Non-disclosure agreements

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.

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

An NDA can give you more confidence when referring to commercially sensitive information in discussions with business partners as it prevents them from passing this information on.

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

NDAs can cover intellectual property and trading information such as:

• trade secrets - e.g. a formula, programme or process
• technical drawings and designs
• mathematical and chemical formulae
• business plans
• customer and prospect lists.

Non-disclosure agreements (NDAs) should be specific to your requirements. 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.

There are many instances where you may need to share sensitive commercial information with stakeholders, such as:

• obtaining estimates from manufacturers for your new product design
• submitting commercial information as part of a tender or pitch process
• progressing a merger or acquisition where the other business will want a detailed view of your finances and assets.

An NDA can ensure that other organisations do not pass details of your ideas to one of your competitors, and provide an element of protection if any deal does not proceed.

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. However it is best to get this in writing and to specify to the employee exactly what is confidential. You should also ensure that the NDA makes provision for when the employee leaves your business.

Journalists are unlikely to sign NDAs unless they are working under a formal commercial contract to produce content for your business. In a journalistic relationship they usually work under more informal arrangements to treat any previews of financial, technical or new product information under embargo, which is a temporary restriction to control when information is released.

Public bodies include governments, local authorities, universities, colleges and schools, the NHS, housing associations, the emergency services and others. If you are seeking a contract with a public body you need to be aware that it may not be possible to achieve the same levels of confidentiality as you would in the private sector.

They are obliged to ensure there is transparency around how public money is spent. Therefore, they respond to Freedom of Information requests from the public which may be made under the:

• the Freedom of Information (Scotland) Act 2002
• the Freedom of Information Act 2000
• the Environmental Information Regulations 2004 (the FOIA).

The Scottish Information Commissioner publishes a full list of all bodies in Scotland affected by the Scottish legislation.

Public bodies should not disclose information which would have a detrimental effect on the commercial interests of others. However, the bar is quite high for evidencing that a commercial interest would be compromised by a response to a freedom of information request, and that that this outweighs the public interest of access to the information.

This is something to bear in mind when submitting tender responses, for example. Clearly label anything you believe to be a commercial interest with full justification for your rationale, but be aware that any request for confidentiality could be overruled.

It is a good idea to ask public bodies if they have a confidentiality agreement or NDA which meets the terms of information regulations. When negotiating any agreement around confidentiality of commercial interests, make sure you understand the extent to which any agreement can apply in the event of freedom of information requests.

Also remember that once information is in the public domain, it is harder for you to enforce confidentiality in other contexts.

To understand more, download the Scottish government’s guidance for public bodies where section 8 covers the disclosure of information relating to contracts or procurement processes.

The Scottish Information Commissioner also provides guidance on how exemptions which apply to commercial interests need to be balanced against the public interest, and provides information about confidentiality in commercial arrangements.

With non-disclosure agreements (NDAs) it is a good idea to specify:

• how the information can be used
• any restrictions on the use of the information you provide, e.g. 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, e.g. compensation, for any breach of the agreement.

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 may no longer be considered confidential.

The UK government has published sample NDAs for reference. Also 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.

If an NDA is flawed, e.g. the definitions are not specific, it won't provide enough protection for you or your business. For added protection, you may need to ask a lawyer to draw up a bespoke confidentiality agreement.

You should physically secure your confidential information. In the event of of 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.

The Intellectual Property Office reminds businesses to record what, how and when any confidential information is shared - whether digitally or face-to-face - and suggests asking the recipients of any confidential information to sign a copy to provide evidence that they’ve seen it.

It is a good idea to understand these terms and their definitions, which crop up in non disclosure agreements:

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 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 - an optional way of fixing an amount of compensation that the owner or discloser is paid if the recipient breaches the agreement.

Confidentiality clause - 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.

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, i.e. 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. They should also be appropriate to the type of trade secret you are sharing.

It is a good idea to get to the patent-pending stage of a patent application before approaching investors, marketing or licensing companies. There is more information about patents and intellectual property in our guide Intellectual property: the basics.

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 may be possible to change or add clauses to resolve the issue.

You can speak to a member of Business Gateway about protecting your knowledge and work. Call us on 0845 609 6611.