The ultimate guide to non disclosure agreements: everything you need to know
What is a non disclosure agreement?
A non disclosure agreement is a legally binding contract between two or more parties that ensures that the parties involved are prohibited from sharing any confidential information belonging to the other party. Its primary purpose is to protect sensitive information from being disclosed to unauthorised individuals or entities, ensuring that the information remains confidential and secure.
Why do I need a non disclosure agreement?
Having a non disclosure agreement in place is essential for protecting your business secrets, building trust and maintaining your competitive advantage. We've set out below the key reasons why it is important to use a non disclosure agreement when sharing confidential information, and scenarios where non disclosure agreements are essential.
To keep your sensitive information and intellectual property (IP) confidential
Imagine you've developed a groundbreaking product or a unique business strategy that sets you apart from your competitors. Sharing your confidential information, such as valuable IP, with potential investors, partners, or employees is often necessary, but it also comes with risks. A non disclosure agreement ensures that the recipients of your sensitive information are legally bound to keep it confidential, preventing unauthorised disclosure and protecting your valuable secrets.
Here's a real-life example: Let's say you're a tech startup discussing your cutting-edge software with a potential investor. By having a non disclosure agreement in place, you can confidently share the details, knowing that the investor is legally obligated to maintain confidentiality, reducing the risk of your innovative ideas being stolen or replicated.
To build trust and secure partnerships
Collaborations and partnerships often play a crucial role in fuelling business growth. However, these ventures often entail sharing sensitive proprietary information with third parties. Where this is the case, a non-disclosure agreement is fundamental to cultivating these business relationships while safeguarding your confidential data.
Real-life example: Imagine you're a fashion designer collaborating with a manufacturer to bring your clothing line to life. With a well-drafted non-disclosure agreement in place, you can confidently share your innovative ideas, designs and production techniques. This legally binding agreement ensures that the manufacturer is obligated to maintain the confidentiality of the information you have provided. With a non disclosure agreement, you can mitigate the risk of your unique designs being replicated or leaked to competitors.
To maintain a competitive advantage
Keeping your most valuable information a secret allows you to maintain your competitive edge in the market. By setting clear boundaries and restricting the use of your confidential information, a non disclosure agreement ensures that the strategies and proprietary aspects that set your business apart from rivals remain a secret.
Real-life example: Let's consider a scenario where your company has created groundbreaking technology that's yet to be patented. Sharing this intellectual property with potential partners or investors can be daunting without proper protection. A non-disclosure agreement acts as a safety net, allowing you to share essential details without fear that your invention may be stolen.
What are the different types of non disclosure agreement?
There are different types of non disclosure agreement to suit various business situations.
Choosing the right type of non disclosure agreement depends on your specific business needs and who will be disclosing confidential information. We have listed below the main types of non disclosure agreement to help you navigate which is the right one for you:
One-way non disclosure agreement
Also known as a unilateral non disclosure agreement, this is used where only one party discloses confidential information to the other party. It is commonly used when engaging employees, freelancers or contractors who need access to your proprietary information while maintaining confidentiality.
You can find our fully-customisable one-way non disclosure agreement here.
Our legal experts have also answered the top most frequently asked questions about one-way non disclosure agreements which you can explore via this link.
Two-way non disclosure agreement
Also known as a mutual non disclosure agreement, this type of agreement should be used when both parties have the potential to disclose their confidential information to the other.
It ensures that both parties are bound by the same level of confidentiality and prevents either party from disclosing the other's sensitive information.
You can find our two-way non disclosure agreement here.
To brush up further on your knowledge of two-way non disclosure agreements, our experts have answered the 8 most frequently asked questions.
Multi-party non disclosure agreement
Also known as a multi-lateral non disclosure agreement, for use where you may need to involve multiple parties, such as in complex collaborations or joint ventures.
A multilateral non disclosure agreement establishes confidentiality obligations among multiple entities, providing a framework for sharing information while maintaining each party’s confidentiality obligations.
Choosing the right type of non disclosure agreement
We've created this flow chart to help you determine which is the most suitable type of non disclosure agreement for your situation. Let's make sure your confidential information stays safe while building successful partnerships! Simply follow the steps and find the type of non disclosure agreement that fits your circumstances.
Top tip from our legal experts:
Make sure a two-way non disclosure agreement defines any party that discloses confidential information as the "disclosing party".
If you're presented with a two-way or mutual non disclosure agreement, although it may be called a “mutual” non disclosure agreement, the language used in the agreement may not actually provide protection for both parties. This means that only one party will be bound by confidentiality obligations.
It’s therefore vital to carefully read the non disclosure agreement and make sure it offers the correct protection depending on which party will be disclosing confidential information.
When should I use a one-way non disclosure agreement?
Circumstances where you might use a one-way non disclosure agreement include:
- With employees
Where an employee will be given access to the company's confidential information, it's always a good idea to ensure the employee agrees to keep the company's proprietary information confidential. Non disclosure terms can either be agreed by signing a non disclosure agreement or by including confidentiality terms in the employment contract.
- When engaging consultants or freelancers
When you are engaging external contractors or freelancers who will handle the company’s confidential information.
If you have already signed a non disclosure agreement in this instance, and you’re looking for a consultancy agreement template to finalise the contractual terms of the engagement then click here, or check out our freelancer agreement template freelancer agreement.
- When entering into investor or funding discussions
Where a startup or business sharing sensitive information with potential investors, it is important to ensure any confidential information owned by the company is protected.
