Steps for Preparing a Non-Disclosure Agreement (NDA): Lawyers Advice
In the 21st century, every business has developed its own proprietary information, strategies, trade secrets, and intellectual property which is confidential to the business. Industries ranging from pharmaceuticals, softwares, cosmetics to food and beverages have businesses who hold a large amount of confidential information. For a business to maintain its competitive edge in the market, one needs to ensure that such sensitive information doesn’t fall in the wrong hands, for example- a rival competitor. A Non-Disclosure Agreement (NDA) is frequently used by businesses to prevent that from happening.
A Non-Disclosure Agreement (NDA) refers to a legally binding contract signed between parties, which allow the parties to share with one another confidential information amongst others, however such information is privy from being divulged to a third party. The signatories to a Non-Disclosure Agreement (NDA) often include an employer and an employees, or a start-up company and between its potential investors, among others. These agreements have been conventionally used by businesses and institutions to preclude confidential information from being shared or exploited, by any stakeholders in the business, for example- business collaborators, employees, service providers, etc. These agreements impose a contractual obligation on individuals to not disclose certain data to others and use it only in accordance with the terms and conditions specified in the agreement. If such obligation is breached by parties and the confidential information is misused in any way, the business can seek legal discourse, in accordance with the terms of the agreement.
Non-Disclosure Agreements (NDA’s) are crucial agreements with far-flung consequences for the protection of a business’s intellectual property and confidential data, hence it must be drafted keeping in mind the transaction and the objective sought to be achieved by the negotiating parties.
Essential Clauses in a Non-Disclosure Agreement (NDA)
Defining ‘Confidential Information’: It is imperative for every NDA to classify what information should and should not be considered confidential. Such classification can vary on transactional basis. The disclosing party should favour a broader definition of “confidential information” and refrain from specifying information as being confidential. A wider definition would reduce the scope of ambiguity and the disclosing party would be able to derive the greatest benefit out of it.
Term of NDA: A time period for the validity of the agreement must be mentioned. The term of the agreement is a critical factor as it has to be decided according to the nature of such information disclosed, as it can be a sensitive proprietary information or a trade secret. A longer term of the NDA is preferred in case the trade secrets are being disclosed, as some trade secrets are defined based on the market value of the company.
Survival Clause: A survival clause specifies the terms and conditions of the contract which remain in effect even after the execution or termination of the contract. It is in the best interests of the disclosing party to make such provision in case of dispute resolution and confidentiality, to survive the termination of the NDA.
Disclosures: This clause defines the parties with whom confidential information should be disclosed. It defines the “disclosing parties” and the “recipient parties”. It should clearly outline the types of representatives who will be privy to this confidential information. All representatives mentioned in the agreement must be aware that the information is confidential, and which clauses of the NDA they are legally bound to.
The NDA must also protect the disclosing party from the recipient party in the event of circumvention. And therefore a non-circumvention clause must be added to prohibit the recipient party from circumvention, avoidance or by-passing of the disclosing party in order to refrain from signing of a contract.
Usage of Confidential Information: This is a complex clause in the agreement, as it deals with the potential usage of the confidential information by the recipient party. The clause may seem straightforward, however the issue arises when we encounter the “doctrine of inevitable disclosure”. According to the doctrine, even despite the best intentions, the disclosing party, who deals with confidential information of the business on a daily basis, it would be improbable to not disclose it ,even unintentionally or misuse such information. To resolve this issue, keeping a short time limit on usage of such confidential information is beneficial to the disclosing party.
Legal Obligation to Disclose: Conventionally, the purpose NDA serves for the signatories is to prevent disclosure of confidential information to third parties, however, in some circumstances there exists certain exceptions. Therefore, requisite exceptions to the NDA must be applicable when such disclosure is mandated by any legal or administrative proceedings. Compelled disclosure is an infrequent occurrence, however this clause grants protection to the discloser as well as the recipient.
Return/Destruction of Confidential Information: This clause necessitates the recipient at, the behest of the discloser, to confirm the return or destruction of all confidential information. The nature of the confidential information shared, influences the timeframe and the strategy utilized to deal with such information, but it is consonant with the time duration of the NDA. Technology has made the return of all confidential data, exceedingly difficult and nearly impossible. With innovation in virtual storage, it is a challenge to completely destroy or return all confidential information.
In cases wherein the nature of the information is tricky to destroy, then the clause should prohibit the recipient from using such information in the normal course of his own business or using it in the future.
