What Is A Non Disclosure Agreement (Explained: All You Need To Know)

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What Is A Non Disclosure Agreement

A non-disclosure agreement, also known as NDA, is commonly used in business to protect confidential and sensitive business information. 

A non disclosure agreement is a legally binding contract. 

Its primary purpose is to allow a party or parties to share sensitive information within legally defined parameters in such a way that the receiving party does not share it with others. 

Probably one of the most common types of agreements signed by businesses is non disclosure agreements.

When a non disclosure agreement benefits both parties in the contract, we’ll refer to it as a mutual non disclosure agreement. 

When it benefits only one party, we’ll refer to it as a non disclosure agreement or a unilateral non disclosure agreement.

For example, employees are usually asked to sign confidentiality agreements to prevent the employer’s private business information from being released. 

Companies entering into a partnership or joint venture will execute non disclosure agreements to protect their confidential information.

Types of Non-Disclosure Agreements

There are three types of non-disclosure agreements: mutual, non-mutual, and multilateral non disclosure agreements.

Mutual Non-Disclosure Agreement

Mutual non-disclosure agreements are commonly referred to as bilateral NDA. 

These agreements protect both parties when sharing private data. 

The contract is signed to prevent the other party from using and sharing the information. 

These agreements are common between trading partners, in mergers and acquisitions, and joint ventures, and many other business dealings.

Unilateral Non-Disclosure Agreement

Non-mutual or unilateral non-disclosure agreements are when one party obligates itself to protect the confidential information received from the other party. 

These contracts are used when companies are required to divulge confidential data to another party like a vendor, supplier, client, shareholders, employees, customers, partners, and advisors.

Multilateral Non-Disclosing Agreements

Multilateral non-disclosing agreements are those contracts that include more than two parties. 

The primary purpose of these written commitments is to prevent all parties involved from sharing or using other parties’ sensitive information. 

These agreements are more prevalent in complex negotiations and commercial transactions involving many parties. 

For instance, a multilateral non-disclosure agreement can be signed between several companies joining forces to bid on a public project.

Advantages of Non-Disclosure Agreements

There are many advantages of having a non-disclosure agreement. 

Keeping sensitive information about your business private is the primary benefit. 

Patents, financial data, suppliers, negotiations, business plans, and more can be protected from becoming public, business competitors, and other interested parties.

Every company has information that it considers private, sensitive, or proprietary.

As a result, using a non-disclosure agreement, companies can disclose their information to other parties with the right level of legal protection.

An NDA is an effective mechanism to keep sensitive information confidential. 

Another key advantage of non disclosure agreement is that it defines what is considered a breach of the agreement and the consequences.

When the parties contractually determine what they consider confidential information, what is prohibited, and what happens if there’s a violation, there’s more legal clarity as to the consequences of a breach.

Disadvantages of Non-Disclosure Agreements

Non disclosure agreements also have some disadvantages. 

One main challenge in executing non disclosure agreements is to operationalize the obligations in the agreement.

If the agreement is very broad and imposes strict obligations on a party to preserve confidential information, then that party must ensure that it complies with its obligations.

Operationalizing non disclosure agreement processes can be a costly venture for businesses.

Another important disadvantage is that signing non disclosure agreements can take long and result in lost business opportunities.

Companies are looking to be as agile as possible and take advantage of opportunities quickly.

However, negotiating a non disclosure agreement may require the services of lawyers and many internal stakeholders resulting in delays.

Another disadvantage is that the non disclosure agreement can potentially deter some business partners, employees, contractors, or others from doing business with your company.

The reason this could be the case is that the obligations are too strict or that the non disclosure agreement imposes too many obligations on them leading them to fear signing the contract.

Non Disclosure Agreement Examples

Let’s look at a few examples of non disclosure agreements.

Company-Contractor

It’s common for companies to use this type of agreement to prevent contractors from disclosing private information. 

The primary reason for using a company-contractor non-disclosure agreement is to stop contractors from divulging vital information that could benefit competitors. 

A company-contractor non-disclosure agreement can also include other provisions such as non-competition clauses. 

Remember that contractors are independent workers and have more autonomy than the company’s workers. 

Companies create NDAs to stop them from sharing information that could prejudice the company. 

Inventors-Intermediaries

Commonly, inventors create unilateral non-disclosure agreements to secure their inventions from being shared, used, or patented by evaluators. 

These agreements are good mechanisms for preventing intermediaries from discussing the inventors: 

• Customer information
• Company operations
• Service data
• Accounting reports
• Intellectual property

Employer-Employee

Most company workers are required to sign a non-disclosure agreement. 

