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Understanding the Essence and Structure of Non-Disclosure Agreements

Written by Shreya Kalyani

Fifth Year, BBA. LLB. Chanakya National Law University





Disclaimer: Please note that the views expressed below represent the opinions of the article's author. The following does not necessarily represent the views of Law & Order.


A non-disclosure agreement is executed to create a legal obligation on the other party to maintain the privacy of the confidential information that has been shared, whether as a part of the discussion for a transaction or by virtue of a position held by him.[1] For instance, a new employee joining a company may be required to sign the agreement for creating a legal obligation on him not to reveal or disclose particular confidential information of the company of which he just got access to. The party here undertakes not to disclose the sensitive information of the company i.e. any non-public information or material disclosed or provided by one party to another. If disclosed, the disclosing party would be liable for legal consequences.

A Non-Disclosure Agreement is important at places where sharing of information is the essence of a transaction; but the information is so valuable that a company cannot afford it to be disclosed or be released by any means by anyone.

The company does not want all the information to be in the public domain such as trade secrets, marketing strategy, technology, and business-related ideas. KFC, Coca-Cola and for many such restaurant chains which have managed to keep their trade secrets for so many years, this agreement is the tool which enforces obligation on people to maintain secrecy. However, for executing such agreements, it is crucial to define what information constitutes as being private which depends upon the nature of transactions.

Importance and use of NDA

The non-disclosure agreement is used with potential investors, creditors, clients or suppliers, or as a part of employment agreement. It can be used in Merger and Acquisition transactions and pre-investment discussions. It may be signed at a time where business models are being presented for inviting investment by potential investors, a partner willing to join the business, partnership for joint venture, a prospective buyer of product and technology, any service provider who has access to some sensitive information while providing those services, or any new employee who has been given access to some proprietary or business information after joining the company. It is generally signed at the commencement of a business relationship directing that while they are associated with the company including the time when the relationship concludes, or relationship ends, either way, they cannot leak out the secrets of the company. It can also be entered into, at the time of conclusion of a relationship but it becomes a bit tough to negotiate terms at that time since the person having information may not be highly impacted by it because his interests may not be involved anymore.

The importance of executing NDA was reflected in the case of FairFest Media Ltd. Vs ITE Group Plc & Ors.,[2] where the petitioner, which was a company engaged in the business of organizing travel shows, entered into NDA for a period of six months with the respondent in the anticipation of entering into a Joint Venturing Agreement at a later date. According to the NDA signed, the respondent was supposed to maintain the confidentiality of the information received by him for two years after the termination of NDA. The respondent within the period stipulated in NDA indirectly passed on the information to a third party. The information was related to marketing strategy, capital investments, and costing and profitability of the travel show. The High Court, enforcing the secrecy clause in the NDA, held that all this information was trade secrets and passed an injunction restraining the respondent from sharing any information protected under the Agreement.

What specific terms it should necessarily include

The agreement should determine the disclosing party, receiving party, and the third parties, if any, who are to be included in the contract. The most important clause is to decide who, other than the receiving party, can have access to those discussions and information. The receiving party may need to contact their accountants or lawyers for any advice or any third party from whom they might need any services. So in such cases, it becomes necessary to specifically include which third parties are allowed to know about the confidential discussions.

The second important clause is to specify what information constitutes as sensitive and is to be kept confidential. It should also be mentioned whether oral conversation and discussions include all the documents, plans, policies, processes, emails, letters, etc. or not. Permitted use of such disclosed information should be reflected in the agreement i.e. purpose for which such discussions took place and information has been disclosed in the very first place. Clearly marking materials is useful when the agreement is between the company and the third party.

The agreement must also include the ‘Non-Binding’ clause because generally signing of Non-Disclosure Agreement doesn’t mandatorily signify the permanent relationship and a right to withdraw from the relationship must be preserved.


The other important clauses include terms of the agreement, exclusions of certain information from confidential treatment, remedies available against breach of terms, return of information.

Whether the agreement is mutual or unilateral

Every person who is legally authorized to enter into such a legal agreement can sign it. A Non-Disclosure agreement may be mutual or one-sided.