Jurisdiction & Dispute Resolution Clause: In case of breach, it is important to specify in the agreement which court has jurisdiction, if any, in case of legal action taken by either party. Jurisdiction is a fundamental issue, and if not correctly determined can be a cause of a lengthy legal proceeding. The discloser should opt for a jurisdiction that is favorable to him, wherein it would be easy to conduct a legal proceeding and enforce it. The mode of dispute resolution should be clearly defined. If arbitration is a preferred choice of dispute resolution, an arbitration clause to that effect must be added. The process for arbitration under the Arbitration & Conciliation Act of 1996 and the amendments thereafter should also be applied to the NDA.
Remedies: The disclosing party is entitled to either liquated damages, injunctive relief, specific performance, or any other remedy available in law and equity in the event of breach of the NDA. The first option to approach in the case of breach, is monetary damages. However this clause gives room to the parties to reach a mutual agreement, in cases where the monetary damage is considered inadequate or the cost of breach is hard to prove or assess, then the discloser is permitted to pursue injunction as an alternative approach.
The agreement must also state which party shall bear the responsibility of legal fees, if the suit is filed with regard to the disclosure of confidential information whether individually or jointly, despite the outcome of the proceedings.
Non-Compete Clause: By agreeing to a non-compete clause, the recipient agrees to not enter a business which competes with the business of the discloser. This negative covenant is an essential part of the agreement, in cases wherein the recipient is in the same or similar business and may use such confidential information to compete against the discloser, within a short time span. It is difficult to enforce an NDA in Indian Courts, and it varies from cases to case basis.
Whether an NDA is in restraint of trade?
In VFS Global Services Pvt Ltd. v. Mr.Suprit Roy [2008 (2) Bom CR 446] the Hon’ble Bombay High Court ruled that a clause which prohibited an employee from disclosing any proprietary or trade secrets is not in restraint of trade. On interpretation of Section 27 of the Indian Contract Act, 1872, it is inferred that the effect of such a clause is not to restrain any employee from practicing a lawful profession, trade or business.
Whether the non-compete clause under non-disclosure obligations are enforceable during the term of the contract?
This issue brings Section 27 of the Indian Contract Act, 1872 into the picture, which talks about ‘restrictive agreements’ and its exceptions. The Supreme Court in Niranjan Shankar Golikari v. The Century Spinning and Mfg. Co. [1967 AIR 1098] ruled that a non-compete clause (negative covenant) is applicable between the parties during the period of the contract, and conventionally does not attract Section 27 of Indian Contract Act, 1872 as it is not treated as a restraint of trade. The Delhi High Court in Wipro Ltd. v. Beckman Coulter International S. A [2006 (3) ARBLR 118 (Delhi)] opined that any negative covenants in an employment agreement, concerning a period post termination, which restrict a person’s right to seek employment or do business in the same or similar field as the other party, it would be a violation of Section 27 of the Indian Contract Act, 1872, and therefore void.
Whether non-disclosure obligations are applicable post termination of the contract?
The judgments in Fairfest Media Ltd. v. ITE Group Plc [2015(2) CHN (CAL) 704] and Hi-Tech Systems & Services Ltd. v. Suprabhat Ray and Ors. [AIR 2015 Cal 261) indicate that Courts may not be unyielding to enforcing secrecy clauses post-termination of an agreement.
In both the cases mentioned above, on breach of the contract, an injunction was filed against the Respondents restraining them from sharing any confidential information it had received, for the time period mentioned in the NDA,( 2 years and 3 years respectively in the above cases), from the date of expiry of the NDA, thus implementing the secrecy clause in the NDA.
Hence, we see Indian Courts implementing non-disclosure obligations even post- termination of agreements, without objections to the time frame therein, which can be interpreted to mean that a time period of 2-3 years is considered reasonable. In the cases mentioned above, an obligation of secrecy surviving for two to three years, conclude that the law is settled on what are reasonable restrictions that can be enforced in a secrecy/non-disclosure clause post termination of an agreement.
A Non-Disclosure Agreement (NDA) can be used to effectively to legitimately protect a business’s commercial interests and confidentiality in numerous circumstances. A business may leave itself exposed to risks of loss or misuse of it confidential information, without a Non- Disclosure Agreement (NDA) in place. From the above precedents , we can infer that an Non- Disclosure Agreement (NDA) can only be enforced effectively when the restraint imposed was with regard to not using any confidential acquired during the course of that contractual relationship, and not with carrying on a similar trade/ profession/ occupation. However, the law on this aspect is not considered settled yet, as to what reasonable restrictions can be enforced in an NDA post it termination. With the rise in the importance of protection of trade secret protection and its enforcement, there is call for a settled law on the same.
Authored By: Adv. Anant Sharma & Rainna Jain