Non-disclosure agreements: your questions answered

Last updated: 10 November 2020

Estimated reading time: 15 minutes

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There are some matters that are commercially sensitive to a business but you, nonetheless, need to share the information with a third party, for example, with a potential franchisee, business purchaser or new investor. Prior to making disclosure, it’s important to protect your business and to ensure that the recipient of the confidential information knows that they need to respect the information’s confidential nature and the penalties for failing to do so. Your business can achieve this through use of a non-disclosure agreement. In this article our commercial solicitors answer your frequently asked questions on non-disclosure agreements.

Jump to:

  1. What is a non-disclosure agreement?
  2. When should a business use a non-disclosure agreement?
  3. What is the law on a third party disclosing confidential information?
  4. How does a non-disclosure agreement work?
  5. What are the key provisions in a non-disclosure agreement?
  6. What are the different types of non-disclosure agreement?
  7. How long does a non-disclosure agreement last for?
  8. Can a non-disclosure agreement be terminated?
  9. Are non-disclosure agreements legally binding and enforceable?
  10. What type of information isn’t covered or included in an NDA?
  11. Does a non-disclosure agreement need to be notarised?
  12. How do mutual non-disclosure agreements work?
  13. How do one-way non-disclosure agreements work?
  14. Should employees sign non-disclosure agreements as part of their employment contracts?
  15. Non-circumvention clauses in non-disclosure agreements
  16. Non-solicitation clauses in non-disclosure agreements
  17. Non-compete clauses in NDAs
  18. Does GDPR impact on non-disclosure agreements?
  19. What happens if you breach a non-disclosure agreement?
  20. Is a non-disclosure agreement worthwhile?

What is a non-disclosure agreement?

A non-disclosure agreement is a legal contract over the sharing of information in confidence. The most effective way of ensuring that disclosed information is treated confidentially is through a non-disclosure agreement. This not only identifies the confidential information, so there can be no dispute as to its confidential nature, but also puts the receiver of the confidential information under a contractual obligation that is easier to enforce than a claim under general or common law.

Prior to disclosing information about your business that you believe is commercially sensitive you need to consider:

  • Does the information need to be shared or can you proceed in the absence of disclosure of the confidential information?
  • Is the organisation that you are disclosing to subject to regulatory rules on confidentiality, such as solicitors who are regulated by the Law Society and who are subject to strict professional rules on client confidentiality?
  • Use of a non-disclosure agreement if disclosure is needed to a third party and you don’t believe that they are subject to professional confidentiality rules to give your business sufficient protection against a breach of confidentiality.

If there are discussions about a non-disclosure agreement you may also hear the document referred to as a confidentiality agreement or NDA.

When should a business use a non-disclosure agreement?

What amounts to commercially sensitive information varies from business to business but the following are examples of where a non-disclosure agreement should be considered:

  • Describing an invention, new product or technology to a potential partner that isn’t patented or where you don’t have intellectual property protection (for example as part of a potential joint venture agreement or for an investor).
  • Sharing information about your business with a prospective buyer or franchisee as part of a franchise purchase agreement. This information could include your detailed management accounts, business plans, projected forecasts, or key clients.
  • Giving information to a potential service provider, such as a freelancer or sub-contractor, to enable them to quote for work.

A non-disclosure or a confidentiality agreement can either be:

  • An initial agreement as part of preliminary business discussions.
  • Form part of a substantive commercial contract , such as a joint venture or franchise agreement.
  • Form a stand-alone agreement between your business and a third party, complementing the main contract.

What is the law on a third party disclosing confidential information?

Some UK business owners assume that they don’t need a non-disclosure agreement either because they can trust the party that they are giving commercially sensitive information to or because they assume that the law will protect their business, without the need for a confidentiality agreement.

The law governing the protection of confidential information comes from the common law principle of equity. The equitable doctrine of confidence or confidentiality is relied on where confidential information can’t be protected by intellectual property rights, for example, patents or copyright. However, the use of a non-disclosure agreement is advisable rather than seeking to rely on common law principles.

In addition to UK common law, there is some protection against the unauthorised disclosure by a third party of trade secrets through statutory instrument 2018 number 597 entitled The Trade Secrets (Enforcement, etc.) Regulations 2018. The 2018 Regulations brought the EU Regulations on trade secrets into force to ensure conformity of rules between member states thus harmonising the treatment of confidential business information in the EU, including the UK. Despite Brexit, the 2018 Regulations remain in force and will continue to do so unless the UK government takes the decision to revise the regulations as part of its de-regularisation process after the UK’s exit from the EU and the end of the transition process.