Mutual agreement is used where both the parties share confidential information to each other during the transaction or might possibly reveal to them while discussing its terms and the obligation is upon both the parties. So both the parties sign it and promise not to disclose it to any third party.


For example in cases of merger, partnership, and collaboration, etc. On the other hand, a Unilateral or one-sided agreement is used where one party has to share his part of the information and the receiving party is obliged not to disclose it any further. For example, employees, clients, and vendors, etc.

What governs an NDA

Mere signing of an agreement is not enough, it should be drafted well and should be capable of being enforced in the court of law. To make it enforceable:

It should be in accordance with the Indian Contract Act, 1872. It shall be executed by parties capable of entering into a contract i.e. age of majority, sound mind, free consent, and intention to create a legal relationship. The object of the contract must be lawful and the terms of the contract must be valid by law. [3]

The contract must be stamped for being accepted in the court. However, it is not mandatory to sign NDA on a stamp paper but it is one of the suggested procedural formality to ensure its further validity and enforceability so that it cannot be questioned in the court.

An NDA must be registered as per the Registration Act, 1908 since registration helps in proving the accuracy of the document over a long period. However, it is not mandatory but is advised to register since it becomes easy to prove its validity.

Important elements in NDA which make it appropriate

The disclosing party may prefer to include any information and documents in the Confidential Criteria thereby, broadening the scope. But broadening the scope too much is not advisable, rather party must limit the confidentiality to information that truly needs to be kept as a secret and if not done, would wholly or substantially affect the company[4]. If the clause is too broad and onerous then there are chances it might be struck down by the court. So it should be specific but of course not outright restrictive. The future actions of the receiving party after the end of a contractual relationship may be included in the agreement. For example, an employee signing the agreement has the obligation not to share the employer’s information with others. However, prohibiting him to have employment in that industry is an unreasonable condition. Therefore, this clause has to be drafted carefully. Moreover, all the information mentioned must be precise, language should be simple and clear. Conflicting sentences must be avoided.

Is there any exception where disclosing the information would not amount to a breach

At certain positions, the receiving party may be compelled by the authorities or any government agency to disclose the details. That forms a part of an exception in such agreements which must be specifically provided that such a disclosure would not be deemed to be a breach of the agreement. The receiving party must ensure that such a clause is incorporated in the agreement to have a safeguard against such situations.

Another exception can be information that is already known to the public or is already in the public domain should not form part of the responsibility of the receiving party to maintain confidentiality.

Also, in a case where the receiving party receives confidential information from a third party like an independent supplier having no relation with the disclosing party, then that information cannot be demanded to be kept confidential through the non-disclosure agreement. [5]

Is it for an indefinite period or has a specific time limit

The agreement can have a time frame decided by the parties up to which it will be applicable. Such a timeframe should be pragmatic and reasonable. The intended duration of the agreement depends upon the nature of the information. Be it 5 years or 10 years, it is important to keep in mind that courts won’t enforce an unrealistic time limit when it comes to Non-disclosure agreements.[6] Some information might become unrealistic after months and some might stay significant and sensitive to be kept confidential for years. So the same should be reflected accordingly in the agreement. Usually, the disclosing party would want to keep this obligation alive for as long as possible but the receiving party would intend to limit it to certain years. What might be actually reasonable depends upon the nature of the transaction and information that is the subject of the agreement.

The agreement may contain a ‘Return of Information’ clause[7] which states that after the end of the agreement the information shared must be returned to the disclosing party. And all the information stored in the hard drive or email storage must be deleted. This clause is to establish that all the information wherever stored, must be removed and if any bit of it is not possible to delete then the receiving party refrains from using it or takes reasonable steps to avert others from having access to it.

Consequences of breach of the agreement

Penalties for breach of the agreement have to be included in the agreement which may consist of damages in the form of lost profits or a pre-decided calculated sum.[8] This should be mutually decided to avoid aftermath conflict and wasting time seeking recourse from courts or tribunals.


It is recommended to have mutually agreed on fair remedy beforehand so that the process doesn’t get lengthy at the time of asking for damages. For this, it is important that the clause states what actions would constitute a breach and what circumstances would lead to the demanding of damages. The jurisdiction should also be specified in case the conflict goes beyond the remedies stated in the agreement.


