For many businesses, the protection of information which provides a competitive edge is imperative to success. Confidential information may be disclosed in the course of business for a variety of different purposes such as negotiations regarding a potential business acquisition or commercial exploitation with a third party.
Parties who envisage disclosing confidential information to third parties should ideally enter into a non-disclosure agreement (NDA) in order to provide clarity on the treatment of information provided. Here are some key considerations when entering into an NDA.
- Definition of confidential information: this underpins the information being provided under the NDA. The definition is typically drafted widely, it should cover written as well as oral information. Beware of NDA’s that require the disclosing party to subsequently identify in writing any confidential information disclosed orally. The reality is that this is seldom (if ever) done, which potentially leaves orally disclosed information outside the parameters of the NDA.
- Exclusions: an NDA will define what information is not subject to confidentiality. This typically includes information already known, information already in the public domain, information independently produced by the receiving party and information received from a person/entity who owes no obligation of confidence to the disclosing party.
- Treatment of confidential information/permitted use: NDAs should specify how confidential information is to be used and treated. This includes defining a purpose for its use and preventing disclosure outside of that purpose. The NDA should be clear regarding to whom the receiving party may disclose confidential information received (typically employees and professional advisors), and care must be taken to ensure that the receiving party procures compliance with the NDA by those persons. Care should also be taken to ensure that a receiving party treats the confidential information received with a minimum ‘reasonable’ standard of care. NDAs can often prescribe a standard of care which is measured only in comparison to how the receiving party treats its own confidential information. If a receiving party treats their own confidential information poorly, then that is the standard to which confidential information received under the NDA will be compared to.
- Period of confidentiality: this issue is arguably one of the most important to cover. A party should consider the value of the confidential information to be disclosed and decide whether an indefinite or fixed period of confidence should be placed on it. Many NDA’s are only applicable for a very limited period of time (e.g. three years). For certain types of information (e.g. financial information), that may be fine, however, for trade secrets that have lasting value, it may be woefully inadequate. An assessment as to what information you are disclosing, and how long it is likely to remain confidential, is essential.
- Governing law and dispute resolution: jurisdiction is an important issue for NDAs, as the law of confidential information is subject to differing treatment from country to country. It is usually advisable to opt for a ‘home’ jurisdiction for familiarity, but careful consideration is necessary when dealing with parties in foreign jurisdictions, both as to the choice of law, and the format for dispute resolution. For example, an English company which obtains a judgment in the English courts against a Chinese company could struggle to enforce the same in China as the Chinese courts require reciprocal recognition for judgments, and no such agreement has been made with the UK. However, China is a signatory to the New York Convention 1958 for the recognition and enforcement of international arbitration awards. Hence arbitration (whether in the UK, China, or a neutral country) is often the preferred form for dispute resolution in NDA’s with Chinese contractors, to ensure greater ease of enforcement.