The 2018 Regulations allow a business to bring a claim under either common law or the 2018 Regulations. To bring a claim under the 2018 Regulations the information your business wants to protect must:

  • Be secret information – for example it can’t be accounts published at companies house but it could be detailed management accounts that include your profit margins or projected forecasts.
  • Have commercial value – for example, your profit margins may have commercial value to a competitor who can use them to undercut your prices.
  • Have been subject to reasonable steps under the circumstances to keep the information secret – otherwise the third party could say that they didn’t know that the information was secret or commercially sensitive to the business. 

To succeed on a claim under the 2018 Regulations you need to be able to establish that:

  • The information wasn’t known to the public or to experts or ‘generally known or readily accessible to persons within the circles that normally deal with that kind of information’ and
  • You provided the information to the third party in confidence and you said that or a reasonable person would have realised the information was given in confidence and
  • You have suffered a loss because the third party shared the confidential information or used it in a way that you would not have agreed to.

The 2018 Regulations do assist because of globalisation and the use of data and communication technology that can make confidential information easily portable. With the 2018 Regulations harmonising the definition and the treatment of trade secrets across the EU it means there is a consistency of approach between member states that’s helpful if you are conducting business with EU based partners or you have a UK based business with a European offices.

However, use of and reliance on the 2018 Regulations can prove difficult if you can’t easily prove your case that the information was confidential. That is why the use of non-disclosure agreements are recommended to ensure it is clear to all parties that the information is confidential in nature and the contractual consequences of breaching the agreement to keep the information private. It is important that the contents of the confidentiality agreement are negotiated to identify the confidential information and to ensure that recipient of the information can comply with the terms of the agreement.

How does a non-disclosure agreement work?

Non-disclosure agreements work by ensuring both parties to a transaction or potential project (such as a joint venture) understand the confidential nature of information that is disclosed and the consequences of any breach of confidentiality. For example:

  • The right of the discloser to receive compensation or
  • The right of the discloser to obtain an injunction order to prevent further damage or loss arising from the breach of confidentiality.

What are the key provisions in a non-disclosure agreement?

The inclusion of the following key provisions is recommended in confidentiality agreements:

  • Definition of the confidential information to be protected by the non-disclosure agreement. The definition should be broad enough to catch all the categories of confidential information being disclosed and may also detail the types of data disclosed and specify that any work that is created or derived from the confidential material is also caught by the non-disclosure agreement. The agreement can say information disclosed orally is confidential, although you will need to follow this up in writing following verbal disclosure.
  • Use of confidential information for the permitted purpose. The agreement needs to specify under what circumstances and for what purpose the recipient can use the confidential information.
  • Sharing of confidential information. If the recipient is allowed or not allowed to share the confidential information with any third party, then this should spelt out in the agreement. For example, the recipient may be allowed to share information with key employees and advisors, although there may be a requirement that these individuals also sign non-disclosure agreements.
  • Return of confidential information. The non-disclosure agreement should set out what will happen to the confidential information. If a joint venture or a franchise goes ahead then the third party may still need the confidential information and be subject to confidentiality clauses in the substantive joint venture or sale or franchise agreement. If the project or transaction does not proceed then the non-disclosure agreement should provide that the confidential information will be returned to the disclosing party or destroyed.
  • Duration of the agreement. The agreement will contain a time period during which it will remain in effect.
  • Non-solicitation of employees. To prevent the recipient of your confidential information from attempting to hire your employees for a period of time specified in the agreement.
  • Breach remedies clause. To set out that you are entitled to apply for an injunction to prevent the other party disclosing, or continuing to disclose, your confidential information and damages.
  • No transaction obligation. To make it clear that there is no obligation on you to deal with the recipient just because you shared information with them.
  • Jurisdiction clause. To identify the law and court jurisdiction that will apply to the contract in the event of any dispute or court case.

What are the different types of non-disclosure agreement?

The different types of non-disclosure agreements are:

  • Unilateral or ‘one-way’ agreement – involving two parties, where only one of them will disclose confidential information to the other. These unilateral NDAs are most commonly used to protect trade secrets.
  • Bilateral, ‘mutual’ or ‘two-way’ agreement – involving two parties where both intend to disclose confidential information to the other. These bilateral non-disclosure agreements are most common where businesses are considering a merger or a joint venture.
  • Multilateral agreement – involving three or more parties. These types of non-disclosure agreements are usually prepared where there are multiple parties involved and at least one party will be disclosing confidential information to the others. It avoids having to complete multiple non-disclosure agreements.