Importance of NDA for a Startup


After the commencement of a startup, the founders would want to protect their confidential information from outsiders they deal with. A non-disclosure agreement is a tool that can be used in the following cases:

  1. Among co-founders and partners, they do have a high mutual trust but over time things might change. They have access to a lot of confidential information which without the execution of this agreement might get the company to pay huge costs.

  2. With employees, their obligation of non-disclosure can also be a part of their employment agreement or a separate agreement. The term of obligation can exceed the term of employment.

  3. Independent contractors, someone who is constantly working on the products and services of the company, comes in contact with a lot of confidential information. So it is important to put a legal obligation upon him for maintaining confidentiality.

Cases, where startups can avoid the use of Non-Disclosure agreement, are as follows:

  1. Investors: Asking a potential investor to sign such an agreement may send a negative signal. A number of startups are asking for fundraising, it would not be reasonable to make the investor sign such an agreement. What such startups can do is conduct due diligence on the investors and make sure they are reputable and they have not invested in any competing business. Any investor who is already reputed would not allow its reputation to get tarnished just for stealing ideas. Also, it is very hard for a startup to get picked for investment among a hundred other deals, therefore insisting them to sign a document may not be a good idea.

  2. Lawyers and accountants: Keeping their client’s information confidential is a part of their professional service. They are ethically bound to keep their client’s confidence, so asking them to enter into such an agreement would be redundant. However, they may be required to sign it in cases of Merger & Acquisition deals.

Conclusion

Non-Disclosure Agreement is an important tool used to protect sensitive information. Companies and startups use it to ensure that their ideas won’t be stolen by people they are negotiating with. This agreement can be of use for multinational corporations, partnerships, small companies, startups, and every other organization which at one point or the other has to deal with outsiders and entrust confidential information to them in course of their dealings.


Without an NDA in place, it is more likely that confidential information will be disclosed without one’s permission and they could lose the chance to patent the invention or maintain information as a secret.

Besides costing you all the money the company could have made with their ideas, they’ll also be losing all the time and money that went into the development.





[1] Adam Hayes, HOW NDA’S WORK AND WHY ARE THEY IMPORTANT, Jun 25, 2019, https://www.investopedia.com/articles/investing/041315/how-ndas-work-and-why-theyre-important.asp#:~:text=Non%2Ddisclosure%20agreements%20are%20an,people%20they%20are%20negotiating%20with. [2] 2015(2) CHN (CAL) 704. [3] Indian Contract Act, 1872, Section 10. [4] Aileene Koh, 11 Mistakes that could invalidate your NDA, https://www.everynda.com/blog/11-ways-invalidate-nda/; Madras High Court Vs. M/S Secan Invescast (India). [5] Richard Harroch, The key elements of NDA, Mar 10, 2016; https://www.forbes.com/sites/allbusiness/2016/03/10/the-key-elements-of-non-disclosure-agreements/#b40ae11627dd [6] Madras High Court Vs. M/S Secan Invescast (India). [7] Sarang Khanna, How to make effective Non-Disclosure Agreements, April 19, 2018; https://blog.ipleaders.in/are-non-disclosure-agreements-becoming-useless/ [8] Section 73 of Indian Contract Act, 1872. BIBLIOGRAPHY

1. Adam Hayes, How Nda’s Work And Why Are They Important, Jun 25, 2019, https://www.investopedia.com/articles/investing/041315/how-ndas-work-and-why-theyre-important.asp#:~:text=Non%2Ddisclosure%20agreements%20are%20an,people%20they%20are%20negotiating%20with.

2. Aileene Koh, 11 Mistakes That Could Invalidate Your Nda, https://www.everynda.com/blog/11-ways-invalidate-nda/

3. Richard Harroch, The Key Elements Of Non- Disclosure Agreement, Mar 10, 2016; https://www.forbes.com/sites/allbusiness/2016/03/10/the-key-elements-of-non-disclosure-agreements/#b40ae11627dd

4. Sarang Khanna, How To Make Effective Non-Disclosure Agreements, April 19, 2018; https://blog.ipleaders.in/are-non-disclosure-agreements-becoming-useless/

5. Indian Contract Act, 1872.

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