Many businesses have to disclose confidential information during their day to day work. Confidential information can be incredibly valuable — it could be a new business idea or information you wish to keep from competitors. It is common for parties to sign a non-disclosure agreement (NDA) before exchanging information. However, it is essential to consider whether an NDA is, in fact, effective and whether it is worthwhile to sign one. This article will explain:

  • when using an NDA will be effective; and
  • how to ensure that it will adequately protect your confidential information.

1. When Should You Use an Non-Disclosure Agreement?

NDAs are widely used to protect initial conversations between parties before they enter a more formal business relationship with a legal contract.

For example, you are launching an app and choosing a developer. You are sharing your plans with a number of developers with the end goal of engaging a developer and entering a development agreement. You will need an NDA to make sure they do not steal your idea and create their own app.

Before you prepare an NDA, make sure the other party is willing to sign it.

For example, if you are raising funds for your startup and are speaking to investors, an NDA may be helpful to ensure your financials are kept confidential. However, investors who routinely discuss investment opportunities may prefer not to sign an NDA.

Once you agree to a formal arrangement with the other party, make sure you have an agreement in place with strong confidentiality clauses which will apply moving forward.

2. One-Way or Two-Way Agreement?

When preparing an NDA, the first thing to consider is whether you will need a one-way NDA or a two-way NDA. If it is a one-way NDA, you will be sharing information, but the other party will not be. Here, the other party will have non-disclosure obligations. If you are the only party disclosing information, a one-way NDA will ensure that you are not unnecessarily required to comply with non-disclosure obligations.

If it is a two-way NDA where both parties are exchanging information, both parties will have non-disclosure obligations. 

3. What Does a Non-Disclosure-Agreement Include?

An NDA will need to include a range of different provisions. Below are some examples of clauses that you may need to include in your NDA, to fulfil a variety of purposes:

Purpose Example Clause
Obligations of the Receiver of Information The receiver is under the following obligations in relation to confidential information:

  • not to disclose it to any third party;
  • use it only for a defined purpose;
  • notify the discloser if it is lost or used in a way that is not authorised; and
  • only disclose it if required for the purpose or if required by law.
Rights Over the Information The receiver acknowledges that the discloser does not assign any ownership of the confidential information to the receiver and that there is no commitment from either parties to enter a formal relationship following initial discussions.
Term of Agreement The parties agree to how long the non-disclosure obligations last.
Compensation The discloser requires an indemnity from the receiver if the agreement is breached.
Dispute Resolution Process Any disputes will be resolved by arbitration.

4. Is a Non-Disclosure-Agreement Effective?

An NDA is a market standard in many industries and businesses often use them when sharing confidential information. An NDA acts as a preventative measure to avoid a receiver from disclosing information.

However, if someone discloses the information and breaches the NDA, the terms of an NDA can be difficult to enforce because:

  • someone may find a way to use the information to their commercial advantage without being in direct breach of the NDA;
  • once disclosed, information cannot be then undisclosed;
  • a receiver will often take steps to hide the breach; and
  • if you chose to consider legal action, it can be challenging to ascertain the compensation you should be awarded. This is especially so if you run a new business seeking funding or collaboration before you launch.

Therefore, before disclosing information, you should conduct due diligence on the receiver to make sure they are unlikely to disclose your confidential information. You should also make sure that your NDA addresses these potential scenarios as much as possible.

For example, you may consider that a university is a reliable receiver because they: 

  • sign NDAs all the time;
  • are less likely to commercialise your idea; and 
  • have a good reputation.

You should also consider what information you disclose. It is best practice only to reveal the information you absolutely need to. 

Key Takeaways

An NDA can be useful as a preventative measure to discourage other businesses from disclosing valuable confidential information. However, if a breach does occur, it could be challenging to reverse the effect of the disclosure as well as demonstrate: 

  • that there was a breach;
  • the origin of the breach; and
  • to determine the value of the damages. 

If you have any questions about whether you need an NDA, contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.

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