Ten Commandments Of A Non-Disclosure Agreement

by | Jan 17, 2022 | Blogs, Our Firsts | 0 comments

WHY DO YOU NEED A NON DISCLOSURE AGREEMENT?

It takes decades to build trust and even longer to earn an up-standing reputation in the society and yet, every entity in the business world, from budding entrepreneurs, freelancers, start-ups and MSMEs to large, global enterprises, need to build quick relationships and networks with practical strangers on any given day to advance their business and maximize their profits. Not every prospective association can be secured with Doctor-Patient privilege or Attorney-Client privilege or Spousal privilege to inculcate an initial sense of confidence in divulging certain information that has been earmarked ‘confidential’.

When you are gearing up for a collaboration of any kind to further your business prospects, irrespective of it culminating into an employer-employee relationship or an agency or simply hiring a consultant to audit your accounts or a contractor to outsource manufacturing of a product, more often than not, it is imperative to make them privy to certain sensitive information pertaining to your business, be it your future plans, customer list, marketing strategy, ideas, inventions, research data, IPRs, revenue details, account information, price list so on and so forth that could cause irreparable injury to your business entity, if it were to be leaked and yet you are bound to take the risk unless you have no plans to grow. What do you do when caught in this predicament?

You enter into a contract. If there’s any law that we, as individuals, could make for ourselves without relying on the Legislature in the conventional sense, it’s a contract, provided it is not patently illegal, against public policy or immoral by any reckoning.

The first step is to ascertain the kind of contract you need as it has to be tailor-made given your specific situation and surrounding circumstances, illustrating the scope, objective and aim of the contract. You need to be able to envision the potential breaches and their remedies in law thereby incorporating your crisis management plan in those provisions and remember, the devil is in the details. Subsequently, when you table your draft and the other party goes through it, negotiations and compromises are foisted on it, eventually condensing it into a legally binding document agreed upon and abided by all its signatories.

In this piece, the subject matter being ‘safeguarding confidential information’, the kind of contract we’ll restrict ourselves to, is a Non-Disclosure Agreement (“NDA”). While you are entirely capable and well within your rights to draft an NDA on your own, be forewarned that a poorly drafted NDA with its foundation in the general templates downloaded from Google, failing to take into account adequate legal and economic repercussions in case of breach and not hiring an attorney to proofread or vet it, could land you in much bigger problems than not having an NDA in the first place could’ve led to.

THE TEN COMMANDMENTS

Protection of the information is the ‘Arc of Covenant’ and the Ten Commandments you MUST adhere to while drafting or proofreading an NDA to derive the most benefit out of it are as follows:*[1]

1.THOU SHALT NOT DIVULGE ANY INFORMATION DURING ANY DISCUSSION WITHOUT FIRST SIGNING AN NDA

  • Identify whether you need a unilateral, bilateral or multilateral NDA in congruence with your business goal.
  • Protect your interests while ensuring that there are no provisions in the NDA that could be termed as unfair, arbitrary or illegal so as to avoid potential conflict and challenge to the NDA.

2. THOU SHALT IDENTIFY AND DOVETAIL THE DEFINITION AND SCOPE OF ‘CONFIDENTIAL INFORMATION’ IN THE NDA

  • The most important provision of the NDA is the clause defining ‘confidential information’. It has to be specific, detailed albeit non-exhaustive so there is no scope of any confusion or loopholes that the Receiving Party may take advantage of while there’s enough room for the Disclosing Party to add any further information to the list as and when required.
  • You MUST specify in the recitals, the purpose for which you need to disclose such information and stipulate that the Receiving Party may use the information solely for the purpose stated in the NDA.
  • You may add a specific, non-compulsory requirement on the part of the Disclosing Party to mark the information confidential if it is so, to enhance clarity.
  • The definition of Trade Secrets, if any, should be given separately as there may be a time limit to maintain secrecy of confidential information to be specified in the interest of justice, however, it is a norm that the Trade Secrets are to be kept secret indefinitely.
  • Sample clauses:
  • Definition Of Confidential Information. For purposes of this Agreement, “Confidential Information” means any confidential or proprietary information that belongs to the Company and/or its subsidiaries, or any of their clients or suppliers, including without limitation, technical data, market data, trade secrets, trademarks, service marks, copyrights, other intellectual property, know-how, research, business plans, product information, projects, services, client lists and information, client preferences, client transactions, supplier lists and information, supplier rates, software, hardware, technology, inventions, developments, processes, formulas, designs, drawings, marketing methods and strategies, pricing strategies, sales methods, financial information, revenue figures, account information, credit information, financing arrangements and other information disclosed to the Executive by the Company and/or its subsidiaries in confidence, directly or indirectly, and whether in writing, orally or by electronic records, drawings, pictures or inspection of tangible property. “Confidential Information” does not include any of the foregoing information that has entered the public domain other than by a breach of this Agreement.
  • Definition Of Trade Secrets: The term “Trade Secret” as used in this Agreement shall mean information including, but not limited to, technical or nontechnical data, a formula, a pattern, a compilation, a program, a device, a method, a technique, a drawing, a process, financial data, financial plans, product plans, or a list of actual or potential customers or suppliers which: derives economic value, actual or potential from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and is the subject of reasonable efforts by the Company to maintain its secrecy.

