Non-disclosure agreements

Developing a unique product or idea can often be crucial to the success of a new business.

Sharing new knowledge and original work which you intend to use commercially requires a high level of mutual trust. It is essential that you consider confidentiality before approaching another company or individual when seeking to develop your ideas. The UK law of confidentiality is the right to prevent disclosure of confidential information acquired in confidential circumstances.

A non-disclosure agreement (NDA), also known as a confidentiality agreement, is a legal contract between you and another party not to disclose information that you have shared for a specific purpose.

This guide explains NDAs, their key terms and their impact. The guide also highlights issues that you need to bear in mind when preparing and signing an NDA.

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What is a non-disclosure agreement?

A non-disclosure agreement (NDA), also known as a confidentiality agreement, is a low-cost way to protect your business’ ideas.

An NDA is a legal contract between you and another party. Typically, you agree to disclose information to them for a specific purpose, while they agree not to disclose that information to anyone else. This allows you to share your trade secrets with business partners while preventing them from passing this information on.

For example, you may have come up with a product design and need to get an estimate from a manufacturer of how much it will cost to make. An NDA can ensure that your partner does not pass details of your idea to one of your competitors.

As well as using NDAs with your clients, suppliers, resellers and advisers, you can also use these agreements with your employees and with journalists to whom you want to give a ‘sneak preview’ of financial, technical or new product information.

NDAs can cover:

• trade secrets – eg a formula, programme or process
• technical drawings and designs
• mathematical and chemical formulae
• business plans
• customer and prospect lists

Information qualifies as a trade secret or confidential when it is not known in the public domain and is valuable only as long as it remains secret or confidential.

NDAs between you and public bodies need to be carefully considered because any information that you might provide may be disclosed under the terms of the Freedom of Information Act 2000. This gives anyone the right of access to information held by public authorities. Read about the Freedom of Information Act on the Ministry of Justice (MoJ) website- Opens in a new window.

If you need to approach potential business partners, have a clear idea beforehand of what you want to share with them – and stick to it. This minimises the risk of breaches of confidentiality.

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Types of non-disclosure agreement

A non-disclosure agreement (NDA) is a legal contract between you and another party not to disclose information you have shared for a specific purpose.

This allows businesses to approach potential partners, suppliers, consultants and customers with their idea, knowing that the other party is legally forbidden to pass on that information. These agreements can be tailored to your requirements.

They can be used to:

• share intellectual property
• share commercial or trading information
• formalise a relationship, eg between an employer and employee

NDAs for employees

Current and former employees are responsible for most breaches of confidentiality. Employees are under an implied duty not to use trade secrets in a manner that will harm your business, but it is best to get this in writing and to specify to the employee exactly what is confidential. Equally, you should ensure that the NDA makes provision for when the employee leaves your business.

Other types of NDAs

• A precedentconfidentiality agreement is used for mergers and acquisitions. If a company wants to buy your business, it will want to look at your books and assets. An NDA can provide an element of protection for your confidential information and trade secrets if the prospective buyer pulls out of the deal.
• If you don’t know exactly what information you will need to disclose during a commercial relationship, you can still use an NDA. It is a good idea to classify as confidential any information that will be disclosed later, so that the NDA still applies.

One-way and two-way NDAs

• A one-way NDA is used when only one business is sharing information and the other agrees to keep it confidential.
• A two-way NDA is used when both businesses are sharing confidential information with each other and want to be sure that neither will disclose their trade secrets.

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Ways to prepare a non-disclosure agreement

Non-disclosure agreement (NDA) templates can be bought off the shelf, allowing you to adjust them for your needs. This is inexpensive and the template can be reused.

You can:

• Buy an NDA from the CompactLaw website- Opens in a new window. There are many other websites that offer similar services.
• Download an example of an agreement [opens in a new window].

If you are dealing with a public body that is covered by the Freedom of Information Act 2000, you can read more about the Freedom of Information Act on the Ministry of Justice website- Opens in a new window.

If an NDA is flawed, eg the definitions are not specific, it won’t provide enough protection for you or your business. You should consider asking a lawyer to draw up a bespoke confidentiality agreement for added protection.

Find a solicitor on the Law Society website.

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Key non-disclosure agreement terms

Certain terms are likely to crop up in non-disclosure agreements. It is a good idea to understand these terms and their definitions:

Confidentiality – a legal principle that maintains secrecy between parties.

Owner or discloser – the name of the person, organisation or business disclosing the information.

Recipient – the name of the person, organisation or business that is receiving the information and that is responsible for ensuring its confidentiality.

Statement of reasons – a short paragraph defining the context in which the information will be disclosed and why the parties want to make the information the subject of a contract.

Subject – the information and documents that will be the subject of the confidentiality agreement.

Penalty clause – this is an optional way of fixing an amount of compensation that the owner or discloser is paid if the recipient breaches the agreement.

Confidentiality clause – this is an optional clause that requires both parties to keep the existence of the confidentiality agreement a secret.

