5 key provisions of a confidentiality agreement

Non-disclosure agreements or confidentiality agreements (NDAs) are used when one party shares confidential information with another party and wishes to restrict the recipient’s use of the information so it is not made public. NDAs may be used by a variety of persons, including employers, inventors, researchers and business entities contemplating negotiations or confidential discussions.

The appropriate form of NDA will depend upon a number of factors. We have outlined below the 5 key matters to look out for in an NDA.

non-disclosure agreement

1.       Should the NDA be 1-way or mutual (i.e. 2-way)?

NDAs can be either 1-way or mutual.

If only 1 party will be disclosing confidential information to the other, then it will be in the interest of the disclosing party to enter into a 1-way confidentiality agreement. For example, if you are disclosing your idea to a potential business partner.

If both parties will be disclosing confidential information to the other, then a 2-way NDA should be entered into whereby both parties are required to keep the information they receive from the other confidential. For example, you and your business partner want to discuss each other’s business plans to see if you want to work together.

2.       What is considered ‘confidential information’?

The parties to a confidentiality agreement should clearly define what is meant by ‘confidential information’. The definition of ‘confidential information’ is important because the obligations under the NDA will apply to information that falls within this definition.

‘Confidential information’ can include information in both tangible and oral form. If you are the disclosing party, you will typically want the definition of ‘confidential information’ to be fairly expansive and you may also want to designate certain key information such as pricing, discounts, product roadmaps, financial projections, strategic marketing plans and source code as confidential.

If you are the recipient of confidential information, you will want to narrow the definition of ‘confidential information’ because not everything disclosed will actually constitute confidential information and the broader the definition, the more burdensome your obligation of confidentiality becomes. It is also in your interest to require that the discloser mark all information ‘confidential’ in order to receive confidential treatment, or, if the disclosure is oral, to follow it up with a written confirmation that the oral disclosure was indeed confidential.

It is not unusual for NDAs to expressly spell out when information will not qualify as confidential. For example, it is normal for ‘confidential information’ not to include information that was generally known to the public on the date of the NDA or information which was rightfully known by the recipient prior to its receipt of that information from the disclosing party. Information that is independently developed by the recipient should also be excluded from the definition of ‘confidential information’

3.       What are the restrictions on use and disclosure?

It is important to include a provision in the NDA which spells out how each party may use the other party’s confidential information and the steps that it must take to safeguard such information. Typically, use of confidential information is restricted to performance of the stated purpose and confidential information may not be used for any other purpose.

Illustration - two people discussing NDA

The NDA should also include a clause restricting the recipient of confidential information from disclosing it to others. It is fairly common for the recipient of confidential information to be permitted to disclose such information to its employees or even to the recipient’s agents, contractors or consultants (such as legal advisors and accountants) provided that those persons are required to keep the information confidential and only access the confidential information on a ‘need-to-know’ basis and for the stated purpose specified in the NDA.

4.       When should ‘confidential information’ be returned?

The NDA should include a clause dealing with when the parties must return or destroy the confidential information received under the NDA and the way in which they must return or destroy it. 

Return or destruction should occur upon written request and not upon termination or expiration of the NDA. Most people and business entities will not have administrative processes in place for the automatic return or destruction of confidential information upon expiration or termination of the NDA. 

Recipients may ask for an exception to the return or destroy provision for backup copies that have been archived and/or sent to storage. In such cases, it is common to include in the NDA a provision enabling the recipient to retain a copy of the confidential information solely for archival purposes subject to the confidentiality restrictions contained in the NDA. 

5.       How long is the term of the agreement and the period of the confidentiality obligation?

There are two distinct concepts here: term of the NDA and period of the confidentiality obligation.

The term of the NDA is the period of time under which disclosures will be protected by the NDA. It is common for NDAs to have a term of between 1 to 5 years. For example, an NDA may govern disclosures between the parties for 2 years from the date the NDA is signed.

The protection period is the amount of time under which the recipient is obligated under the non-disclosure and use restrictions under the NDA – regardless of whether the NDA itself has expired or been terminated. For example, a recipient may be required to protect ‘confidential information’ for a period of 3 years from receipt of that information. If there is no ‘protection period’ in the NDA, this will mean that the obligations of confidentiality will potentially continue indefinitely.

The term of the NDA and the protection period should not be the same. For purposes of clarity, if the term of the NDA is 3 years and the protection period is also 3 years, make sure that the protection period starts from the date of disclosure and not the date the NDA is signed. 

 

If you have any questions regarding this article, please contact Source Legal Online at always@sourcelegalonline.com.au or 1300 609 450. 

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