3. THOU SHALT SPECIFY THE EXCEPTIONS AND THE DUTY OF THE RECEIVING PARTY TO INFORM IMMEDIATELY IN CASE THE INFORMATION IS LEAKED BY ACCIDENT

  • It is recommended to specify the conditions wherein the Receiving Party may disclose the confidential information. Although it is a Receiving Party friendly clause, it diminishes the probability of the NDA seeming as arbitrary or unfair.
  • Since the Receiving Party, in most cases, will have to take its subordinates, associates, contractors, agents, affiliates etc. into confidence in order to work towards the ‘Purpose’ or the project for the Disclosing Party, there are chances the information may get leaked. It is advised to add a clause mandating the Receiving Party to get its employees, affiliates, agents etc. to sign an NDA on the same terms before engaging them. Even so, it is always beneficial to ensure the Receiving Party is required to notify the Disclosing Party immediately in case of such accidental leakage so the Disclosing Party has a chance to exercise some damage control like a press release making it public and retaining ownership before anyone else does.
  • Sample Clauses:
  • Exceptions to Confidential Information. “Confidential Information” shall not include any information that the Receiving Party is able to demonstrate is: (a) publicly available or later becomes publicly available other than through a breach of this Agreement; (b) known to the Receiving Party or its employees, agents or representatives prior to disclosure by the other party; (c) subsequently lawfully obtained by the Receiving Party or its employees, agents or representatives from a third party that is not under any obligations of confidentiality; (d) independently developed by the Receiving Party or its employees, agents or representatives, without use of the Confidential Information of the Disclosing Party as evidenced by contemporaneous documentation in the Receiving Party’s possession; or (e) legally required to be disclosed by the Receiving Party. As to any disclosures which are legally required, the Receiving Party shall provide the Disclosing Party, its third party contractors and any other affected parties with reasonable notice prior to such disclosure, to the extent permissible under the order requiring disclosure, and cooperate with the Receiving Party to establish suitable arrangements to minimize the extent and scope of any required disclosure. In the event a party seeks to assert one or more of the foregoing exceptions (a)-(e), such party shall bear the burden of proof of the applicability thereof.
  • Notice of Disclosure. The receiving party will promptly notify the disclosing party if it discovers any loss or unauthorized disclosure of Confidential Information.

