The value of a non-disclosure agreement in keeping pre-contract negotiations confidential
While the media focus has been on their questionable use in cases of sexual harassment and bullying, non-disclosure agreements can be very valuable in a variety of legitimate business situations.
Dermot Callinan, a corporate and commercial specialist with Myers & Co Solicitors in Stoke-on-Trent explains how the use of a non-disclosure agreement provides essential protection of commercial information when commencing discussions about any sensitive business deal, such as a company acquisition or disposal, a joint venture or merger, licensing or outsourcing arrangement.
At the start of negotiations, it will be necessary to determine how confidential information can be exchanged with a view to achieving an agreement. Often this information is confidential or commercially sensitive and if it is incorrectly utilised or disseminated to an unknown third party it can have serious consequences. If you are the party providing the information it may undermine your commercial edge, meanwhile if you are the receiver of the information and it is incorrectly disseminated it may expose you to unnecessary litigation.
From the prospective of the party releasing the information another benefit of a non-disclosure agreement is the control that can be utilised when the information is misused. For example, if it becomes apparent that the party receiving the confidential information has no intention of completing an acquisition or entering a trading relationship but is merely using the information for its own commercial advantage. The owner of the information can take steps to protect their position by triggering the termination provisions, potentially seeking an action for breach of contract or an injunction for the most serious cases.
Whether you are the party giving the information or receiving the information, it is beneficial to have a bespoke non-disclosure agreement which is tailored to the particular circumstances.
Do you need a mutual or unilateral NDA?
Broadly speaking, there are two distinct approaches for the drafting of a non-disclosure agreement:
- a mutual agreement where both parties agree to be bound by the confidential terms; or
- a unilateral agreement where one party is bound by the confidential terms for the benefit of the party who is in possession of the confidential information. Often the prospective party receiving the confidential information will need to take a commercially pragmatic view on adopting the burden of a unilateral agreement against the benefit of receiving the confidential information to enable them to understand the business in which they may be collaborating or transacting with.
Defining the confidential information
It is crucial you consider carefully your objectives and the format of the agreement before you instruct a solicitor to commence with the drafting of the document so that you can ensure that it represents your intentions and reflects the scope of the information which is being protected.
If you are the owner of the confidential information, you will want to define the concept of ‘confidential information’ in extremely broad terms with a view to ensuring that your position is fully protected. From an owner’s perspective it could include any information conveyed to the receiving party.
In contrast, if you are being given access to the information you may seek to restrict the extent of the phrase ‘confidential information’ to ensure that the scope of the obligations is not excessive.
Ultimately, both parties need to be pragmatic about the scope and your solicitor will be able to find the appropriate middle ground.
Who will be bound by the NDA?
You will need to negotiate who can access the confidential information.
In the event of a business sale or purchase, both a seller and purchaser will be keen to disseminate the confidential information flowing under the non-disclosure agreement with their professional advisers such as accountants, solicitors and technical support teams.
A similar approach arises where the non-disclosure agreement is utilised in anticipation of a joint venture or an outsourcing contract. In this case, aside from enabling professional advisers to review the confidential information, the party receiving the material may also wish to discuss the proposed scope of work with their sub-contractors and supply chain to ensure that it is priced correctly, and any key risks are identified and manged.
To ensure that confidentiality flows down to third parties most receiving parties to such information will need to cascade the obligations to third parties by requesting they enter into a like-for-like agreement or at the very least confirm they understand the nature of the agreement.
How long will the NDA be in force?
The timescale in which the agreement remains valid is often at the discretion of the parties. Ordinarily it is common to see a non-disclosure agreement with a termination provision which is either triggered by virtue of a transaction progressing to completion or by the parties expressly or implicitly agreeing to stop the exercise of disclosing information.
In a situation where the parties decided to enter into a formal agreement, such as an acquisition or a contract, then the final transactional documentation will often contain bespoke confidentiality clauses. It is beneficial for parties to consider carefully the larger picture in terms of the intention of the parties and discuss this with their solicitor before the drafting and negotiations are commenced.
The non-disclosure agreement will often contain a provision for what should happen to the information if the transaction does not complete. Often the information collated under the agreement may need to be returned. Alternatively, the receiving party may need to confirm that they have destroyed it. Both parties may wish to include specific provisions in respect of this.
For advice on the use of a non-disclosure agreement in advance of sensitive corporate or commercial discussions, please contact Dermot Callinan on 01782 525010 or email firstname.lastname@example.org.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.