How long does a non-disclosure agreement last for?

If you are disclosing confidential information you may want to keep the information secret forever. However, non-disclosure agreements normally set a time period where the recipient is bound to keep the information confidential. The time period may depend on the nature of the business venture as in a fast-moving industry, like technology, the reality is that the information may lose its commercial value relatively quickly. Generally it’s usually unrealistic to expect your recipient to be obliged to keep the information confidential indefinitely. Most recipients of confidential information will want to make sure there is a definite date after which they will be released from their obligations.

If a non-disclosure agreement expires, you may still have rights under intellectual property law, for example to protect your copyrights or patents.

Can a non-disclosure agreement be terminated?

A NDA can be terminated by the provider of the confidential information if this is provided for in the non-disclosure agreement. The agreement can also be terminated by mutual consent. Usually a recipient of information can’t terminate a non-disclosure agreement, as this would defeat its purpose.

Are non-disclosure agreements legally binding and enforceable?

Provided that the non-disclosure agreement has been drawn up by a competent commercial solicitor and properly executed, a non-disclosure agreement will be legally binding.  The main issue for those entering a non-disclosure agreement is whether the agreement is enforceable.

When looking at the enforceability of a non-disclosure agreement you need to consider the following:

  • Is the information really confidential? If the information isn’t secret then it won’t be protected.
  • Does the confidential information belong to you?  If the confidential information doesn’t belong to you then you can’t control its circulation. For example, if an idea has been developed by a supplier or contractor, it may not be your property to begin with.
  • Who is the contracting party? You need to make sure that you are contracting with the correct legal entity, and that the document is signed by an appropriate director or officer in the case of an organisation. Note that your recipient may be operating under a trading name that’s different from their legal name.
  • Is the information in the public domain? Your agreement may not protect you if the recipient of the confidential information also gets the confidential information about your business from a third party or can show that the information was already publicly available.
  • Prior information. Any information that you share with a third party prior to signing a confidentiality agreement will not be covered by its scope.
  • Can you prove a breach of confidentiality? It can be difficult to prove that the recipient did, in fact, breach the terms of the non-disclosure agreement and it was them that released the information, rather than say a former employee of your business.
  • Use of the non-disclosure agreement. It is not appropriate to use a non-disclosure agreement to prevent appropriate disclosure. For example, a non-disclosure agreement against an employee can’t be enforced to stop an employee from making disclosures about breaches of the law or illegal activity, like sexual misconduct.
  • Is the agreement clear or over-reaching? The definition of what information is confidential must not be so wide-reaching as to make the agreement too vague to comply with, or mean that complying with it would be too onerous or restrictive.
  • Can the breaching party pay? A business or individual may have limited funds to be able to pay damages for any losses you may suffer.
  • Restraint of trade. A non-compete clause or restrictive covenant in a non-disclosure agreement may be not be valid because it is deemed anti-competitive or unreasonable in scope.

What type of information isn’t covered or included in an NDA?

NDAs will not cover information that:

  • Is already in the public domain or
  • Was disclosed by you to the recipient prior to the non-disclosure agreement being signed
  • That is already known by them because they received it from another source.

Does a non-disclosure agreement need to be notarised?

A non-disclosure agreement does not need to be notarised. It is possible however to execute an NDA as a deed, which means you can bring an action for breach for up to twelve years after it terminates, as opposed to the usual six.

How do mutual non-disclosure agreements work?

Mutual non-disclosure agreements work by imposing obligations of confidentiality on both parties to the agreement, a kind of a confidentiality tit-for-tat. Your recipient will not be able disclose your confidential information, and you won’t be able to disclose theirs. These types of agreement are common in M&A and investment scenarios, where both sides will be sharing confidential aspects of their respective businesses.

How do one-way non-disclosure agreements work?

One-way non-disclosure agreements only contain obligations on one of the parties. This type of agreement is common where you are developing a new product or service and seeking potential suppliers or partners.

Should employees sign non-disclosure agreements as part of their employment contracts?

It is possible to ask employees to sign a non-disclosure agreement as part of their employment contract. However, you should not use a NDA to prevent whistle-blowing, or to stop an employee from making disclosures of illegal activities or to avoid a legal requirement to make a referral to a regulatory body, government agency or the police.

