Non-disclosure agreements are commonplace in many commercial settings. Put simply, a non-disclosure agreement is a legally binding contract made between two parties. Under this contract, both parties agree not to share confidential information or other sensitive information with others. Before signing a non-disclosure agreement (NDA), you should consider:
- the importance of an NDA in your commercial context;
- the scope of your agreement;
- the consequences of breaching your agreement; and
- how long you are bound by the terms of the agreement.
By considering the above points, you can ensure that you are entering into a confidential relationship based on mutually beneficial terms.
Why are NDAs Important?
Confidentiality agreements are necessary to prevent employees or other parties from leaking sensitive information to the public. For example, say you were the owner of a business. If someone leaked confidential information about your business to the public, this could be detrimental to the success of your business. Furthermore, it could prevent you from applying for intellectual property protection like patents.
Ultimately, if someone breaches an NDA, the other party can pursue legal action for breach of contract. In this sense, NDAs can be useful in a range of commercial contexts, including protecting:
- your workplace’s trade secrets (any piece of confidential information that is valuable to the business);
- your workplace’s confidential information when management decides to enter into negotiations with a potential business partner; or
- your own ideas when finding different service providers for your startup.
What Is the Scope of Your NDA?
Like any contract, an NDA should clearly set out your obligations. In an NDA, this would principally concern what information is confidential and what is not.
For example, an NDA can prevent you from disclosing financial information, information about business partners and a company’s trade secrets. An NDA can also provide what is excluded from the agreement, such as information you have previously disclosed to the company or public knowledge information.
You should be clear about the scope of your NDA to avoid breaching the agreement. Where terms are vague or you are unsure about their operation, you should immediately seek clarification from your employer. By being proactive, you can ensure that both you and your employer are on the same page.
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What are the Consequences of a Breach?
Of course, you would not be entering into a confidentiality agreement with the express intention of breaching it. However, breaches often arise in unexpected ways. For this reason, you should clarify what the consequences of breaching an NDA are.
Typically, an NDA will clarify what the consequences of leaking confidential information are. The consequences might include:
- an injunction, which can prevent the party in breach from committing further breaches;
- liquidated damages, which can entitle your employer to a specific amount of damages paid at your expense in the instance where you breach the agreement; and
- other legal actions, such as trade mark infringement or breach of fiduciary duty.
The consequences for a breach are typically high in order to deter you from breaching the agreement. Thus, in practice, it is not unusual to find NDAs where the punishment for breach is extreme. Nevertheless, before you sign an NDA, you should make yourself aware of the consequences of the breach and perhaps seek to renegotiate the agreement if you feel as though the punishment is not proportionate to the breach.
How Long Do the Terms of the NDA Bind Me?
One of the most important clauses you should look out for before signing any non-disclosure agreement is the duration of the agreement. An NDA should specify how long the agreement binds you. This will have implications for the type of information you can disclose whilst working for your prospective employer.
An NDA can also affect how you conduct yourself once you leave the place of employment. For example, an NDA will typically oblige you to return or destroy any confidential information you acquired during your employment once you leave the workplace. For this reason, you should be aware of how long you are bound by the terms of the confidentiality agreement to avoid potential breaches.
Key Takeaways
Before signing a non-disclosure agreement, you should consider the commercial context, the information you can and cannot disclose, the consequences of a breach, and how long the information must be confidential.
If you need advice on whether you should enter into an NDA, LegalVision’s experienced commercial contract lawyers can help. Call us on 1300 544 755 or complete the form on this page.
Frequently Asked Questions
A non-compete clause in a contract can prevent you from entering into another commercial arrangement that would compete with your current arrangement. For example, if you begin employment at a tech company, a non-compete clause in your employment contract can prevent you from starting your own tech company during your period of employment.
In instances where information becomes common knowledge, the law deems it to have entered the public domain. When information is in the public domain, this limits your ability to seek intellectual property protection over that information.
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