A Non-Disclosure Agreement (NDA), also called as ‘Confidentiality Agreement’, is a document wherein the parties to the agreement, agree NOT to disclose the confidential information/data specified in the ‘Confidentiality Clause’ of the NDA to the third party beyond the terms of the agreement. NDAs are often signed between the two companies or two individuals or other entities, but an employer can also enter into an agreement or deal with his employees. In India, the Indian Contract Act, 1872 governs the Non-Disclosure Agreement.
Need Of An NDA
NDAs are mostly utilized for the following benefits:
- It helps the parties in elaborately classifying the information being disclosed to the other party.
- The related parties mutually agree to protect the confidentiality of the received information.
- It imposes obligations on the party to protect the confidentiality of the information so received.
- The remedies and reliefs in case of a breach can be made to be binding upon the parties to the agreement.
Types Of NDA
Nature or types of NDA have major impact on it’s usage and purpose. NDAs are of three types:-
- Unilateral: Involves two parties to the agreement but only one of which can disclose certain information while restricting any further disclosure
- Bilateral: Involves two parties to the agreement and both disclose information to each other e.g. Joint Venture.
- Multilateral: Involves three or more parties to the agreement, where one party discloses the information to the other parties and intends to protect any further disclosures
NDA: Detailed Understanding
An individual or a business entity might find himself/itself in events or circumstances requiring to enter and sign an NDA. Few of them are mentioned beneath here:
- a business deal
- taking expert’s advice on a new product
- starting a new project
- investigating the possibility of investment with another party
- providing employment
- signing a contract worker for any sensitive project
- dealing with confidential client information
- discussing commercially sensitive information with another party etc.
- protecting the proprietary data/ information from being misused
An NDA is a legally binding document or contract, which is governed by the Indian Contract Act, 1872. It is suggested to have the NDA stamped to ensure further validity and enforceability. NDA having witnesses has a limitation period of twelve years for claiming a breach of agreement in the court of law, whereas the limitation period is six years in case of an agreement without a witness.
There is no specific time limit relating to the duration of NDA. It generally extends over a period of 2 to 5 years. The corporates might enter into a Non-Terminating NDA for permanent protection of trade secrets. NDA loses its validity and comes to an end as soon as the ‘confidential information’ becomes public.
Printing of NDA on stamp paper is not mandatory. It may be printed on the company’s letterhead and signed by the parties on both sides of each page. If one chooses to print it on a stamp paper, it should be done on a non-judicial stamp paper or e-stamp paper which is available in certain states. The amount of stamp paper varies in states. Once printed, it should be signed in the presence of one or more witnesses and could be notarized.
As per the Indian Contract Act, registration of an NDA is not mandatory. But it is advisable always to register an NDA as it makes proving the validity of the document easy in case of a breach.
Essential Content Of NDA
Definition of Confidential Information
Definition of ‘Confidential Information’ in the transaction shall be clearly covered. The disclosing party generally has a broader definition, whereas the receiving party might have a narrower definition for the same.
Definition of ‘NOT’ a Confidential Information
Insertion of a clause specifying what is NOT confidential information is equally important. There could be transactions where some data cannot be expected to remain confidential. Also, the information which has already become public cannot be treated as confidential.
Term of Confidentiality
It is crucial for any NDA to define and set the duration of the validity of the NDA which could be decided upon the nature of the transaction. It could be one year or ten years or for an indefinite time.
The NDA shall also define the parties with whom disclosure of confidential information are permitted. It might become unavoidable especially while conducting specific due diligence such as sharing financial data with associated representatives, partners or companies.
There might be some exceptions for disclosure of the confidential information to the third party like government bodies or for a legal proceeding. In such situations, sharing of such confidential information shall not be considered as an infringement. Thus, necessary exceptions to NDA shall also be specified therein.
If any infringement of the clauses of the agreement or breach of agreement occurs, the NDA should have an explicit mention of the remedies available to the aggrieved party.
Interaction with Employees
To safeguard the organisation from losing potential employees who could join the other party, the NDA shall have an employee solicitation clause which restricts the other party from inducing the employees.
A smooth business carries real-life challenges and often needs exceptions. Parties to an agreement may be required at times to disclose a particular part of the information within themselves, which otherwise would not have come to the knowledge of the other party. Consequences of loss of such information may or may not be impactful. Considering this impact, the NDA may be entered into between the parties with a separate sort of arrangement. This may be entered in the event of a failure in order to confirm the maintenance of confidentiality of such importance.