These contracts are practical for prohibiting employees from sharing, using, and divulging sensitive data, such as:

• Technical info
• Supply sources
• Business plans
• Pricing strategy
• Trade secrets
• Advertising, merchandising, and marketing information
• Operation mechanisms

Vendor-Buyer

It’s a common practice for vendors to prevent buyers from disclosing private information known during the product or service transaction.

Typically, a buyer can’t share the following data:

• Financial and internal information
• Seller’s proprietary rights
• Manufacturing process
• Technical and scientific data

Non Disclosure Agreement FAQ

Does A Non-Disclosure Agreement Protect all Information?

No, there is some information that an NDA does not protect. 

Public records, such as company contact information or SEC filings, are not included in non-disclosure agreements. 

Courts can view the extension of a confidentiality agreement in different ways. 

For instance, if the data included in the contract is disclosed in another way, such as a court matter or subpoena, the provisions of the agreement may not be enforced against such information. 

Also, the parties can contractually exclude certain types of information from the meaning of conflidential information.

Recommended article:

• What is initial disclosure

How to Effectively Draft a Non-Disclosure Agreement

Writing non disclosure agreements that provide the right balance between doing business and legal protection is ideal.

Some business relationships require less or more confidentiality than others. 

An effective NDA must include the following information:

• Parties bound by the contract
• Sensitive information that a party cannot disclose
• Information that each party can divulge to others
• Duration of the agreement
• The geographical location of the contract
• Consequences of revealing, using, or sharing protected data by the NDA

The parties can include other provisions in a non disclosure agreement, but it’s best to keep the agreement simple and to the point.

What Could Happen If You Breach a Non-Disclosure Agreement?

Every state has its own laws and statutes relating to the consequences of breaching a non-disclosure agreement. 

Typically, when a party breaks a non disclosure agreement, the penalties are determined by the agreement itself.

Otherwise, the relevant state law will govern the breach of the agreement. 

Sometimes when a party is aware of a non-disclosure agreement violation from another party, they might send a cease and desist letter to stop the conflict from escalating. 

However, legal actions are filed in some cases to prevent further losses and compensate a party for the agreement violations. 

It’s possible for all parties involved to agree without taking legal action even though lawsuits for breaching non-disclosure agreements are prevalent to compensate for damages. 

The most common penalties for a non-disclosure breach involve financial compensation and rulings from a court ordering the breaching party to cease its breach. 

Penalties of financial compensation are usually determined in the agreement, which can include: 

• Compensatory damages that are specified in the agreement’s terms
• Restoration of business losses 
• Payment of legal costs associated with the breach of contract lawsuit 

Recommended article:

• What are compensatory damages

What Happens When You Sign a Non-Disclosure Agreement?

You’re given access to sensitive information if you are requested to sign a non-disclosure agreement. 

This usually occurs:

• When you start a new job
• Begin a work contract
• Embark on an investment opportunity
• Negotiate a joint venture
• Become a business partner
• Acquire a company 
• Merge with a business

What Are The Elements of a Non Disclosure Agreement?

The non disclosure agreement typically has the following elements: 

• Identification of parties
• Confidentiality obligations
• Scope
• Penalties
• Exclusions
• Time frame
• Remedies
• Governing law and venue

Make sure you understand the terms of the non disclosure agreement before signing it. 

Recommended article:

• What are liquidated damages 

How Long Does a Non-Disclosure Agreement Last?

How long a non-disclosure agreement lasts depends on its purpose. 

Usually, timeframes can last between 12 and 120 months. 

But it’s determined by the type of sensitive information you want to keep confidential. 

In some cases, the parties will include a perpetual obligation to maintain the information secret or until certain events take place (like the information going into the public domain).

How Much Does a Non-Disclosure Agreement Cost?

Most of the time, non-disclosure agreements are affordable and cost-effective. 

However, it all depends on the complexity of the contract. 

Generally, you can expect to pay between $200 and $2,750. 

In complex commercial transactions, the costs can go up even higher if the agreement includes other protective terms and conditions.

Takeaways 

So there you have it folks!

Non-disclosure agreements are essential in protecting sensitive and valuable information shared by businesses with employees, business partners, investors, and others. 

A well-drafted lawsuit can prevent costly lawsuits between the parties and provide them with peace of mind when doing business with one another.

Non-disclosure agreements are affordable, cost-effective, and legally binding. 

You can determine what is considered confidential information, what the parties can do with the information, and what happens when there’s a breach.
Now that you know what a non disclosure agreement is all about, good luck with your research!

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