What is a Non-Disclosure Agreement and When Do You Need One?

What is a Non-Disclosure Agreement?

A Non-Disclosure Agreement is a legally binding contract between two or more parties that restricts the use and disclosure of confidential information. One or both parties agree that information shared between them will be kept confidential and used only for the specified purpose.

An NDA is typically the first document signed before any substantive business discussion takes place. It creates a legal framework that allows both parties to share sensitive information openly, safe in the knowledge that the other party is legally obligated to keep it confidential.

What Information Can an NDA Protect?

An NDA can protect virtually any category of confidential information, including:

• Business plans and strategies
• Financial information — revenue, costs, forecasts
• Client and customer lists
• Technical specifications, software code or processes
• Trade secrets and proprietary methods
• Personal data about employees or customers
• Product development plans or prototypes
• Terms of a potential transaction or deal

The NDA should describe the confidential information clearly. Vague descriptions can make an NDA harder to enforce — the more specific you can be about what is confidential, the stronger your protection.

Mutual vs One-Way NDAs

There are two main types of NDA, and choosing the right one depends on who is sharing confidential information.

A one-way NDA — also called a unilateral NDA — imposes confidentiality obligations on one party only. This is appropriate where only one party is sharing sensitive information. For example, if you are disclosing your business plans to a potential investor or contractor but they are not sharing anything sensitive in return, a one-way NDA protects your information without imposing unnecessary obligations on the other party.

A mutual NDA — also called a bilateral NDA — imposes confidentiality obligations on both parties. This is appropriate where both parties will be sharing sensitive information with each other. For example, if two businesses are exploring a potential partnership or joint venture and both will be disclosing commercially sensitive information, a mutual NDA protects both sides equally.

What Else Should an NDA Include?

A well-drafted NDA should specify:

• The purpose for which the information is being shared — for example, to explore a potential business partnership
• Exactly what information is confidential — and what is excluded, such as information that is already publicly known
• How long the confidentiality obligations last — one, two, three or five years, or indefinitely
• What happens if confidential information is disclosed in breach of the agreement
• The governing law — England and Wales in our case
• Whether injunctive relief is available — this allows a party to apply for a court order to stop a breach quickly, without having to prove financial loss first

When Should You Use an NDA?

You should consider an NDA whenever you are about to share sensitive information with someone who is not already bound by confidentiality — for example, an employee contract. Common situations include:

• Preliminary discussions with a potential business partner or investor
• Engaging a freelancer, consultant or contractor who will have access to sensitive systems or information
• Exploring a potential acquisition or sale of a business
• Sharing technical information or intellectual property with a supplier or manufacturer
• Any situation where you are disclosing information you would not want the other party to use for their own benefit or share with others

An NDA is not a substitute for other protections — patents, trademarks and copyright protect intellectual property in different ways. An NDA is a contractual remedy that can be enforced through the courts if breached.