NDAs are one of the most commonly signed business agreements, and rightfully so - they ensure that business-critical information stays protected and doesn’t get into the wrong hands.
With an NDA in place, you can enforce legal provisions wherein clients, third-party vendors, employees, or other parties - who have access to confidential information of your company - can’t disclose or misrepresent the same at any given time.
In this post, we’ve come up with key information and checklists that help you:
- Draft foolproof NDAs
- Comprehensively review NDAs shared by third parties, and
- Understand exactly what you’re getting into before signing an NDA
Let’s dig in.
10 Must-have Clauses in an NDA
It's important to remember that while the nature and scope of NDAs may vary, there are some crucial terms and provisions that must be included in every NDA.
- Details of the parties: NDAs often include details on the contract's signatories - the information supplier and recipient.
- Confidential information & its usage: This section specifies what types of information are confidential and how they should be used in great detail.
- Exceptions to confidentiality obligations: This clause lists certain exceptions to confidentiality obligations. These exclusions mainly apply to information made public during a court proceeding or an investigation.
- Term: This clause covers the length of time that the agreement will be in effect.
- Return of confidential information: This segment mandates that the receiving party returns the information and any derivative works and deletes the same from their systems after the agreement's term is up.
- Governing law and jurisdiction: This clause specifies the laws that will apply in the wake of a dispute between the parties and courts that will have jurisdiction to hear the matter.
- Dispute resolution: This provision includes the method or mechanism to resolve disputes.
- Obligation of the parties: This section explicitly spells out the obligations of the involved parties.
- Consequences of NDA breach: This clause outlines the penalties the recipient of the confidential information would experience if they violated any of its terms.
- Right to seek an injunction: This provision enables a party to quickly seek a stay from a court upon detecting a breach.
Also, Read -> Five things to look for in an NDA
Also read: A Quick Introduction to eSignatures
11 Crucial Questions to Ask Before Signing NDAs
The nature of the "confidential information" disclosed between the parties is what matters most when signing an NDA. The term of the NDA, as well as the confidentiality period, are additional considerations.
Below is a simple Q&A exercise that you could ponder whether when drafting an NDA or mid-way negotiating.
Question #1 What is the nature of the NDA?
The scope of the business or the nature of the services determines how the NDA is structured. When both parties are sharing or disclosing information, use a mutual NDA. When any party is sharing information, consider a unilateral NDA.
✔️Pro Tip: Go through every clause of the NDA minutely before signing. Choose whether to employ mutual or unilateral NDA.
Question #2 Was the definition of confidential information adequate?
While examining an NDA, ensure that the party clearly defines the scope of the confidential information. Too general language often limits the ability to communicate powerfully and share knowledge. So, see whether NDA comprises ambiguous language since such terminology could be risky. Perhaps, courts usually deem this vague language to be unenforceable.
✔️Pro Tip: By this time, you should have determined which information is privileged or confidential. In essence, you should be able to identify what is permissible to disclose and what is not.
Question #3 Does confidential information include the necessary exceptions?
See whether you have the required exclusions to what constitutes confidential information. That being said, always ensure that the items on the following are added as the exclusion of confidential information.
- Publicly available data
- Data that's already in the recipient's possession at the time of disclosure
- Data that's legitimately acquired from a third party without any confidentiality obligations
- Data that's independently created by the recipient without using another party’s private data
- Legal or regulatory disclosure obligations
Question #4 Are there any details about the parties in the contract?
It is a good practice to include the details of all parties who will have access to confidential information - be it involved parties or their parent companies and subsidiaries.
✔️Pro Tip: A good NDA specifies strictly between which parties the contract is being signed.
Question #5 How long does the confidentiality obligation last?
The primary goal of signing an NDA is to protect the information shared; as a result, it ensures that the privacy and confidentiality of the information shared is safe and minimises the risk of disclosures. Hence, it is important to have clear clauses on confidentiality obligation in the NDA - how long do you want involved parties to stay obligated to confidential information?
