA cannot protect information that is already publicly available or is widely known.

An NDA is also not required if you are simply having initial, informal discussions with potential investors or clients and no sensitive information is on the table. Investors can be hesitant to sign NDAs as they are often reviewing multiple opportunities at any one time. Insisting on an NDA can seriously reduce chances of investment success.

Perhaps most importantly, under UK law NDAs cannot be used to cover up criminal activity or unethical activity, including workplace discrimination or harassment. A business cannot silence whistleblowers amongst its workforce in these cases.

NDAs are enforceable in the UK if they have been drafted correctly and ethically and they remain a valuable legal tool for all sorts of UK businesses.

An NDA will never be able to provide a cast iron guarantee that business secrets won’t be revealed – but the prospect of hefty fines if a leak occurs certainly makes people think twice.

At ORJ, we have some of the region’s top commercial lawyers. Speak to us today about creating an effective NDA, or for any other business law advice.