4. THOU SHALT CLEARLY STATE THE OBLIGATIONS AND ACKNOWLEDGMENTS OF THE RECEIVING PARTY

  • It is imperative to specifically enumerate the obligations of the Receiving Party so as to nullify the impact of excuses and defenses the Receiving Party may come up with in case of a breach.
  • The following sample clauses form a part of the obligations:
  • Non-Disclosure and Non-Use of Confidential Information. The Executive acknowledges that the Confidential Information of the Company is a valuable, unique asset of the Company and the Executive’s unauthorized use or disclosure thereof could cause irreparable harm to the Company for which no remedy at law could be adequate. Accordingly, the Executive agrees that he shall hold all Confidential Information of the Company in strict confidence and solely for the benefit of the Company, and that, except as necessary in the course of Executive’s duties as an employee of the Company, he shall not, directly or indirectly, disclose or use or authorize any third party to disclose or use any Confidential Information. The Executive shall follow all the Company policies and procedures to protect all Confidential Information and take any additional precautions necessary to preserve and protect the use or disclosure of any Confidential Information at all times.
  • Non-Circumvention. The Receiving Party hereby irrevocably agrees not to circumvent, avoid, bypass, or obviate, directly or indirectly, the intent of this Agreement, to avoid payment of fees in any transaction with any corporation, partnership or individual, introduced by the Disclosing Party to the Receiving Party, in connection with any project, any loans or collateral, or other transaction involving any products, transfers, or services, or addition, renewal extension, rollover, amendment, renegotiations, new contracts, parallel contracts/agreements, or third party assignments thereof. The obligations of this Agreement shall remain in effect for a period of eighteen (18) months following the expiration of the term of this Agreement.
  • Non-Compete and Non-solicitation.*[2]During the term of the NDA and for one (1) year thereafter, Receiving Party will not, without the Disclosing Party’s prior written consent, (a) directly work on any products or services, or indirectly work on any commercial products or services, that are competitive with products or services (i) being commercially developed or exploited by the Disclosing Party and (ii) on which the Receiving Party worked or about which Receiving Party learned Proprietary Information during the term of NDA with the Disclosing Party; or (b) solicit the employment of any employee of the Disclosing Party with whom Receiving Party has had contact in connection with the relationship arising under this Agreement.
  • Return of Information. Upon the earlier of the written request of the Disclosing Party or when no longer needed by the Receiving Party for fulfillment of its obligations under this Agreement, and to the extent permitted by Requirements of Law, the Receiving Party shall either: (1) promptly return to the Disclosing Party all documents and other tangible (including, without limitation, electronic) materials containing the Confidential Information disclosed by the Disclosing Party, and all copies thereof in its possession or control, or (2) erase or destroy all such materials.
  • No Warranty. The Receiving Party acknowledges that the Confidential Information is being provided under this Agreement “as is” and without any representation or warranty of any kind, either express or implied, regarding the accuracy or completeness or other quality of the Confidential Information. In no event shall the Disclosing Party or its affiliates or any of their respective directors, officers, employees, agents or representatives (including, without limitation, RBCCM) have any liability to other party relating to or arising out of any use of the Confidential Information in accordance with this Agreement.
  • No Agency. Nothing herein contained shall be deemed to authorize or empower either party to act as agent for the other party to this Agreement, or to conduct business in the name, or for the account, of the other party to this Agreement.

5. THOU SHALT PROTECT YOUR INTELLECTUAL PROPERTY RIGHTS

  • Sharing sensitive information and data, more often than not, includes sharing information regarding your IPRs, your inventions, your logo, design, database etc.
  • It has to be specifically clarified that any information shared by you does not permit the Receiving Party to exploit your IPRs.
  • Sample Clauses:
  • No licence or any other right. No licence or any other right related to any Intellectual Property Right of the Company pertaining to the confidential information and Trade secrets shall be deemed granted when the Company provides the Specifications, special function requirements for the Product, and design and model of the products to the Contractor. Such Specifications and function requirements provided by the Company shall only be used by the Contractor for the purpose of this Contract and no other purpose.

6. THOU SHALT SPECIFY THE INJUNCTIVE RELIEF AND LIQUIDATED DAMAGES IN CASE OF BREACH

  • Specify the relief you are entitled to if the Receiving Party breaches the Agreement in the form of liquidated damages or injunctive relief or both.
  • Sample clause:
  • Injunctive Relief. Receiving Party acknowledges that any misappropriation of any of the Confidential Information in violation of this Agreement may cause Disclosing Party irreparable harm, the amount of which may be difficult to ascertain, and therefore agrees that the Disclosing Party shall have the right to apply to a court of competent jurisdiction for an order enjoining any such further misappropriation and for such other relief as the Disclosing Party deems appropriate. This right of Disclosing Party is to be in addition to the remedies otherwise available to Disclosing Party.

7. THOU SHALT SPECIFY THE TERM OF CONTRACT

  • It is considered fair and reasonable when you specify a time limit for maintaining the secrecy which usually ranges from one year to ten years as one can’t be expected to take it to his/her grave.
  • Trade secrets can be asked to be retained permanently, that is how companies like Coca-Cola and KFC have been able to keep their trade secrets secure till date. It is important to include the clauses that will survive the expiry or termination of the NDA.
  • As most NDAs are signed before striking a deal, instead of specifying termination clause, usually parties include a ‘No obligation’ clause in the NDA which states that neither party is obliged to continue the discussions or actually enter into a business contract subsequently.
  • Sample Clauses:
  • Term. In connection with all other Confidential Information, the obligations of this agreement will begin on the Effective Date and continue for a period of 3 years. The obligations under clause 5 shall continue for 5 years after the expiry of this Agreement. The obligation to maintain the secrecy of the Trade secrets shall continue indefinitely.
  • No Other Obligations. Neither party has any obligation under this agreement to continue the discussions or to enter into any other agreement.

