Confidentiality agreements and NDAs

The five clauses that decide whether an NDA works

1. The definition of confidential information. Too narrow and the thing that matters is not covered. Too broad, such as "all information disclosed", and a court may find it unreasonable or unworkable. The best drafting identifies categories and requires that written material be marked or that oral disclosures be confirmed in writing within a set period.
2. The permitted purpose. This is the most under-used clause. The recipient may use the information only for the stated purpose, for example evaluating a proposed acquisition. That single sentence converts misuse into a straightforward breach of contract without needing to prove disclosure to a third party.
3. The carve-outs. Information that is already public, already known to the recipient, independently developed without reference to your material, or received lawfully from a third party. Also disclosure required by law or by a court, with notice to you where lawful. An agreement without these is likely to be read down.
4. Permitted recipients. Advisers, financiers and employees on a need to know basis, with the discloser responsible for their compliance.
5. Return, destruction and survival. What must be handed back or deleted at the end, what may be retained for legal or backup purposes, and how long the obligations continue after the agreement ends.

What an NDA cannot do

Be realistic about the limits, because misplaced confidence is the reason people disclose more than they should.

• It does not stop someone using general skill and knowledge. A departing employee is entitled to take with them what they have learned as a professional. The line between general know-how and your confidential information is genuinely difficult and is argued case by case.
• It does not create ownership. Confidentiality is not intellectual property. If you want to own an invention, file a patent. If you want to own a brand, register a trade mark. If you want to own work a contractor produces, take an assignment.
• It does not un-disclose anything. Once information is genuinely public, it is no longer confidential and the agreement stops protecting it.
• It cannot lawfully gag a protected disclosure. Terms purporting to prevent a person reporting to a regulator, making a protected whistleblower disclosure, or giving evidence are ineffective and may themselves be unlawful.
• It is only as good as the counterparty. An NDA signed by a shell company with no assets gives you a right to sue nobody.

One way, mutual, or built into another document

A one-way agreement suits a situation where only you are disclosing, for example when you show a prospective buyer your financials. A mutual agreement suits negotiations where both sides will share information, such as a joint venture discussion, and it is usually easier to get signed because it does not feel one-sided.

Often you do not need a separate document at all. Confidentiality provisions belong inside your employment contracts, your contractor agreements, your service agreements and your shareholders agreement. A standalone NDA is for the situations those documents do not cover, which is mostly pre-contractual discussions.

In a business sale, the confidentiality agreement should be signed before anything is disclosed, and it should restrict not only disclosure but also solicitation of your staff and customers. Prospective buyers are frequently competitors. See selling a business.

Enforcing one

The remedy that matters most is an injunction, because damages rarely repair a leak. That means speed. If you become aware of a breach, act quickly: delay undermines an urgent application, and a court asked to grant an injunction will want to know why you waited three months.

Practically, the first step is usually a letter putting the recipient on notice, requiring return or destruction, and requiring an undertaking. That resolves a large share of breaches, particularly where the recipient is a business with a reputation to protect. If it does not, an application for interlocutory relief in the Supreme Court is the next step, and it requires evidence: what was disclosed, when, under what obligation, and what harm is threatened.

Damages are available where loss can be proven, and an account of profits may be available where the recipient has made money from the misuse. Both are harder to quantify than clients expect, which is another reason to focus on prevention and on who you disclose to. See commercial dispute resolution for the process.