The Ultimate Guide to Non-Disclosure Agreements

Published March 8, 2024

Non-disclosure agreements are legally enforceable agreements between parties. They are used to guarantee that certain information will remain confidential. They are typically used in a variety of contexts. Business transactions, employment, inventions and patents, real estate, and legal settlements call for them.

If you’re about to encounter an NDA and clueless about them, keep reading. We’ll discuss everything you need to know about them. We’ll have an emphasis on the question and are enforceable. We’ll also discuss what it is, its purpose when you need it, and situations that might make it unenforceable. We’ll also have a designated section on how to create an NDA. Let’s start.

What Is an NDA?

Non-disclosure agreements are legally enforceable contracts. They make a confidential relationship with a person who has sensitive data and a person who will gain access to that data. A confidential relationship means one or both parties are responsible for not sharing that information.

NDAs are also acknowledged as confidentiality agreements, confidentiality disclosure agreements, and non-disclosure contracts. You may encounter one at the start of a business relationship. Also, on large financial exchanges.

These agreements fixate on an individual’s or organization’s information privacy. It varies from other business contracts, such as service or sales agreements. The latter focuses on the terms and conditions of service or transactions.

The Purpose of a Non-Disclosure Agreement

The purpose of a non-disclosure agreement is a two-sided coin. One for confidentiality. The other is for protection. Data guarded by a confidentiality contract can include everything. It is from product aspects to client roasters. Business models, test results, and even press releases or product reviews. An NDA can cover them all.

Furthermore, an NDA crafts the legal framework to protect ideas and information from being stolen. Also, shared with competitors along with third parties. Breaking an NDA agreement will have you facing legal ramifications. These include lawsuits, financial penalties, and even criminal charges. It protects anyone seeking it so that even accidental breaches are guarded.

There are three critical functions of an NDA:

1. Ruling protected information

NDA classifies information by establishing a boundary between what data is confidential and what can be shared. It allows parties to work freely within it.

2. Protecting sensitive data

Signing an NDA is a legal obligation. It becomes the party’s duty to keep sensitive data confidential. Any leak of that intelligence is a breach of contract.

3. Protecting patent rights

Public disclosure of a pending invention can sometimes revoke patent rights. A non-disclosure agreement can protect an inventor as they craft or innovate their new product or concept.

When Do You Need an NDA

Whether you’re eyeing investors, hiring new employers, or seeking new partners and collaborators, at some point, sensitive data must be shared with individuals or entities outside your organization. A non-disclosure agreement guarantees that a company moves forward safely with these processes.

These are five situations that raise the need for a confidentiality contract.

1. Product

When your company enters into a sale or licensing of a product and technology. This calls for ensuring all the data you disclose cannot be shared with third parties.

2. Employees

Employees have the privilege to access confidential and proprietary information. Thus, you need to ensure they cannot share your organization’s vulnerable data while on the job or once they leave.

3. Partners

You need to guarantee that during negotiations with an investor or a new partner, data shared during these talks is guarded.

4. New clients

When onboarding a new client, your firm may become privy. An NDA will protect your organization by ruling which data cannot be shared. It will minimize accidental exposure to legal liability.

5. Mergers and acquisitions

When selling your business, sensitive financial or operations data must be shared. It is so with the buying entity, intermediaries, and brokers. An NDA guarantees that data is protected.

Are Ndas Enforceable?

Non-disclosure agreements are generally acknowledged as legally enforceable contracts. They make for a confidential relationship between parties to guard sensitive information.

The enforceability of NDAs, however, depends on various factors. For instance, they must attain the general requirements of a contract to be enforceable. It includes mutual consent. It has to have consideration. It should interest a lawful object. Finally, it has to have contractual capacity.

Enforcing a confidentiality contract can also be demanding and costly. Yet, despite such dilemmas, it is a critical tool. It is excellent for guarding vulnerable data and trading secrets in many contexts.

Parts of a Non-Disclosure Agreement

All NDAs should include these distinct parts.

1. Identification of parties

Also, acknowledge as parties to the agreement. This section pinpoints the people and entities involved in the non-disclosure contract. It illustrates who the disclosing party and recipient are using names and addresses.

2. Definitions

Definitions lay out the different types of information guarded by the agreement. This part also sets rules regarding how it is handled. It answers the query of what data is confidential.

3. Obligations

This portion answers what happens if the guarded data is shared. It sets out specific behavior expected from each signatory. It also lays out the consequences of failing to exercise the agreement.

4. Scope

A clearly defined scope guarantees an NDA’s enforceability. Using general terms like “proprietary information” isn’t adequately specific. It won’t hold up in a legal setting. The scope should lay out what distinct data the NDA covers.

5. Time frame

Most NDAs do not last forever. Many confidentiality agreements will explicitly state the number of years that vulnerable data must be in secrecy. Suppose it is one with an indefinite time frame. It will still often indicate when the agreement no longer guards data.

6. Return of information

After the conclusion of business between the parties, an NDA may demand that the recipient agree that sensitive data has been returned or destroyed.

7. Exclusions

These are the kinds of information that do not require confidentiality. It might involve public knowledge. It might also be previously disclosed details or information to someone new before entering a business—also, data on financial relationships with a company or firm.

8. Remedies

It illustrates what happens in case of a breach of the confidentiality contract. There are many routes of action or remedies. It may include a restraining order and reimbursement for damages. Also, other actions for breach of fiduciary duty and copyright, patent, or trademark infringement.

What Situations or Circumstances Might Make an NDA Unenforceable?

1. The agreement language is too broad.

Suppose the non-disclosure contract is overly broad or restrictive. It’s more likely that a court will spot issues with it. This is especially true if it’s not distinct in scope or duration.

2. The data is not confidential.

It’s challenging for an entity to convince a court to uphold an NDA against an employee if the data has already been widely disclosed also, if it is public knowledge.

3. The agreement demands the employee to do something illegal.

Such an example is when an employer demands that the employee remain quiet. It is for something that the employee has a legal obligation to report.

4. Wrong party on the NDA

NDA signed with the wrong party. For instance, a trading name as opposed to a legal entity. It could potentially lead to agreement invalidation.

5. Unlimited Duration

Non-disclosure agreements that are not definitive in duration may be ruled unenforceable. It’s vital to come to terms with a reasonable time frame.

6. Unreasonable scope

Suppose the NDA restricts a former employee from using general knowledge or skills in their new job. It could lead to an overly restrictive and unenforceable contract.

7. Violation of public policy or law

NDAs will not be enforced if they harm public policy or law.

Creating an NDA

To create a legally binding NDA, you must employ specific language. It is in cases of defining confidential data, parties, and scope. Broad language that can be interpreted multiple ways may not hold up in a legal dispute. Also, you must be vigilant not to disclose sensitive information they want protected by the NDA before the contract signing. NDAs do not protect previously known data.

There is currently no standard system for NDAs. Organizations have the freedom to create them on their own. Still, here is a general guideline for crafting your non-disclosure agreement:

1. Choose your NDA template
2. Define the parties
3. Define confidential information
4. Specify the purpose of the disclosure
5. Set the duration
6. Enter the consequences of a breach
7. Signature and date
8. Notarization