Typically only the company shares confidential information in this scenario. However, if the investor will also be sharing confidential information then a two-way non disclosure agreement would be appropriate.
When should I use a two-way non disclosure agreement?
Circumstances where you might use a two-way non disclosure agreement include:
- Product development and collaboration
Where two parties will be discussing sensitive information and/or joining forces with collaborative efforts for product development or research projects.
- Mergers and acquisitions
Where both parties in negotiations for mergers, acquisitions, or partnerships will be exchanging confidential information to evaluate the potential deal.
- Discussions before the provision of services
Where a service provider and potential customer may be entering into discussions providing services to assess if the parties should work together.
For a more in-depth dive into the differences between mutual and unilateral non disclosure agreements, check out this blog.
How to draft a non disclosure agreement
When drafting a non disclosure agreement, there are several essential components that should be included to ensure its effectiveness:
1. Use clear and concise language
Keep it simple; always draft a non disclosure agreement in a clear and concise manner. This minimises the potential for misunderstandings or ambiguities to arise later on.
2. Correctly identify the parties
The non disclosure agreement should clearly identify who the disclosing party is and the receiving party is. This includes the legal names, addresses and contact information of both parties. By clearly identifying the parties and determining which of them will be disclosing confidential information, it becomes easier to enforce the obligations outlined in the agreement.
3. Include a comprehensive definition of confidential information
The non disclosure agreement should include a clear and unambiguous definition of the confidential information that the disclosing party wishes to protect. It is important to note that the definition of confidential information will vary depending on the type of information being disclosed and the nature of the relationship between the parties.
The contract should state exactly what isdefined as confidential information. It should also state what is not considered to be confidential information).
Clearly indicate how long the agreement will last, as this will dictate how long either party will need to carry out its confidentiality obligations.
Typically the length of a non-disclosure agreement spans from 1 to 5 years. However, the term may be indefinite, depending on the nature of the confidential information and if it is reasonable considering the parties' legitimate business interests. For more information about the importance of including the term in a non disclosure agreement, check out these FAQs.
5. Clearly identify the permitted use of the information and any restrictions
The non disclosure agreement should provide guidelines on how the permitted party can use the confidential information. It should specify the purposes for which the information can be used, such as for internal evaluation or decision-making processes.
Additionally, it should include restrictions on the use of the information, explicitly stating that the receiving party cannot disclose or use the information for any purpose that is not included in the contract.
6. Outline each obligation of confidentiality
The non disclosure agreement should clearly set out the receiving party's obligations. This includes obligations such as maintaining the confidentiality of the information, exercising reasonable care to prevent unauthorised access or disclosure, and limiting access to the information to only those who have a legitimate need to know.
The non disclosure agreement should also highlight the receiving party's duty to promptly notify the disclosing party in the event of a suspected or actual breach of the agreement.
7. Consequences of termination
Clearly define the circumstances under which the non disclosure agreement can be terminated. It should also set out a process for what happens after the contract comes to an end, such as returning and/or destroying the confidential information within a certain timeframe.
It's important to note, non disclosure agreements must be drafted in compliance with applicable laws and regulations. Certain types of information, such as information related to illegal activities or public knowledge, will likely be exempt from protection under a non disclosure agreement.
While we've provided an overview of the key clauses to include in your non disclosure agreements above, our legal experts take a deeper dive into their 7 top tips to include in these types of agreements.
Enforcing a non disclosure agreement
A non disclosure agreement is a legally binding contract and a breach of its terms can have serious consequences. In the event of a breach, the disclosing party may seek legal remedies to enforce the non disclosure agreement and also seek damages for any losses incurred.
Legal remedies can include:
Injunctions: the court may issue an injunction, which is a court order that prohibits the receiving party from disclosing or using the confidential information in breach of the non disclosure agreement.
Damages: the innocent party may seek monetary damages to compensate for any financial losses suffered as a result of the breach. These damages can include actual damages, lost profits and any other quantifiable losses.
Specific performance order: in certain cases, the court may order the receiving party to perform specific actions, such as returning or destroying any confidential information in their possession.
Factors influencing enforceability
The enforceability of a non disclosure agreement can be influenced by various factors, including the following:
Clear and unambiguous language: The terms of the non disclosure agreement should be drafted in clear and unambiguous language to avoid any potential misunderstandings or disputes.
Compliance with applicable laws: The non disclosure agreement should comply with any applicable laws and regulations governing confidentiality agreements in the relevant jurisdiction.
Proportionality: The restrictions and obligations imposed on the receiving party should be reasonable and proportional to the nature of the information being protected.
Non disclosure agreements are an important tool to help businesses keep their confidential information and trade secrets safe from their competitors. They play a vital role in protecting proprietary data while cultivating trust and collaboration with partners, employees and contractors.
Throughout this guide, we've covered the fundamental aspects of non disclosure agreements, from understanding what they are and why they are crucial, to exploring the key elements that make up a robust non disclosure agreement template. We hope it has equipped you with valuable insights and knowledge to navigate your own non disclosure agreements and protect your sensitive information effectively.
Create your own non-disclosure agreement using Docue
With Docue, you can prepare your own non-disclosure agreement that is tailored to your business and the type of confidential information that you need to protect.
Docue’s one-way non disclosure agreement and two-way non disclosure agreement templates are fully customisable; all you need to do is answer a series of questions to create a lawyer-grade contract in minutes.
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