What should be included in a confidentiality agreement? 7 top tips from lawyers
When do you need a confidentiality agreement?
Confidentiality agreements are essential when you need to share valuable information about your business or idea with another party. The main purpose of a confidentiality agreement is to prevent certain types of information from being leaked to a third party. Here are some common scenarios where confidentiality agreements are necessary to ensure your confidential information is protected:
Presenting an invention or business idea
When sharing your innovative concepts with potential partners, investors, or distributors, a confidentiality agreement ensures that your ideas remain confidential and cannot be used without your consent.
Ahead of mergers and acquisitions
When disclosing financial, marketing and other sensitive information to prospective buyers, a confidentiality agreement safeguards your proprietary data from being misused or shared without permission.
Showcasing new products or technologies
When demonstrating your latest product or technology to potential buyers or licensees, a confidentiality agreement prevents unauthorised use or disclosure of your valuable intellectual property.
Engaging service providers
When engaging the services of companies or individuals who may have access to sensitive information, such as customer data or trade secrets, a confidentiality agreement ensures the protection of your confidential information.
Employee access to proprietary information
If employees have access to confidential and proprietary information as part of their job responsibilities, a confidentiality agreement sets clear expectations and obligations regarding the handling and protection of such information. Any contractors, consultants or freelancers should also be bound by confidentiality terms if they will have access to a company's sensitive information.
Is a confidentiality agreement always necessary?
It's crucial to consider the specific circumstances and parties involved before deciding whether a confidentiality agreement is necessary. A general rule is - if you will be disclosing information that you wouldn't want to fall into the wrong hands, then make sure you enter into a confidentiality agreement.
It's important to note that confidentiality agreements may not be suitable for all situations. For example, if information that you are disclosing is already in the public domain or has been disclosed by a third party, then a confidentiality agreement may not be necessary.
Do you need to simple confidentiality agreement template to protect your sensitive information when chatting with third parties? We’ve listed below the different forms of confidentiality agreements to help you choose.
Most common types of confidentiality agreements
Confidentiality agreements between two parties come in two forms. The type of confidentiality agreement will be dependent on which party will be disclosing confidential information. These include:
Mutual confidentiality agreements
Mutual confidentiality agreements are used when both parties have the potential to share confidential information. This format ensures that both parties are bound by the same obligations of confidentiality and non-use. However, it's important to consider whether a mutual agreement is necessary if you do not anticipate receiving confidential information from the other party.
You can find Docue’s mutual confidentiality agreement template here.
One-way confidentiality agreements
Non-mutual or one-way confidentiality agreements are used when only one party will be disclosing confidential information. In this scenario, the disclosing party is protected by the agreement, while the receiving party must ensure maintain the disclosed information is kept confidential.
You can find Docue’s one-way confidentiality agreement template here.
When selecting the appropriate type of agreement, it's crucial to consider who will be sharing confidential information, and the nature of the information being shared.
Top tips: 7 key terms to include in a confidentiality agreement
Now you’ve selected the type of agreement that you need; let’s dive into our most valuable tips when it comes to preparing a confidentiality agreement template. Creating an effective confidentiality agreement doesn't have to be complex or lengthy. In fact, the best agreements are often concise and straightforward.
Here are our top tips to consider when drafting a confidentiality agreement:
1. Ensure the parties are identified and defined correctly
Clearly identify the parties involved in the agreement at the beginning of the document. If only one party is disclosing confidential information, they can be referred to as the "disclosing party," while the recipient of the information will often be referred to as the "receiving party" or the "recipient."
Top tip: Always check the language used in the confidentiality agreement to define the party that will be disclosing the confidential information. Although the title may indicate that the other party have given you a mutual confidentiality agreement template, if only one specific party has been defined as the “disclosing party”, then it is likely that it is a one-way confidentiality agreement, which only offers protection to the party defined as the disclosing party.
On the other hand, if the language in the contract defines the “disclosing party” as any party that discloses confidential information under the confidentiality agreement, then it is much more likely that it is a mutual confidentiality agreement.
It's also important to consider whether any other individuals or companies may be party to the agreement, such as related or affiliated companies, partners or agents. If so, ensure that the agreement covers those third parties as well.
2. Carefully define confidential information
What information are you seeking to protect? You should ensure that the confidentiality agreement defines exactly what is considered to be confidential information. You can specify whether it includes any information, only written information marked as "confidential," or even oral information. Striking a balance between a broad definition to protect your sensitive data and a clear identification of what can or cannot be used by the recipient is vital.
Top tip: When you’re dealing with information that is verbally communicated, you may wish to consider requiring the disclosing party to also give written confirmation that certain information given verbally is confidential. Its always easier to prove that a certain piece of confidential information is confidential if you have clearly marked it in writing.