✔️Pro Tip: You can generally shield confidential information for as long as possible. However, NDAs typically have a length of 3-5 years, depending on the nature and the industry sector.
Question #6 What statute governs your NDA?
In case of disputes, there is a high chance that legal action will be initiated. Hence, it is important that all involved parties mutually decide the statute - which country’s or state’s law apply to the NDA and under the jurisdiction of which court will the disputes be resolved?
For instance, the following cases apply to geographies like US and Europe:
- You should familiarize yourself with the Uniform Trade Secrets Act if you're dealing with an American corporation, and the NDA specifies that any legal issues will be resolved in the US.
- The TRIPS Agreement and GDPR specify how the contract and the fines will be handled if you or the firm files a lawsuit in the EU.
✔️Pro Tip: There is no established tradition regarding which party is entitled to the home court advantage under the venue and choice of law clause. If only one party reveals information, that party may contend it should benefit from using its state's statute and the court's location. Using a neutral place where the parties have enough links for the court to support their decision is a common strategy.
Question #7 Does further negotiation need to be conducted?
NDAs are entirely negotiable before signing. Therefore, feel free to propose changes if any conditions in the agreement seem unfair or highly detrimental.
Moreover, a balance between the parties is necessary for any contract to be effective. So try answering any queries you may have and state any reservations you may have.
✔️Pro Tip: Unfortunately, most big businesses have set-in-stone NDAs as part of company policy.
Question #8 What will the recipient do with the confidential information?
Suppose you are the party sharing confidential information. In that case, you will probably be upset if you find out the receiving party is using it for anything unrelated to what you intended when you released it. Look for specific restrictions on how the receiving party might use the protected information.
✔️Pro Tip: As a disclosing party, you must assess the use of confidential information other than the agreed scope or objective. If you’re the receiving party, you ought to reduce the possibility that you will violate the limitations.
Question #9 If the contract ends, must the confidential information be returned or destroyed?
Most NDAs stipulate that the receiving party return or destroy all confidential information to the disclosing party upon termination. It's critical to consider the electronic trail left by email-transmitted content when considering disposal. When it comes to electronic data, parties should discuss how it will be received, stored, returned, and destroyed by the receiving party once the agreement's period is up.
✔️Pro Tip: Look for explanations on what must be done with the other party's confidential information in the event of termination. Further, always agree to a process to be followed regarding the return or destruction of confidential information after termination.
Question #10 What are the available/applicable/appropriate remedies for a breach?
An NDA will typically clarify the repercussions of disclosing confidential information. Possible outcomes include injunctions, liquidated damages, and other legal actions.
Also, to dissuade you from breaking the agreement, the penalties for doing so are frequently severe. As a result, it is common to discover NDAs with stiff penalties for breaches. Before you sign an NDA, you should acquaint yourself with the ramifications of the violation and try to renegotiate the agreement if you believe the penalty is out of proportion to the breach.
✔️Pro Tip: Avoid signing an NDA that does not have penalties specified.
Question #11 Do they contain any peculiar terms?
Additional confidentiality provisions, such as non-solicitation, jurisdictional, and types like mutual NDAs, should be carefully read, understood, and if necessary, discussed with legal counsel.
✔️Pro Tip: Look for these clauses in your NDA -
• Liabilities: It is a good practice to agree upon the liabilities of each party before signing an NDA. This clause not only will help in preventing unjust legal legal actions but also in resolving disputes and settling damages quickly.
• Alternative Dispute Resolution: In case of disputes, ADRs such as arbitration and mediation can be far more affordable and reasonable than seeking legal action in courts.
Additionally, here are a few extra points to keep in mind when dealing with NDAs:
- Are warranties, disclaimers, and limitations of liability addressed?
- Does each party retain control over its intellectual property?
- Would it be necessary to include a clause that prohibits reverse engineering?
- How are disputes resolved?
A Checklist for Reviewing NDAs
If you have answered the above questions and want to ensure your NDA finally protects your business, run through this NDA checklist right away.
