The Basics Of Non-Disclosure Agreements Explained

There was a time when agreements were verbal and confidences were strictly held.

But thanks to screen captures, copy-and-pastes, and the spread of information in a matter of nanoseconds, people have become much more exacting.

Doing business these days demands folders full of proposals, contracts, and statements — all before the project or actual “work” begins. Among these official forms is a non-disclosure agreement or an NDA.

Also known as a confidentiality agreement or confidential disclosure agreement, this document asks someone you’re entering into a work relationship with to keep certain sensitive information a secret.

Rather than indicating a sign of mistrust, NDAs have become a standard part of doing business.

In this article, we’ll review the details of a non-disclosure agreement, go over the different types of NDAs, and share some common examples of what is and isn’t included in these documents.

What Is a Non-Disclosure Agreement?

An NDA is defined as a legal contract between at least two parties that outlines the protection of any form of material, knowledge, or information.

It creates a confidential relationship between the relevant parties, in which they agree to share the information with one another for pre-approved purposes, but also agree not to disclose the information to any outside party.

By creating a legal obligation to privacy, an NDA compels the parties to keep all specified information secret and secure.

Should it not be upheld, the injured party can claim a breach of contract and hold the right to take legal recourse or even sue for damages.

NDAs offer a number of applications, the most common of which prevent the spread of sensitive, proprietary information, or protect a brand or creator’s intellectual property or trade secrets.

An NDA’s coverage is virtually unlimited — it can include product designs, manufacturing processes, customer data, passwords, source codes, recipes, and a whole lot more.

Ultimately, it's up to the parties involved to define what they consider to be confidential.

Types of Non-Disclosure Agreements

There are many reasons why a party might require an NDA. And depending on those reasons, there’s a specific type of NDA that may work best.

The three basic types are unilateral, bilateral or mutual, and multilateral.

Unilateral Agreement

A unilateral NDA, or one-way NDA, is the most common type.

It involves two parties, where only one party (the disclosing party) intends to disclose information to the other party (the receiving party), provided that the information is protected from further disclosure.

These are typically implemented in a company-employee relationship, where the agreement protects the company’s trade secrets or any confidential information the employee acquires, learns, or discovers on the job.

Other likely cases include attorney-client privilege, doctor-patient confidentiality, or any other professional-client confidentiality.

Bilateral Agreement

A bilateral agreement, also called a mutual NDA or two-way NDA, involves two parties that both intend to disclose information to one another, under the mutual understanding to protect the information from further disclosure.

Since both parties are given equal treatment, bilateral agreements are generally a fairer deal.

Bilateral agreements are good for cases when a company is considering a joint venture, merger, or sale; or if the receiving party could possibly become a disclosing party (or vice versa).

A mutual NDA can also be used between a designer and manufacturer, an independent contractor and client, or a small business owner and potential partner or licensee.

Multilateral Agreement

A multilateral agreement involves three or more parties, where at least one party intends to disclose information to the other parties and requires protection from further disclosure.

A multilateral agreement can eliminate the need for a separate NDA between all parties, and is useful when the information is more or less similar among all receiving parties.

For instance, if a company is contracting two third-party providers to work together on a comprehensive service (e.g., a graphic designer and a web developer), then a multilateral agreement would be a swift way to cover all bases.

Keep in mind, however, that the more parties involved, the more complicated an agreement can be to finalize and manage.

Benefits of an NDA

As expected, most parties enter into non-disclosure agreements for the sake of confidentiality.

In fact, many business dealings, such as mergers and partnerships, may not move forward without the binding confidence provided by an NDA.

An additional benefit of a non-disclosure agreement, however, is the customization — it can be tailored to any specific terms, when those terms apply, when they don’t, and when they end.

Even what’s considered “confidential information” is defined by the parties themselves.

This enables them to protect anything that’s important to their business, whether it’s a particular process or technique, a program code, a client list, or a secret heirloom recipe.

