NDA Goals & Obligations
Let’s say that you have a great idea that you want to take to the market and you want to work with an investor. Maybe you operate a business and a competitor approaches you about a potential deal. Before saying “yay”, think: NDA. Signing a non-disclosure agreement (“NDA“) is the first step to proceeding with the above types of transactions. Before letting someone “look under the hood”, agree in writing to terms that deal with how the parties will treat what they find.
An NDA is also commonly referred to as a confidentiality agreement because principally, an NDA sets out the parties’ agreed on procedure for the sharing and use of confidential information. Obligations can be one-way (meaning what duties are owed by the receiving party to the party disclosing confidential information) or mutual (meaning the reciprocal duties that the parties owe to each other with respect to each others’ confidential information).
Some argue that an NDA is little more than paperwork getting in the way of progressing with a business transaction. However, an NDA can set the tone and parameters of how the parties will treat each other throughout the life of their business relationship and establishes the processes for the transmission of confidential information, the terms of its use and its return and/or destruction. NDAs (or even confidentiality clauses) are used in a variety of contexts: purchase and sale transactions, licensing agreements for intellectual property, employment and hiring of contractors and dispute resolution.
As with any type of contract, a ‘one size fits all’ approach is rarely appropriate. An NDA should be crafted so that it deals the specific context of the transaction(s) being contemplated and accordingly, the specific goals and obligations that the parties reasonably owe each other. However here are some considerations (among others) that should be captured in an NDA:
- Scope and Purpose: Who should be a party to the NDA? What type of information does the NDA cover and for what purpose? While the context in which the NDA is born relates to a transaction (such as a potential investment) the confidentiality obligations of the parties may be wider in scope than simply the transaction contemplated.
- Who? Who can see the information? Employees? Advisors? Lenders? The NDA should address this issue, as well as the terms of third party disclosure of confidential information.
- Term: How long will the NDA be effective for and how may that period be extended or terminated, and on what terms?
- Exclusions: What information should be excluded from the terms of the NDA? Often, information that was public knowledge (but not because a party breached the NDA) or developed independently.
- Indemnity: What remedies follow should a breach of the NDA occur and at what expense? While the entering of an NDA (much like the larger transaction) will have practical limits on the ability to enforce the provisions and terms on a breaching party (for example, if the breaching party is located outside of the province or country, or if they have limited financial means) often an NDA has very strong language in favour of the disclosing party to allow them to make the breaching party liable for the full cost and consequences associated with a breach of the NDA itself.
The material provided above is for the purposes of assisting parties to discuss the nature of the obligations entrenched in an NDA and what impact they will have on those parties working together going forward.
We in the Corporate/Commercial Practice Group at Keyser Mason Ball, LLP draft NDAs as part of the normal course of our practice. Should you have any questions regarding this or any aspect of your business, please do not hesitate to get in touch – we’re here to help.
You may reach the author at firstname.lastname@example.org or (905) 276-0431.
This article is provided for general information purposes and should not be considered a legal opinion. Clients are advised to obtain legal advice on their specific situations.