Term of agreement – how long the obligations of the contract last for.

Download information about confidentiality and a sample agreement [opens in a new window].

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Creating a non-disclosure agreement

A non-disclosure agreement (NDA) could suit you if you want to approach industry contacts such as a potential buyer, supplier, customer or partner.

In the agreement, it is a good idea to specify:

• how the information can be used
• any restrictions on the use of the information you provide, eg preventing the recipient from making copies
• that the owner retains the intellectual property rights, copyright or possible patents

The key clauses will be those detailing:

• protection against the copying or retention of confidential information
• protection against disclosure of information not already in the public domain
• a remedy, eg compensation, for any breach of the agreement

Before drawing up an NDA ensure that the information you are seeking to protect cannot be construed as being in the public domain. Once you demonstrate your product, tell someone about an idea or write about it, it can no longer be considered confidential.

Under the terms of the Freedom of Information Act 2000 public bodies will usually reject any confidentiality agreements that relate to the terms of the contract, its value and performance. It is a good idea to ask public bodies if they have a confidentiality agreement or NDA which meets the terms of the Act.

You can find out about confidentiality on the Intellectual Property Office website- Opens in a new window.

Physically secure your confidential information. In any legal action for breach of confidentiality, the courts would be reluctant to treat information as secret that you had not taken practical steps to protect.

Such measures could include:

• locking confidential information away
• limiting the number of people who can access the information
• ensuring you have up-to-date IT security systems in place

It also helps if you have a company policy regarding the use and disclosure of confidential information.

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Issues when signing a non-disclosure agreement

Once you sign a non-disclosure agreement (NDA), you have entered into a legally binding contract. This allows you to share ideas with business partners while preventing them from passing this information on.

Unfortunately, the contract is only as good as the person signing it. If your partner breaches the contract, you can take them to court for damages, but this might be expensive and time consuming. It can also be difficult to quantify the damages.

If you suspect that your business partner may be about to breach the NDA, you can get an injunction, ie a court order preventing them from breaching the agreement, to stop this happening.

To put you in a better position if you do have to go to court, make sure that all definitions and exceptions in the agreement meet your requirements and are appropriate to the type of trade secret you are sharing. If the contract is flawed, it might not provide enough protection.

It is a good idea to get to the patent-pending stage of a patent application before approaching investors, marketing or licensing companies. Find information about applying for a patent on the Intellectual Property Office website- Opens in a new window.

The biggest difficulty is determining exactly what is and what isn’t covered by the agreement. The person disclosing the information wants the contract to be interpreted in its broadest form, whereas the partner prefers to see the contract interpreted in a narrower way.

If any issues arise and worry either party, it is possible to change or add clauses to resolve the issue.

You can download information about confidentiality and a sample agreement [opens in a new window].

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CASE STUDY

Here’s how I use NDAs in my business

The Anglesey Sea Salt Company produces Halen Mon sea salt from the pure waters of the Atlantic just off Anglesey, North Wales. Director David Lea-Wilson describes how the use of non-disclosure agreements (NDAs) enables the company to share sensitive information with suppliers and customers.

What I did

Recognise the need for protection

“Our sea salt is highly regarded for its purity, crunchy texture and distinctive taste. A key factor is the exceptional cleanliness of the seawater we use, but other qualities are imparted via our manufacturing process. As such, we’re keen to keep the details of the process under wraps.

“However, we often need to share information for commercial reasons, for example collaborating with plant designers, negotiating joint ventures or raising finance.

“We can’t patent our process because evaporating sea water is deemed to be a natural chemical process, so non-disclosure agreements have become our principal protection against people copying our idea.”

Define agreement terms

“We wrote our NDA by purchasing several off-the-shelf agreements, then using parts from each that best suited our business. A specialist lawyer checked the agreement before we began using it.

“You have to be very specific about what you’re willing to share and what you’re not in order to minimise the risks. We went through each stage of our process and assessed the business consequences of people knowing a particular thing before deciding what to include. For example, we have to share technical details with plant designers, but the exact temperature we use during evaporation is something we keep to ourselves.

“You also have to be as precise as possible about how the information provided can and can’t be used. We have two versions of our NDA – a full version and a simple one-page version that’s useful for highlighting the key points.”

Apply the agreement

“We introduce the NDA into negotiations upfront and we make it a rule to leave the first meeting with it signed. We also make our use of NDAs clear to all staff at induction and include a clause in contracts about what they can and can’t talk about.

“Occasionally a potential partner refuses to sign our NDA or wants to use their own version, but we always stick to our guns. If someone wants to take the NDA away to study, that’s fine, but we end the meeting immediately – you can’t afford to give anything away before they’ve signed on the dotted line.”

What I’d do differently

Keep a central database

“We keep individual files on everyone who’s ever signed our NDA. However, a centralised record would have been beneficial and we’re now working towards that.”

Do patent searches sooner

“Looking back, we should have done patent searches right at the start to ensure that no-one had a claim to any part of our idea.”