3. Clearly outline the scope of the confidentiality obligations
What's the purpose of the disclosure? Your confidentiality agreement should ensure that the party receiving the confidential information only uses the information for the specified purpose. This is sometimes defined as the "permitted purpose" in confidentiality agreements.
The primary obligation of the recipient is to ensure the disclosed information remains confidential and is not used for any reason outside of those specified in the contract.
Top tip: If you're the party disclosing information, include proactive terms in your confidentiality agreement to outline the preferred steps or measures the recipient must take to keep the confidential information a secret. Such as limiting access to a few authorised individuals within their organisation on a need-to-know basis, or multi-factor authentication to be used when accessing the information.
4. Exclusions from confidentiality obligations
Although certain information may be defined as confidential, certain types of information by its very nature may not be confidential. For example, if the information is already public knowledge, you can't claim that this information is "confidential".
Top tip: In addition to identifying when confidential information needs to be kept confidential, it's also important to include exclusions from the confidentiality obligations to address situations where it would be unfair or difficult for the recipient to keep the information confidential. For example, common exclusions include:
information that is already known to the recipient;
information that is already public knowledge;
information that was independently developed by the recipient before the date the confidentiality agreement was signed; and/or
information disclosed by a third party with no duty of confidentiality to the disclosing party.
Additionally, it is also common to include a provision that allows the recipient to disclose information if required by law (for example, if required by a court), provided they have given prior warning to the disclosing party.
5. Clarify the term of the confidentiality agreement
How long will the confidentiality agreement last? You should ensure that you specify the length of the confidentiality agreement, known as the "term".
Without a clear term, the parties' confidentiality obligations may last forever. While some companies may request confidentiality obligations to have indefinite terms, it may be more practical to agree upon a specific time frame.
Top tip: When drafting or reviewing a confidentiality agreement, always specify how long the parties will be bound by the confidentiality obligations. A common range for confidentiality agreements is 2 to 5 years. However, the specific terms will always be dependent on your circumstances and the nature of the confidential information being shared.
In cases where companies heavily rely on their trade secrets, it is common for them to request longer or even indefinite terms in a confidentiality agreement if an earlier disclosure could potentially harm their business. For instance, if companies like McDonald's need to share their burger sauce recipe or Coca-Cola needs to disclose its secret formula with another company, it may be reasonable to seek a longer term of confidentiality to safeguard their legitimate business interests.
6. Include a governing law and jurisdiction in case of dispute
The governing law clause should specify which jurisdiction's laws will govern the confidentiality agreement. This will ensure that each party understands which legal framework will apply to any disputes or issues that may arise in relation to the contract.
Top tip: Ensure that any disputes related to the confidentiality agreement are exclusively resolved within your city or jurisdiction. Opting for a foreign jurisdiction might lead to complications, especially if you're unfamiliar with its legal system. Additionally, this could present logistical challenges, potentially making the resolution process more complex (not to mention the unwanted cost and efforts required to travel!).
7. Additional terms to protect your business
Depending on your situation, you also may want to consider additional provisions to further protect your interests. Here are a few ideas:
Employee non-solicitation: Have you ever had concerns that another company that you’re in discussions with may think about poaching your best talent? If the other party will be coming into contact with your employees, you can include a clause preventing them from soliciting or hiring your employees for a reasonable period.
Right to seek an injunction: It's always a good idea to include a clause in your confidentiality agreement that grants you the right to seek injunctive relief, allowing you to obtain a court order to prevent the other party from breaching the agreement. This provides an additional layer of protection beyond monetary damages. For more information about remedies available to the parties to a confidentiality agreement, check out this guide.
No automatic rights granted: Just because you're entering into discussions, this shouldn't automatically mean that you'll be granting any additional rights or going into business together. For this reason, it's also a good idea to clarify in the agreement that sharing confidential information does not grant the recipient any rights to the other party’s ideas or guarantee that the parties will enter into a deal following the discussions.
Confidentiality agreements are essential for protecting your valuable information and ensuring that it remains secure when shared with others. By including essential elements such as identification of the parties, clearly defining confidential information, outlining the scope of confidentiality obligations, specifying exclusions and establishing the term of the agreement, you can create an effective confidentiality agreement that protects your interests.
Build trust with third parties by harnessing the power of Docue
Each template contains lawyer-drafted guidance notes to help you every step of the way. Once you have completed your confidentiality agreement, you can send it for e-signature and store the contract securely in Docue’s handy storage vault.
So what are you waiting for? Try Docue today and see just how easy it is.
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