Drafting Confidentiality Agreements

In Depth

Drafting Confidentiality Agreements

Abhishek Mathur | February 2015

INTRODUCTION
Confidentiality Agreement, also known as Non-Disclosure Agreement (NDA), is often the first document exchanged between two contracting parties before the commencement of a business transaction.Through an NDA, typically, the customer discloses the requirements aligned to its business strategy while the service provider or the products vendor discloses its plans, solution, designs and pricing. These disclosures during the course of business need contractual protection. For some corporations, the information disclosed is so sensitive that it could make or mar the fortunes of that corporation forever. NDAs serve as the contractual cover to protect this precious information owned by corporations. While business teams and lawyers both realise the importance of having a good NDA in place,many a time they are working against tight timelines and there is a chance of some key points being missed out. This guide aims to discuss the types, structure, essentials and drafting guidelines of an NDA from a practical standpoint.
TYPES OF NDAS
There are generally three types of NDAs. The most common is the bi-party mutual NDA where both parties agree to keep each other’s information confidential. These agreements are usually easier to sail through than the other two-which are the unilateral bi-party NDA where only one party has the obligation to maintain confidentiality, and the third type is a multi-party NDA where more than two parties are involved in the information exchange. This article pertains to mainly the bi-party mutual NDAs. There are situations when a company has to agree or sign NDAs electronically, without a chance to review or negotiate, for example in case of e-bidding. Nevertheless, an understanding of the basic concepts and key clauses will help in correct risk assessment and mitigation.
STRUCTURE OF AN NDA
The NDA should state clearly the contracting parties. As per the requirements and the reach of the business arrangement, the affiliates of the contracting parties may be included as well. However, as a god practice the main responsibility of keeping the shared information, confidential should remain with the contracting entity. An internal check as to the applicability of the affiliates should be undertaken before their inclusion in the NDA. Recitals are followed by the definition section, and various obligations as we read through the succeeding part of this article.
ESSENTIALS OF AN NDA
The first and foremost component of an NDA is defining the confidential information. Depending on the industry they are operating in, the disclosing party and receiving party are expected to define exhaustively the confidential information which changes hands. For instance, for a software services company, software and source code take primacy in the definition part while for a design company, its intellectual property, whether registered or not should be included for sure in the definition of confidential information. There should be ample attention paid to the relevance of local laws and the business purpose. To exemplify, inclusion of trade secrets in a pharmaceutical industry in thewestern jurisdiction is a necessity, but while dealing with a hardware company in India, where trade secrets are ambiguous legally, the confidential information’s definition including trade secrets might not be pertinent. The NDA should be related to only the specific business purpose as identified by the parties. There should be a clause which prevents use of the confidential information other than the purpose as envisaged in the NDA.
KEY CLAUSES IN AN NDA
A good NDA should contain the proper recitals, definition of confidential information, the confidentiality obligations and its exclusions, the limited warranties clause, remedies for breach, jurisdiction and dispute resolution clause, nonexclusivity, term and termination clause. Non-assignment, non-solicitation clauses also form a part of the key clauses.
KEY ISSUES NEGOTIATED AND PROPOSED SOLUTIONS

Many companies insist on having an indemnity clause explicitly inserted in case of a breach of confidentiality provisions by the recipient. The drafting guideline around this clause should base itself on the fact whether the recipient feels that an NDA (where there is no consideration involved) is a suitable document to agree for monetary damages. Usually, not all NDAs actually translate into final agreements and it is not advisable to agree for indemnity provisions. The more acceptable way of addressing a breach is preventing the defaulting party to be restrained from further disclosure by an appropriate injunction issues by a competent judicial body. However, in case where it is deemed necessary or justifiable to agree or to ask for an indemnity, there should be a corollary clause inserted whereby the parties agree that any illegal disclosure or breach of confidentiality is going to cause substantial damage to the party which owns that confidential information. This clause puts an end to speculative arguments as to the monetary value imputed to it by a subsequent judicial decision.

Another clause often discussed is the dispute resolution method, local courts or arbitration and the governing laws. While each party would prefer its own jurisdiction for obvious reasons, sometimes, it is better to opt for a neutral jurisdiction as a solution. However, both parties should be prepared to agree for the same jurisdiction in case the NDA is followed by a contract. In the case of contracts without a clear governing law, courts are likely to refer to the NDA to settle the issues. Also, it should be kept in mind that in case of parties agreeing to opt for arbitration, the arbitral panel should be having sufficient authority to issue injunctions as and when required. In case, the aggrieved party has to opt for court’s intervention to issue appropriate injunctions, it defeats the purpose of choosing arbitration over litigation.
CONCLUSION
NDAs are very important as they not only protect the commercially sensitive information but also set the contracting tenor of a subsequent agreement. Experience shows that the parties’ future proclivity to key contractual clauses in the services/products agreement can be predicted by their response to the NDA clauses. Seasoned lawyers and businessmen know this and use this knowledge for the benefit of their respective organisations.

About Author

Abhishek Mathur

Based in the New Delhi office, Abhishek Mathur is a Junior Associate in the Litigation Team of Dhir & Dhir Associates. He has completed his LLB from Symbiosis International University in the year 2019 and holds a diploma in Competition Law from National Law University, Delhi. His area of interest and expertise lie in Banking and Insolvency Laws, Intellectual Property Law and Competition Law. He regularly represents clients in an array of matters before various Courts and Tribunals including DRT, DRAT, NCLT, NCLAT, High Courts and the Supreme Court.