There has been much publicity over the use of non-disclosure agreements between employers and employees. In 2020 ACAS published a guide on the use of non-disclosure agreements within an employment setting that can be found here. The guidance covers NDAs in settlement agreements, employment contracts and other arrangements such as agency worker assignments, volunteer arrangements, and redundancy and severance schemes.

The proper use of non-disclosure agreements arising out of an employment relationship is lawful provided that the information given to the employee is truly confidential. Business trivia isn’t confidential. Information that may have some confidential aspect to it can be protected but not indefinitely. However, truly confidential trade secrets can remainconfidential even after the employee has left their employment with an ongoing requirement of confidentiality.

Our employment law team specialise in advising on non-disclosure agreements and employees and this article looks at how to deal with an employee breach of confidentiality

Non-circumvention clauses in non-disclosure agreements

A non-circumvention clause in an NDA is one that seeks to restrict the recipient of confidential information from using it other than for a narrowly defined purpose. Its aim is to prevent the recipient from moving forward with a deal or contract without you, for example, by going directly to your suppliers and cutting you out of the deal.

Non-solicitation clauses in non-disclosure agreements

Non-solicitation clauses in NDAs aim to prevent a third party, such as a supplier, potential partner or investor, from soliciting your employees to work for them.

Non-compete clauses in NDAs

If you wish to restrict an employee or other third party from competing with your business for the duration of the non-disclosure agreement, or for a specified period after they leave your employment or the agreement ends, it is possible to protect your interests by including a non-compete clause. These clauses can be void or unenforceable unless they are:

  • Designed to protect a legitimate business interest. For example, trade secrets or lists of suppliers and customers or confidential information regarding the financial health of your business that you would not want in the hands of competitors.
  • No wider than reasonably necessary to protect that interest. This means the restriction should be limited in duration or geographical scope and should not cover activities that are unrelated or incidental to your main business interests. In the case of employment contracts, it would not be reasonable to prevent someone from making a living in their chosen field, particularly if the number of businesses operating in that field is small.
  • Not contrary to the public interest.

Does GDPR impact on non-disclosure agreements?

The General Data Protection Regulation (GDPR) impacts on non-disclosure agreements as these will need to be drafted (or updated if they already exist) to make sure the provisions reflect the requirements of the regulations. Our data protection solicitors can advise on this.

Given that a disclosing party under an NDA may be giving personal data to a recipient, they could be data controllers and data processors respectively under the GDPR. Article 28 imposes on data controllers a duty to control how that data is used, in a written contract that specifies:

  • The subject matter of the processing
  • The duration of the processing
  • The nature and purpose of the processing
  • The type of personal data being processed
  • The categories of the data subjects
  • The obligations and rights of the controller
  • That the processor acts on the documented instructions of the controller
  • The need for the processor to delete or hand back the personal data at the end of the contract
  • The requirement for the processor to implement appropriate technical and organisational measures to protect the data
  • A right for the controller to audit the processor

What happens if you breach a non-disclosure agreement?

If you breach the terms of a non-disclosure agreement, the following remedies may be sought against you:

  • An injunction – injunctions are normally the first remedy if your business discovers that there is an intention to breach the confidential information. An injunction application can be issued to prevent the defendant from disclosing or using the information. For more information read our article on how to file an injunction application against a business.
  • Damages to compensate the injured party for their losses.
  • A fee to cover the amount the recipient of the confidential information would otherwise have paid for a license to use the information.
  • An accounting for any profits the recipient made from exploiting the information they received.

A well drafted non-disclosure agreement will detail all the remedies that are open to the parties (in the case of a two-way NDA) or to the discloser in a one-way NDA. A non-disclosure agreement may seek to quantify in advance the amount of damages that the discloser would receive in the case of a breach, but these types of specific clauses are not always enforceable.

Is a non-disclosure agreement worthwhile?

If you need to release confidential information as part of a potential business transaction or to workers, then a non-disclosure agreement is an essential business tool to safeguard your interests. A confidentiality agreement provides legal justification for the protection of your information. Furthermore, even if an individual clause in the agreement is deemed invalid, the remainder of the non-disclosure agreement should be fully enforceable.

In addition, a non-disclosure agreement puts third parties on notice that you intend to protect your trade interests and that through the completion of the non-disclosure agreement you have the means to do so.

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What next?

Non-disclosure agreements will require legal advice. Contact our commercial solicitors for help drafting and negotiating your NDA or confidentiality agreement: call us on 0800 689 1700, email us at enquiries@hjsolicitors.co.uk or fill out our contact form below and we’ll get back to you.

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