How to Make a Safe NDA
A non-disclosure agreement (NDA) is a contract that’s used when confidential information is being shared.
This legal contract requires a Receiving Party of confidential information to maintain secrecy and not to misuse the information for profit and without the authorization of the Disclosing Party.
NDA agreements are often perceived to benefit one party only (the Disclosing Party) and be a disadvantage for the other party (the Receiving Party of confidential information).
However, a NDA agreement can be drafted in such a way that it protects the interests of not just one party but other parties involved.
One-way or unilateral NDA.
A unilateral NDA is normally used where only one party is expected to share confidential information.
The agreement is created to protect the Disclosing Party’s information only.
Two-way or mutual NDA.
A mutual NDA is appropriate where both parties intend to share confidential information.
Unlike a unilateral NDA, the NDA can be used to protect the interests of both parties to the agreement. The advantage of using a mutual NDA is that the drafter is normally going to make the terms of the NDA a lot fairer as it applies to both parties.
Even if you’re not sure if you’re going to be sharing confidential information, it’s a good idea to ask for a mutual NDA just in case you do end up needing to share confidential information later on.
A multilateral NDA is less common as it involves more than 2 parties. This could be in a situation where the disclosing party intends to disclose confidential information to more than one party.
The advantage of creating such agreement is that the Disclosing Party doesn’t have to create separate unilateral NDA agreements with each individual party.
A multilateral agreement can also be created for the benefit of more than two parties. This is where there might be 3 parties involved in the agreement who all intend to share confidential information.
However, when there are so many parties involved, the agreement becomes a lot more complicated to draft and manage, as consensus between the parties have to be reached on everything.
The best way to make most NDA agreements safe where there are only two parties involved, without additional complications, is to create a mutual NDA.
Besides safety for both parties, here are some other benefits of a mutual NDA:
Confidentiality for both parties.
Confidential information disclosed by either party during negotiations will be protected.
Even if negotiations start out with only one party disclosing confidential information, there is no need to create a second NDA if the second party suddenly decides to disclose confidential information.
For example, when a startup is seeking financing from investors, the startup often has to disclose sensitive information about its intellectual property, points of difference and profit margins to the investor. On the other hand, if the investor does indeed become interested in investing in the startup, the investor will probably have to disclose confidential information about his or her financial position and available lending capital to the startup.
Instead of having to draft up a second NDA, the investor can safely make disclosures knowing that he or she is covered by confidentiality as well.
Protection against failed mergers, acquisitions and joint ventures.
If negotiations for mergers, acquisitions and joint ventures fail, disclosed commercially valuable confidential information cannot be used to benefit either party. This reassurance is especially important so that parties feel comfortable making necessary disclosures in order to progress negotiations.
Ease of achieving agreement.
It takes less time to work out a mutually agreeable set of terms and conditions since both sides have to abide by the same rights and restrictions. This also makes the negotiation process much simpler and faster.
More balanced, fair and reasonable terms.
Mutual NDA tend to be more balanced, fair and reasonable than one-way agreements. The drafting party knows that it will be bound by the same restrictions it is seeking to impose on the other. Because of this, the finalized terms will normally be fair for both parties involved.
Although mutual NDA agreements tend to be drafted more fairly for both parties, there are still certain clauses which can give an extra advantage to one party, if not looked at carefully.
Definition of confidential information.
Unless your definition of confidential information is extremely wide, you have to ensure that your agreed definition covers the information that you intend to disclose.
For example, if you believe that most of your confidential information will be disclosed verbally, you should ensure that the confidentiality will also extend to verbal disclosures and not just written documents.
Of course, if you can provide written confirmation of the verbal disclosures made, the clearer the evidence will be that you have indeed made such disclosures.
However, you shouldn’t limit yourself to only written disclosures as this may expose you to lost of ownership of confidential information if you forget to confirm something down in writing.
If you believe that most of your confidential information will be shared through a presentation, you should include the presentation as part of your definition and also mark your slides as confidential.
Here’s an example of a presentation entitled “Customer Lifetime Value in Digital Marketing” where the words “Confidential & Proprietary” are used throughout the whole presentation’s index:
Governing law and jurisdiction clause.
Normally, to prevent vagueness, there is only one governing law and jurisdiction that is chosen for the NDA.
The governing law refers to the law that will apply in determining the outcome of any legal dispute regarding the terms of the agreement. The jurisdiction is the court that will determine the matter.
Although it’s possible to not choose a governing law and jurisdiction for the NDA, it’s normally advisable to make a choice during the drafting of the agreement so that in case of a later dispute regarding the enforcement of the agreement, the parties won’t have to litigate the matter.
Since it’s likely that only one governing law and jurisdiction will be chosen, the parties need to negotiate to find a governing law and jurisdiction that is fair to both parties.
Here’s an example of a clause from the Canadian Corporate Counsel Association’s agreement:
Even though the terms of mutual NDA agreements are generally a lot fairer than unilateral NDA agreements, you still need to ensure that the terms are appropriate for your situation and how your own business operates.
Every company is different and what suits another company may not be appropriate for you.
For example, in the case of Convolve, Inc. And Massachusetts Institute of Technology v. Compaq Computer Corporation and Seagate Technology, LLC, Convolve agreed to marking procedures for confidential information that was too burdensome. As a result, Convolve omitted to follow those procedures themselves, resulting in them losing the ability to claim protection for their own confidential information.
Nov 22, 2017 | Non-disclosure Agreements
This article is not a substitute for professional legal advice. This article does not create an attorney-client relationship, nor is it a solicitation to offer legal advice.