8. THOU SHALT RESERVE YOUR RIGHTS

  • There are times when you discover a breach however fail to take immediate action and later it can be used against you in the court of law as you may seem to be sleeping over your rights and have inordinately delayed to enforce them. Therefore it is important to mention that your inaction cannot be construed as a waiver of your rights or acquiescence.
  • Sample clauses:
  • No waiver. The Disclosing Party’s failure or delay in exercising any right, power and privilege hereunder shall not operate as a waiver thereof, nor shall any single or partial exercise thereof or the exercise of any other right, power and privilege hereunder operate as a waiver.
  • Reservation of Rights. No forbearance, indulgence, relaxation or inaction by the Disclosing Party at any time, to require performance of any of the provisions of this Agreement shall, in any way, affect, diminish, or prejudice its right to require performance of that provision at a later point in time.

9. THOU SHALT ENSURE INDEMNITY, SPECIFY GOVERNING LAW, JURISDICTION AND DISPUTE RESOLUTION

  • Even though these are residual clauses, they are extremely significant in case a dispute arises.
  • In the event of choosing the appropriate mechanism for dispute resolution, it is essential to ascertain whether or not it helps your cause in a timely and cost effective manner if you need urgent relief.
  • The jurisdiction clause allows you to choose which court would be most convenient for you to move, provided it is a legally valid option.
  •  Sample clauses:
  • Indemnity. The Receiving Party agrees to indemnify and hold the Disclosing Party harmless from and against any and all loss, liability, damage, claim, cost, and expense (including legal fees) however arising, out of any breach or non-performance by the Receiving Party or its Representatives of any of the Receiving Party’s obligations under this Agreement including, without limitation, the Receiving Party’s obligations regarding the use of and safeguarding of the Confidential Information.
  • Governing Law. This agreement will be governed, construed, and enforced in accordance with the laws of India.
  • Jurisdiction. The Parties irrevocably submit to the exclusive jurisdiction of the courts of New Delhi for the Interpretation and enforcement of this Agreement.
  • Dispute Resolution. Any dispute arising between the parties shall be resolved by mediation, and in the event that efforts to mediate a resolution of the dispute fail, by means of binding arbitration between the parties, with an arbitral panel consisting of three arbitrators; one arbitrator being appointed by each of the parties and the third arbitrator being appointed by the other two arbitrators so appointed. The seat of mediation as well as arbitration shall be at New Delhi. The cost of the proceedings as well as the legal fees shall be reimbursed to the winning party by the losing party.

10. THOU SHALT GET YOUR NDA SIGNED BY AUTHORIZED SIGNATORIES OF THE PARTIES AND WITNESSES AND GET IT REGISTERED

  • The document will not be legally binding if it is not properly executed, hence it is important to ensure that it is signed by the respective parties or their authorized signatories and acknowledge the same in the NDA. It is prudent to ask for a copy of any ‘Letter of Authority’ or ‘Board Resolution’ or ‘Special/General Power of Attorney’.
  • Getting it signed by witnesses enhances the credibility of the NDA and getting it registered makes it explicitly and indubitably legally binding and enforceable so any preliminary objections to its enforcement at a later stage can be effectively and easily countered.

CONCLUSION:

NDAs are the most underrated albeit equally crucial contracts. Taking some time to effectively draft one (or as it is recommended to get one drafted/vetted by an attorney) can ensure security and safety of your business secrets and safeguard your interests against any potential infringement or unfair trade practices by your competitors in the field. A well drafted NDA is the embodiment of the phrase “a stitch in time saves nine”.

[1] Please note that these Commandments focus on protection of the interests of the Disclosing Party i.e. the Party disclosing the confidential information in a unilateral NDA. They may change if the NDA has to be vetted or drafted by the Receiving Party i.e. the Party receiving the confidential information.

[2] * This clause is usually avoided in an NDA so as not to digress from the scope of the Agreement and create unnecessary hurdles in potential business relationship, it is often recommended to be inserted in subsequent contracts with the Receiving Party. However, it is important to specify these terms if you do not wish to enter into any subsequent contract.

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