As soon as discussions about any potential transaction start to get serious, one side often asks the other to sign a Confidentiality Agreement. Any Confidentiality Agreement starts from the proposition that information about a “Transaction” that one party (“Discloser”) shares with the other (“Recipient”) should stay confidential (the “Confidential Information”). If Discloser shares Confidential Information but doesn’t bother to require Recipient to keep it confidential, then Discloser can hardly complain when Recipient lets the cat out of the bag. Confidentiality Agreements often go far beyond that. They sometimes specify measures that Recipient should take to preserve confidentiality. They sometimes include the word “indemnify.” They sometimes have elaborate language consenting to injunctions and other extreme remedies—which is sort of pointless, since it’s unlikely that the victim of a wrongful disclosure will file suit or a court will be able to do much about the violation. And it would be too late, anyway. Once Discloser has signed any Confidentiality Agreement, regardless of its boilerplate terms, Discloser has gotten almost all the value any Confidentiality Agreement will ever deliver: a recognition that Discloser wants to keep the Confidential Information confidential. For any responsible Recipient, that should do it. Adding more verbiage to a Confidentiality Agreement makes it more complex, triggering more negotiations, often without producing much more practical value. Much of the additional legalese relates to hypotheticaeventualities that rarely if ever occur or seeks to impose oppressive obligations and remedies dreamed up by creative counsel in previous deals. For better or worse, that process plays itself out daily in all kinds of legal documents. In the context of Confidentiality Agreements, it slows down Transactions and creates spurious issues. Once in a while, inability to resolve a Confidentiality Agreement actually causes a Recipient to walk away from a possible Transaction. Beyond delivering a recognition that certain information is to be kept confidential, a Confidentiality Agreement, even a very short one, can serve several other purposes. It may give a party insight into the negotiation style and mindset of its contemplated counterparties. Are they practical? Are they overly legalistic? Do they nitpick? Make silly comments? Do the lawyers or the business people run the show? Do they worry about their own shadow? Do they know how to get deals done? This is potentially as true for Recipient as it is for Discloser. Asking a prospective counterparty to sign a Confidentiality Agreement can help determine if the counterparty is serious about a potential Transaction. Legal review isn’t free. Discloser’s request for a signed Confidentiality Agreement can filter out possible counterparties who don’t take the Transaction seriously enough to pay for that review. Of course, one of those counterparties might have ultimately taken the Transaction seriously enough to submit the highest bid. So
any Confidentiality Agreement should not be written in a way that scares away too many people. The most important piece of any Confidentiality Agreement, though, has nothing to do with confidentiality. Instead, it relates to defining what it takes to create a binding agreement. Any Confidentiality Agreement usually makes very clear that no one can become legally obligated to close a Transaction unless the parties agree on Deal Documents and then execute and exchange them. Without protective language like that, any discussions of a possible Transaction can create risk. Today, those discussions often take the form of extended email conversations. They often go into significant detail and include careless expressions of enthusiasm. After the fact, a court can easily interpret these communications as a legal commitment to proceed. They can have the power of a written contract without having been reviewed by lawyers. If one party thinks they reached a deal but the other party doesn’t think so, the disappointed party will sometimes file suit. The judges who hear those claims rarely know much about real estate negotiations or what industry participants expect when they discuss possible Transactions. Sometimes, when judges “go to the email,” they can find binding agreements when one party didn’t really anticipate one. A Confidentiality Agreement can help prevent that problem. It can also immunize a seller from claims arising from the Transaction process itself, such as a claim that someone was supposed to get a “last look” or the seller had an obligation to conduct an auction or other marketing activities in a certain way. A Confidentiality Agreement can also help prevent claims that a counterparty relied on anything Discloser said—a variation on the idea that no one has any liability unless the parties actually negotiate and sign final Transaction Documents. Liability prevention doesn’t have much to do with confidentiality. But a good Confidentiality Agreement can quite effectively protect against liability, claims, and litigation, with no need for huge amounts of fierce legal boilerplate. This article offers a template for a Confidentiality Agreement. It begins with a Base Case, consisting of the basic standard provisions one would expect to see for a bare-bones Confidentiality Agreement without glaring omissions. The Base Case includes language to try to prevent premature liability. Recipient should have no reasonable basis to refuse to sign a Base Case Confidentiality Agreement. The Base Case is designed to be comment-proof, market-standard, and unobjectionable. It covers the main bases for Discloser. It also covers the points that any Recipient would almost always want to see in a Confidentiality Agreement. After the Base Case, this document offers many optional provisions that sometimes appear in Confidentiality Agreements—“stuff we could add” if the parties wanted to be really thorough or really tough or wanted to pick a fight. The Bells & Whistles come in three flavors: (i) provisions Discloser might request; (ii) provisions Recipient might request; and (iii) neutral optional provisions. One can easily adjust the Bells & Whistles as appropriate. Brackets suggest some but not all possible adjustments, particularly within the Bells & Whistles. The use of a Base Case plus Bells & Whistles represents a reasonable structure for template documents, if one wants to try to keep documents short, or at least shorter than otherwise. This structure makes it easy to cover the basics without overcomplicating a document unless necessary. Confidentiality Agreements show up all the time in any commercial transactional practice, not just real estate, so they offer a good testing ground for this approach to documents. Not coincidentally, whenever anyone has demonstrated an automated document assembly system to the author, the first sample document has usually consisted of a Confidentiality Agreement with optional clauses. For some Confidentiality Agreements, some Bells & Whistles will make sense. That should, however, reflect a judgment call. It will rarely make sense to automatically throw in all (or even many) Bells & Whistles. It depends on circumstances, e.g., sensitivity of the Transaction, publicity to date, the parties, other context, etc. Overuse of Bells & Whistles will result in excessive negotiations, delays, and legal fees, with little benefit in the typical case. To the contrary, if the Transaction moves on an urgent timeline (as typical in practically every real estate
