How Do Confidentiality Agreements Work?

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Table of Contents

• What is Confidential Information?
• What Information Can a Confidentiality Agreement Protect?
• When is a Confidentiality Agreement Most Useful?
• What Is Included in a Confidentiality Agreement?
• How Are Confidentiality Agreements Structured?
• Key Takeaways

If you are undertaking business that involves sensitive information, you may wish to take out a confidentiality agreement (or non-disclosure agreement also known as an NDA).  A confidentiality agreement outlines the terms under which sensitive information will remain privileged and private. It is helpful to ensure that you can hold another party legally responsible if they reveal confidential information to unauthorised individuals. This article will outline how confidentiality agreements work and explain why they are so important.

What is Confidential Information?

In the context of a confidentiality agreement, the definition of confidential information is relatively broad. It encompasses business ideas and concepts but could go on to protect detailed development plans.

Under Australian law, it is difficult to protect confidential information under specific pieces of legislation. Therefore, a confidentiality agreement can be beneficial to safeguard sensitive information from being revealed to the wrong people.

What Information Can a Confidentiality Agreement Protect?

Not all information can be protected under a confidentiality agreement. A confidentiality agreement will only be able to protect information that has the necessary quality of confidence. In other words, you can’t make someone keep information confidential that is already public knowledge.

However, this does not mean that a confidentiality agreement will only be valid if the information is:

• original;
• novel; or
• inventive.

Instead, the confidential information must be confidential in character, and there must be some basis for its secrecy.

The validity of confidentiality agreements might come into question if the circumstances where someones shares confidential information was not actually confidential. This circumstance must be one where the parties would have understood the confidential nature of the information.

In some cases, parties to a confidentiality agreement will go to great lengths to protect the confidential information. Therefore, if you would like to pursue legal action against a party that has breached your confidentiality agreement, you can do so.

When is a Confidentiality Agreement Most Useful?

A confidentiality agreement is most useful when you wish to maintain the secrecy of certain information that has been shared with specific individuals. Confidentiality agreements are used in a variety of situations:

1. During Negotiations for the Sale of Business

This usually occurs when the vendor lets the prospective buyer conduct due diligence on the business. Therefore, the buyer will investigate the business’ financial accounts and other sensitive business data. If you are looking to sell your business, you may wish to take out a confidentiality agreement to ensure that your business’ information is protected from competitors.

2. During Joint Venture

If you enter into a joint venture with another business, you will usually reveal certain details about each other’s business. This is done to establish the financial viability of joining forces. Furthermore, if you have already become partners with another business, you may need to continue sharing confidential information throughout your partnership. Therefore, a confidentiality agreement will ensure that the other party cannot exploit your business’ sensitive information for their benefit.

3. To Protect a Concept or Idea

If you have an idea for a business, you may need to approach someone for:

• technical assistance;
• financial backing; or
• a partnership opportunity.

Therefore, you may wish to have the other party sign a confidentiality agreement to ensure that they do not steal your idea. However, in practice, investors will not usually sign confidentiality agreements.

4. In Employment Agreements

Sometimes, you may wish to protect your business’ confidential information that your employees will come in contact with. A confidentiality clause within an employment agreement will ensure that employees cannot tell others of this information both during their employment and after the employment has come to an end.

What Is Included in a Confidentiality Agreement?

Confidentiality agreements have a number of standard clauses and provisions. Typically, the agreement will include clauses which specify the:

• names of the parties;
• actual information to remain confidential;
• purpose of disclosing the confidential information;
• recipient’s obligation to maintain the secrecy of the information;
• period of time that the information is to remain confidential;
• notion that if the recipient uses the confidential information for private benefit or in a damaging manner, that they will be breaching the contract; and
• signatures of both parties.

How Are Confidentiality Agreements Structured?

In less formal circumstances, a confidentiality agreement might exist in a letter. However, in formal business arrangements, a confidentiality agreement will likely be included within a contract or deed.

Whether it is in the form of a deed or a letter, both parties and their respective authorised representatives should sign the confidentiality agreement.

Key Takeaways

A confidentiality agreement is an effective way to ensure that parties could face legal consequences if they disclose your sensitive business information. They are particularly useful during:

• the sale of a business;
• a joint venture between different businesses;
• discussions about a new business idea; and
• the course of someone’s employment.

If you would like to draft a confidentiality agreement and need assistance, contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.