- Signing Parties: Identify exactly which entities are bound by the terms of the agreement. Use the full legal names of all individuals and organizations.
- Type of NDA: NDAs can take several formats, including
- Unilateral: One party (the “disclosing party”) releases confidential information to the other party (the “receiving party”).
- Bilateral: Both parties agree to exchange confidential information with each other.
- Multilateral: Three or more parties anticipate some kind of sharing agreement for confidential information between all of them
- Definition of Confidential Information: This is one of the most important sections of the document. You need to specify exactly what you consider “confidential information” so that the terms of the agreement are valid. For example, a restaurant’s definition of confidential information might include lists of customers, payment card data, recipes, and financial reports. You must also exclude certain information from this definition, such as information that’s already public or that the recipient already has.
- Stated Purpose: The document should explicitly say for what purposes information is being shared and restrict its use to only the provided reasons. For example, if two companies are considering a merger, then the confidential information that they share (such as financial reports) should be used only for each party to make the final decision about the merger.
- Confidentiality Safeguards: The disclosing party should denote whether the information that it sends to the receiving party is confidential or not. The receiving party must take reasonable measures to protect the confidentiality of the information, such as strong IT security. In addition, the disclosing party may wish to take certain measures, such as audits, to ensure that the receiving party is not inappropriately sharing the information.
- Start and End Dates of the Partnership: Your NDA can’t take effect if you never specify the agreement’s start or end dates. The start date should be on or before the day that the parties began to exchange confidential information.
- Length of Time for Secrecy: If your partner can spill the beans immediately after ending the business relationship, your NDA won’t be very effective. Most NDAs remain in force for several years after the relationship concludes, but this may vary depending on what type of information you share. Confidential information about certain technologies may be worthless after a year or two, while other information remains valuable for much longer.
- Disclosure of the Agreement: Some NDAs are self-referencing - they prohibit the signers from acknowledging that they’ve even signed the document. Decide whether you want to add such a clause.
- Jurisdiction: An NDA is useless if it’s not valid in the jurisdiction in which it’s meant to take effect. You should clearly define which city or state will handle disputes and legal cases.
- What are the conditions that lead to the agreement’s termination? What happens if any party wants to leave early?
- How will the parties return confidential information to each other?
- What are the receiving party’s obligations to the disclosing party once the agreement is no longer in effect?
- Injunction: If the receiving party plans to breach the NDA, then monetary damages may not be enough compensation. Including an injunction clause allows the disclosing party to get a court order to stop the disclosure of confidential information.
- Remedies: The costs of a breach can be devastating for the disclosing party, up to and including the closure of the business.
- What are the penalties, financial or legal, for disclosure of confidential information? Do they vary depending on whether the breach was accidental or intentional?
- Are there penalties for early termination?
- Non-Compete Clause: In addition to an NDA, many disclosing parties may want the receiving party to sign a non-compete agreement as well. This may be a separate document or included as part of the NDA. The non-compete clause prohibits the receiving party from using confidential information to go into business against the disclosing party or hiring any of the disclosing party’s employees.
-> How to use the checklist?
The most critical components to include in an NDA are listed, along with an explanation of their significance. Check off each item on the checklist before sending an NDA to the recipient, or figure out why it's not essential in your circumstances.
Automating NDA Lifecycle with CLM Software
After implementing business contracting for global customers, we discovered that NDAs usually make up the majority of contracts stored in a company's repository. As a result, the management of your NDA must be optimized and given the utmost importance.
Furthermore, there are typically seven steps in the NDA management process: creation, negotiation, collaboration, approval, signing, tracking, and renewal. By automating your NDA management, you give your enterprise hundreds of worthwhile hours each year to work on other projects. With the help of standardized NDA templates, AI-powered negotiation tools, and electronic signatures, a contemporary CLM can automate the entire NDA lifecycle.
Bringing it all together
So what's taking you so long? Start using an internal NDA template or work on a third-party NDA with SpotDraft, a centralized and collaborative CLM tool for all teams. Let us show you how it works! Request a demo today.