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A confidentiality agreement/non-disclosure agreement (NDA) is an agreement two parties enter into in circumstances where either or both parties will disclose confidential information to the other in the course of their relationship. Further, they want to keep that information confidential. NDAs are often used to protect initial conversations between two parties before entering into a more formal agreement or commercial transaction. Confidential information can be incredibly valuable, and it may be difficult to do business without sharing such information. Therefore, it is very common for businesses to enter into NDAs to protect their confidential information. This article will unpack five key benefits of using an NDA.

Five Key Benefits of Using a Non-Disclosure Agreement

1. It Provides Confidence to Share Confidential Information 

If your business or company has lots of valuable confidential information that you are reluctant to share with other parties, you may limit the relationships and business opportunities you can foster. This is because other parties may not have enough information from you to provide any sort of assistance. This may also prevent conversations from progressing. 

For example, suppose you have developed a mobile app that is a novel idea. In that case, you may be concerned about sharing your idea with a developer for fear that they will take your idea and then go commercialise it themselves. 

However, if you do not provide them with enough information about your mobile app, they will be unable to tell you if and how they can assist. Also they will not be able to tell you what their quote to assist will be. Therefore, you will find yourself at a standstill. To avoid this issue, it can be a good idea to use an NDA. An NDA will set out: 

  • what information is confidential to you; 
  • the reasons the other party can use the confidential information; 
  • how long it is confidential for; and 
  • what the consequences will be if the other party breaches their obligations under the NDA.

2. A Non-Disclosure Agreement Ensures Clarity on What Information is Confidential

An NDA enables the parties to define what constitutes ‘confidential information’. Therefore, if you are the party disclosing confidential information, you will want this definition to be as broad as possible. Additionally, it should include any commercially sensitive information of your business, whether or not such information is: 

  • in a tangible form; 
  • marked in writing as ‘confidential’; or 
  • provided orally. 

If you are the party receiving the confidential information, you may want the list to be more specific. That way you know what information shared with you will be considered confidential.

3. It Limits the Reasons a Party Can Use the Confidential Information

You may be providing confidential information to another party for a specific reason. For instance, for them to provide a quote to you to develop the software for your mobile app. However, you may be concerned that the other party will use the information for other purposes. 

For example, they could use market research you have done and sell it to someone else or share your ideas with another client. 

A benefit of using an NDA is that you can limit the reasons the receiving party can use the confidential information. This is usually referred to as the ‘purpose’. Further, the receiving party will only be able to use the confidential information for that particular purpose. The ‘purpose’ could be discussing a possible commercial transaction between the parties facilitating one party providing the other with a quote. Or additionally, for a prospective buyer to do due diligence on a business they are interested in purchasing.

4. It Helps to Set and Enforce the Consequences of Disclosure

An NDA can be useful to set out the parties expectations of how confidential information should be protected. Additionally, to set out what the consequences are of disclosing such information. Setting this out clearly in writing and having both parties on the same page will hopefully limit the likelihood of the other party sharing your confidential information. 

An NDA will often set out that if the receiving party breaches the NDA, the disclosing party is likely to suffer loss and/or damage. Further, that the disclosing party may be able to be compensated for this.

In addition, an NDA usually sets out that the disclosing party will be entitled to apply to a court to get the receiving party to immediately stop sharing the confidential information, to limit the harm caused by sharing it.

5. A Non-Disclosure Agreement Helps to Preserve Key Business Relationships

Finally, NDAs can be important to preserve key business relationships. An NDA provides peace of mind in long term business relationships where confidential information must flow between the parties. So, you know your confidential information is protected, and your business relationship is secure. By putting the expectations in writing, everyone will be on the same page. This can avoid disputes arising between the parties, and keep the relationship strong.

Key Takeaways

Businesses often use NDAs in commercial relationships when they need to disclose confidential information, and they want to make sure such information is protected from further disclosure. NDAs or confidentiality agreements can be useful because they help to manage expectations between the parties by setting out: 

  • what information is classified as confidential; 
  • what each party can do with the confidential information; 
  • how long the confidential information is to be protected for; and 
  • what the consequences of disclosing it are. 

Entering into a non-disclosure agreement may allow you to pursue business relationships, you may have otherwise been reluctant to foster, as well as give you peace of mind when it comes to existing ongoing relationships. If you need assistance with reviewing or drafting an NDA for your business, contact LegalVision’s commercial contracts lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

What is a non-disclosure agreement?

A confidentiality agreement, also known as a non-disclosure agreement (NDA) is where two parties will disclose information to the other in the course of their relationship that they want to keep confidential. NDAs provide guidelines on what information is confidential to you, how it can be used, and the consequences for breaching obligations under the NDA. 

Can an NDA limit the purpose for which the confidential information is used? 

When using an NDA, you can limit the reasons the receiving party can use any confidential information. The receiving party will only be able to use the confidential information for the particular purpose outlined in the NDA.

Can NDAs be used without being in a formal arrangement? 

Yes, NDAs are often used before entering into a formal agreement or commercial transaction to protect initial conversations between two parties. NDAs are common in these circumstances as businesses often have to share valuable information to do business. 

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