Should this confidentiality be breached, an NDA covers that as well.

All consequences and remedies in cases of unauthorized disclosure should be written within the contract itself.

This typically includes taking legal action against the theft of confidential information, which includes investigating, building a concrete case, determining what legal claims can be made (e.g., copyright infringement, trade secret misappropriation, patent infringement), and doing a lot of legal paperwork.

Note: Most of the laws that protect confidential business information are based on the Uniform Trade Secrets Act, which covers patterns, formulas, drawings, devices, programs and codes, processes and techniques, and customer lists (in select states).

It's likely that most legal courts will only allow the pursuit of damages if a proper NDA is in place.

Without one, the owner of the information (what would be the disclosing party) has failed to provide any form of protection, and the information is not legally considered confidential.

What’s Included in an NDA?

Although beneficial to business, don’t expect to have every party that walks through your doors to sign an NDA.

These agreements are legally binding and should be enforced only when dealing with information that requires legal protection.

A well-written NDA will generally consist of six key parts:

The parties to the agreement

Start by listing all the parties involved, primarily the disclosing party and the receiving party, but also include any third parties (i.e., affiliate companies, partners, suppliers).

The definition of confidential information

The next step is to establish exactly what constitutes the “confidential information” covered by the contract.

This can be a bit tricky.

On one hand, the disclosing party probably wants such information to be as broad and inclusive as possible, but on the other hand, the receiving party needs information that's clearly identified so they know what they can and can’t use.

It's best to be specific about the type of information (i.e., all documents labeled “confidential,” or verbal information shared during board meetings), but take care not to reveal the actual information itself.

The exclusions from confidential information

The purpose of an NDA is to keep confidential information under wraps.

However, it's a good idea to offer exclusions, such as when sharing information with company-hired lawyers, accountants, or other professionals (who likely are also under an NDA).

Other exclusions include information already common to the industry or rightfully obtained from another source.

This section keeps the NDA from being too restrictive or imbalanced for the receiving party.

The obligations of the receiving party

All receiving parties should be provided with a precise guide for the use of the confidential information — what can they do, and what can't they do.

For instance, most NDAs will state that the receiving party:

• (a) cannot disclose the confidential material to anyone
• (b) cannot use the confidential material for their own benefit
• (c) will use commercially reasonable efforts to protect the confidentiality of the confidential material.

The time period involved

All NDAs should include a definite time period, which usually extends far beyond the actual working relationship.

While most disclosing parties would prefer this to last forever, it’s not very realistic.

Most information will eventually become irrelevant and isn’t worth the cost required to constantly check if the non-disclosure agreement is being upheld “forever.”

Instead, a reasonable period of time is 2-5 years, depending on the industry — technology, for example, changes so fast and is oftentimes even open-source, while a drink formula might last decades.

Miscellaneous provisions

This may be the most crucial part of an NDA, as it answers the question, “What happens if there's a breach of contract made by either party?”

Be specific, such as which state laws will be used, possibilities for injunctive relief, and if there are any alternatives to taking legal actions.

Usually, another form of mediation can provide a less expensive, quicker, and often better solution.

Use this space to also include any other provisions of this agreement that may not have been mentioned.

What’s Not Included in an NDA?

What’s confidential, what's not, what happens when confidentiality is violated — it seems like non-disclosure agreements have it all.

True, by its very nature, a non-disclosure agreement contains pretty much everything the parties want.

However, there are some things that even a custom contract can’t legally cover.

This includes matters of public information (court order proceedings, marriage records, etc.), information common to those in the industry and possessed prior to the NDA, or any information developed independently of the relationship.

Getting Down to Business

Non-disclosure agreements are an increasingly popular way to protect trade secrets and other confidential information from spreading to unwanted eyes and ears.

When drafted properly, using detailed definitions and concrete terms, these documents can be a great way to instill confidence among all the involved parties and get your business relationship started on the right foot.